City's Top-End Office Rents Double in a Year

Top-end office rates in central Moscow are now the second-priciest in the world after occupancy costs almost doubled over the past year, a survey released Wednesday said.

Occupancy costs for offices in the capital posted a 93 percent rise in ruble terms over the 12 months to the end of March, making it the second-fastest riser of the 173 cities surveyed after Vietnam's Ho Chi Minh City, a study by CB Richard Ellis said.

Prices for top-end offices in Moscow now stand at up to $2,500 per square meter per year, making it second in terms of overall cost behind London's West End. Top rents in the West End come in at almost $3,250, while inner central Tokyo is in third place and Mumbai in fourth, the twice-yearly report said.

The highest rates in midtown Manhattan, the most expensive location in the United States, were posted at about $1,100 per square meter — well under half of what you would pay in Moscow.

Despite torpid global economic conditions and last summer's credit crunch, office occupancy costs worldwide are outstripping inflation rates, with much of the rise down to the developing economies.

"These cost increases are dominated by emerging markets, caused by both supply and demand imbalance and the depreciation of the dollar relative to local currencies," Raymond Torto, chief economist at CB Richard Ellis, said in a statement.

"In some of these emerging markets, Class A office space is seriously lacking," Torto said.

In Moscow, however, the soaring rates come against a background of a record number of new office developments coming onto the market across the board.

In the past six months alone almost 1 million square meters of new office space has hit the market, and a further 1.5 million square meters is expected to be made available by the end of the year.

Major developments to have come online recently are the 84,500-square-meter Federation Tower in Moskva-City and the 60,000-square-meter Kosinskaya Plaza to the south of the city.

Although rental rates for some top-end offices in the city center have undoubtedly doubled over the past year, analysts warned against generalizing the overall picture in Moscow.

"You have to be careful when talking about a market the size of Moscow," said Paul Blackman, regional director for Colliers' office property department.

Vacancy rates in central Moscow are currently hovering at about the 3.5 percent mark but rise to 7.5 percent outside the Third Ring Road.

Average rates for Class A offices are about $1,700 per square meter per year — excluding operating expenses and value-added tax — and Class B+ rental rates remain between $700 and $800 per square meter per year, according to a separate report from CB Richard Ellis.

Given the sharp hike in supply, price rises should cool over the next 12 months, Blackman said. Demand, however, would still be very strong.

"This year we are meeting a point where demand and supply is becoming more balanced — as witnessed by the slower growth in rates this year," Blackman said.

"At the present time there is a certain mismatch between what certain landlords are asking for and what potential tenants are willing to pay," he said.

For foreign business representatives, news of Moscow's record rises and the difficulties associated with finding office space came as no surprise.

"Small- and medium-sized enterprises seeking smaller-sized or startup premises are experiencing ongoing difficulties in finding appropriate office space in Moscow," said Neil Cooper, director of the Russo-British Chamber of Commerce.

"Any area below 500 meters is usually snapped up and demands an instant decision from the tenant," Cooper said. "In a highly inflationary environment, this puts particular pressure on smaller companies with limited budgets."

But despite the struggle, not even sky-high prices are enough to deter firms keen to cash in on the country's booming economy. GDP in 2007 grew by just over 8 percent.

"Whilst a major obstacle to starting up business in Russia, I have not heard of any prospective foreign investor being driven out of the market as a consequence," Cooper said.