Colin Dyer, president and CEO at Jones Lang LaSalle, is putting his bets on hotels and stores as Russia's commercial real estate market slowly recovers from the economic crisis.
"In terms of the new demand, hotels will be the most promising segment, followed by retail, then logistics and offices in that order," Dyer said in an interview.
"That's the order of scarcity. There's a big scarcity of the hotel space in Russia and particularly in Moscow," he said.
Dyer, who has been heading the Chicago-based real estate giant since 2004, dropped into Moscow last week to gauge the "new normal" for Russian commercial real estate. He told The Moscow Times that the "new normal" could be defined as a gradual recovery with "very healthy" 5 percent to 10 percent annual growth for the next two to three years.
"We don't expect a boom," Dyer said, adding that a slow recovery would be healthy for the market.
Commercial space has grown quickly in Moscow since the previous economic crisis in 1998. From 1998 to 2003, there were fewer than 400,000 square meters of commercial space in Moscow, of which perhaps half was offices, Dyer noted. Now there are more than 20 million square meters of commercial space, including 12 million square meters of offices.
Going forward, three- to five-star hotels offer promising growth because demand far outstrips supply, Dyer said.
The number of rooms in these hotels in Moscow increased by 4.4 percent in 2009 to reach 11,400, compared with 10,900 a year earlier. Jones Lang LaSalle forecasts that the number of rooms will increase by 12 percent to 12,800 this year.
City Hall, however, said Moscow had a 9.3 percent drop in foreign visitors last year, with 3.5 million people coming to the capital in comparison with 3.9 million people in 2008.
Dyer said the retail sector also should experience tremendous growth because the 66 quality shopping centers currently operating in Moscow are not enough and cannot be compared in quality to those in Europe.
A new trend in the retail segment is that the owners of shopping centers have started seeking higher standards so as to attract customers after the crisis, Dyer said.
An improvement in quality across all segments will be part of the "new normal," he added.
The office segment in Moscow currently has the highest share of vacant spaces — about 22 percent of all commercial space — after a record number of offices were completed in 2008 and 2009, Dyer said.
According to a Jones Lang LaSalle report, office completion in 2009 totaled 1.7 million square meters, down 18 percent from 2.05 million square meters a year earlier.
The profile of the most active office tenants has changed because of the crisis. Finance and construction companies, which were the primary tenants of quality offices in 2008, showed less activity in the market last year, the report said.
The report also said Russian companies accounted for 38 percent of all deals reached in 2009, compared with 54 percent a year earlier.
Dyer predicted that there would be limited or no new development over the next two years — until the vacant space was reduced — and this would be one of the factors defining the "new normal" for the market.
A gradual recovery in the office segment must absorb the vacant space, and there will likely be a need for new offices starting in 2012, he said.
But the office segment will be the last one in which the demand will start to recover in the short term, the chief executive officer said.
The availability of bank loans will be another driver that will affect the pace of the market's recovery, Dyer said.
"Banks are much more careful giving credits. This factor will restrain the market's recovery but won't stop it. This factor will keep the recovery at the major pace," he said.
The investment sales market will start recovering before the rental market, and the pace of its recovery in Moscow will follow the pattern of that in Hong Kong, London and Paris, Dyer said.
Investment sales prices in Russia's commercial real estate market collapsed by about 50 percent in 2009. But as demand started reviving, the market saw a quick bounce in prices, which increased by 10 to 20 percent, Dyer said, adding that this bounce would be followed by a more gradual recovery.
"We've seen it in Hong Kong, London, Paris. There was an initial bounce and then the market continued with quite a slow pace of recovery," he said.
Investment activity in the commercial real estate market declined by 52 percent in 2009. The total investment volume was $2.86 billion, with about 70 percent of the deals closed in the second half of the year.
Foreign investors showed low activity last year, bringing just 24 percent of the total investment volume to the market, compared with 71 percent in 2008.
Although investment activity will increase in 2010 and foreign investors are beginning to be interested in Russia again, the investment sales market will remain Russian-focused in the first half of the year, Dyer said.