Moscow's Malls in State of Arrested Development

MTRental prices for retail space have fallen 30 percent to 40 percent on weakening demand, delaying new projects.
Less than half the shopping malls slated for completion in Moscow last year were actually opened, and even those retail centers that were finished on time will be fortunate to find tenants for half their space, according to Colliers International's annual report.

The city's developers planned to build 20 shopping centers with a total area of more than 1.5 million square meters last year, but because of the financial crisis only 33 percent were opened (seven malls with a total area of 500,000 square meters), the report said. For the most part, only smaller malls were completed, it said.

Among the largest projects that were not finished on time are the 205,000-square-meter Metropolis on Leningradskoye Shosse; a 202,000-square-meter shopping center on Ulitsa Vavilova; and the 145,000-square-meter Gudzon on Kashirskoye Shosse.

"As far as next year goes, the projects most likely to be finished are the ones that were slated for last year and for one reason or another didn't find their way to the market. There's a high likelihood that these projects will open, since they're in the final stages of construction and finding tenants," the report said.

"Those projects that are already under construction will be finished, but no one will be starting new ones. Maybe they'll build one or two," said Vladimir Avdeyev, a partner at SA Ricci King Sturge, citing developers' lack of funds -- both their own and from lenders -- as well as weak demand for retail space.

Rental prices, Avdeyev said, have already fallen roughly 30 percent to 40 percent.

Cushman & Wakefield Stiles and Riabokobylko has forecast a drop in rental prices of 20 percent to 50 percent in electronics and appliances stores, 30 percent to 40 percent for the clothes and shoes segment, 20 percent to 30 percent for hardware and do-it-yourself shops and 40 percent for mobile-phone chains.

"On average, we were able to negotiate a 30 to 40 percent decrease in rent. In some cases, the landlord was ready to halve the rent -- just so long as we wouldn't leave," said Artyom Perevozchikov, Yevroset's vice president for business development.

"Those are discounts we think are most reasonable in the current market. Thanks to this, we're closing far fewer stores than we were planning to last year. For example, in December, we were planning to eliminate 100 outlets, but we only closed 70," he said.

"In late fall last year, several retailers started asking developers to consider lowering rental rates because their sales figures were falling. But only a miniscule percentage of retailers had actually seen a concrete drop in sales by late fall. What's more, their sales volumes increased heading into the traditional New Year's shopping period, albeit not by as much as they had forecast. ... As a result, there was no widespread decline in rental rates," the report said.

Avdeyev, of SA Ricci King Sturge, said the big trend this year would be tenants refusing fixed rental rates and requesting payments tied to their revenue. Electronics retailers Tekhnosila and Eldorado have already offered to pay their properties' owners about 4 percent of sales.

Lyudmila Malofeyeva, vice president of Swiss watch and jewelry stores Consul, said that during crises it is more profitable for retailers to pay rent as a percentage of sales.

"We've also offered such a plan to our landlords. There are a lot of shopping mall managers who aren't willing to meet us halfway, however. ... In the current period of crisis, it's easier for us to reach an agreement with Western companies such as IKEA, which have experience working in crises and are trying to support their partners," Malofeyeva said.

"We're shying away from contracts tied to sales figures -- they're not profitable for us," said Perevozchikov, of Yevroset. "Unlike electronics megastores, we don't know ahead of time -- and we don't want to know -- what our markup will be on a specific item. It's more important to be able to manage it flexibly. As a result, our markup varies significantly depending on the season, consumer preferences and a variety of other factors," he said.

The report also said it would be increasingly common to see new shopping malls opening with only 50 percent to 60 percent of their space filled, whereas before the range of 70 percent to 80 percent was more common.