Less Can Mean More

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With real estate bubbles and toxic mortgages among the root causes of the global financial crisis, it's no wonder that Russia's real estate market has been singled out to bear the brunt of the turmoil. As falling prices breed panic for many producers, they are forgetting that less does not always mean worse.

Indeed, there is pressing need to remind developers, investors and businesses that falling prices were never before a reason to panic, and they shouldn't be today either. Certainly, prices for commercial real estate -- and particularly office rents -- will continue to decline. But companies that rent office space would be doing themselves a favor by examining these reductions for what they are rather than taking them as an indicator of doom ahead.

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Moscow's market for quality office space will likely see a price correction of 15 percent to 20 percent. Although companies tend to fear swift price reductions, careful consideration of the market climate shows that this is not always a bad thing. In terms of confidence, the faster the correction happens, the less stress for the market. As we head into the new year, we are expecting vacancy levels to grow as a result of converging office space supply and demand dynamics. Although many developers are freezing projects, buildings that are in advanced stages of construction will be completed on schedule in 2009. This means that the supply volumes hitting the market in 2009 will be similar to those in 2008. However, tenants are already revising their expansion plans, and demand will continue to decline during the fourth quarter of 2008 and the first quarter of 2009. This will mean that take-up will decrease as supply increases in the short term. In the long term, meanwhile, just as demand begins to pick up, the supply side will see a lag because of all the developers that opted to postpone projects.

While price corrections present their set of risks, they also offer opportunities for various groups of businesses.

How can a fall in prices and rent rates be a good thing? Even in a crisis, there are always people who come out ahead. Today, many companies are giving in to the psychological pressure coming from the financial markets and are opting to "wait and see." But given the conditions we are expecting to see in the next several months, now may just be the best time to make the move.

Occupiers and businesses considering plans to expand in Moscow may find themselves in a surprisingly accommodating market in the next six months. As we see a correction of Moscow's office rents, which have been rated among the highest in the world in the past several years, companies seeking to occupy space in the capital can look forward to additional incentives from developers. If they take advantage of the short period of time in which supply will exceed demand in Moscow's office market, tenants can benefit from certain perks like more affordable rates, longer rent-free periods and partial compensation for fit-outs. More important, since Moscow still has so few quality office projects, they should move quickly so that they have the best pick of available space while it lasts.

In the short term, investors should look to take advantage of a window of opportunity. Because Russia has relatively few investment-grade properties, in the first half of 2009 investors will see a chance to buy quality projects with more attractive returns than usual. Rather than waiting, they will benefit from snatching up a limited number of good buys while they are still available.

Developers who manage to continue on with their projects and put the focus on concept quality may benefit in the long term from a less competitive market after the financial situation stabilizes. As sale prices go down, developers who respond quickly will win out by efficiently disposing of and getting access to liquidity. But a correction in rental rates will also benefit them by creating safer conditions for tenants, which will mean sustainable incomes in the future.

The Russian economy is in a good position to make a faster recovery than other European markets, given its strong fundamentals and a potential to stabilize in 2009. By taking advantage of low rents in the short term, companies may actually help speed up the recovery. Meanwhile, by the end of next year, take-up will begin to increase, compensating for a half-year lag. As demand starts recovering in the end of 2009, we expect rent stabilization followed by the start of a general recovery in 2010. By that time, companies that have already gotten into the market can focus on getting ahead.

The real estate sector occupies a special place in Russia's economy. In the boom period of the past eight years, we have been literally building the country. But as the latest trends and forecasts show, that job is far from over. The current situation presents not just an opportunity for companies to grow but a chance to turn the market around. The real estate market's next cycle will be characterized by more professional players and a new level of project quality.

Vladimir Pinayev is managing director of owner and occupier services, Russia & CIS Jones Lang LaSalle in Moscow.