Modernized Spa Rises On Predecessor's Plot

A historic spa complex will return to Novy Arbat by mid-2010 after a nearly two-decade absence, this time packaged with high-end apartments and office space.

Russian developer Baltiiskaya Stroitelnaya Kompania will build the multiuse complex, including a 23,400-square-meter spa for the Russian Scientific Therapeutic Spa and Bathing Center, part of the Health and Social Development Ministry, the company said in a statement.

Although most analysts say the complex — with its total of 93,600 square meters of space and prime location on one of central Moscow's busiest thoroughfares — is a sure bet, the developers have taken the unusual step of selling off the office space in blocks, rather than leasing larger sections.

"Selling in blocks is more profitable for the developer and consultant than selling as one piece," said Yelizaveta Luchitskaya, a spokeswoman for DTZ, which is serving as a consultant to the project along with IntermarkSavills. DTZ said in an e-mailed statement that it would be selling the office space, while IntermarkSavills will be managing the residential space.

In another departure from the standard practice for such multiuse centers, the development at Novy Arbat 34, which has yet to be named, will feature the government spa and research center instead of a more traditional anchor tenant.

The complex will be located on the site of the former Central Government Institute for Therapeutic Bathing, which was built in the 1920s to research balneology, or the study of medicinal baths, BSK's statement said.

In the late 1960s, a mineral-water spring was found on the center's 1.17-hectare territory. Apparently encouraged by the find, the center then dug a kilometer-deep well and discovered a therapeutic saline solution for use in baths and swimming pools, the statement said.

By the late 1990s, however, the building had fallen into disrepair and it was decided to tear the structure down. Now, a new, elite health center is springing up in its place.

The 12-story center has raised 9 billion rubles ($390 million) in investment, DTZ said in a statement. It will house 20,900 square meters of "de luxe" apartments and 14,500 square meters of office space.

Apartments will range from 65 to 250 square meters. Although none of the firms involved would give figures for investment in the project or expected earnings, Yekaterina Thain, Knight Frank's director of residential property, estimated that the residential space would go for $20,000 to $30,000 per square meter.

The building will also feature offices ranging from 200 to 10,000 square meters and a 750-space underground garage.

Despite the somewhat unconventional sales approach, analysts say it will succeed because of heavy demand for central, Grade A office space.

Lotte Plaza, a multiuse center across the street from the new development, "is a perfect example," said Adam Sherriff-Scott, a senior director at CB Richard Ellis and the head of the firm's office-services group.

"It leased up pretty quickly at good rates, and if there was free space now, they'd get even better rates," he said.

The location — not far from where Novy Arbat and the Garden Ring intersect — will also be a major draw, analysts said.

"I know of some companies with offices in the center who have already reserved space in Moskva-City, but I know they would seriously consider staying in the center if the space existed," said Vladimir Pantyushin, a Russia and CIS analyst for Jones Lang LaSalle.

With transportation, location and demand seemingly in place, analysts say the major stumbling block could be marketing and selling the offices singly.

"You can hardly find office buildings in such prime locations that are being sold by blocks rather than leased," said Alexander Gurganov, an associate director of Jones Lang LaSalle's office agency. "Success will depend on the right marketing strategy, right pricing and right timing."

Luchitskaya, of DTZ, was unfazed by the potential obstacle, however. "Success is guaranteed," she said.