Pinched Retailers Bargain for Deals

VedomostiShopping malls, like the newly finished Atrium, hope to attract global retail chains.
After a disappointing summer, many of the city's retailers have come to their senses and are no longer taking the first property they find for fear of stifling their business growth.

Indeed, many retail chains are moving out of poor-performing locations in search of better deals.

Shopping centers have tried to stop their tenants from leaving by offering discounts, but that has not always helped this summer. And industry experts agree that an anticipated increase in trade this fall is unlikely to stem the slump in rental prices. Some participants even forecast that rates would drop by as much as one-third in less-convenient shopping centers over the next six months.

"This summer was not a successful one for retailers," said Anna Shiryayeva, general director of the Magazin Magazinov agency, which specializes in retail premises. "Companies have realized that lease rates in this sector depend not so much on the state of the real estate market as on the revenues that a store brings in."

Several opposing factors are at work on the market. On one hand, retail continues to attract investments and demand for premises remains high. On the other, potential clients are watching what they pay.

"Demand is well understood, but tenants are very clear about the prices they're ready to pay," Shiryayeva said. "If the price for a site is even slightly high, it will be almost impossible to rent it. And this summer, everyone who was in a position to do so pressured the landlord for a reduction." Some landlords offered seasonal reductions as high as 50 percent to retain quality tenants, according to Stiles & Riabokobylko data.

Stiles & Riabokobylko said the amount of free space in retail centers had increased by 0.9 percent to 3.9 percent as of July. Downtown, this figure rose to 4.7 percent due to the tenant exodus. In other regions, the amount of empty space varied between 0.3 percent in the southwest to 8.1 percent in the northwest -- or 3.7 percent on average. On the better retail streets, it was 7.7 percent -- an increase of 1 percent.

Despite seasonal problems, international giants continue to show an interest in the local market. According to a rating published in July by the A.T. Kearney consulting company, Russia is one of the five most attractive developing markets for global retail chains. Russia came fourth after China, Slovakia and Hungary.

But this investment has disadvantages as well as advantages, said Balla Fai, commercial real estate director with Penny Lane Realty.

The newcomers raise the level of local competition, but they also give the city's stores a chance to make hundreds of millions of dollars by selling out to a foreign investor.

Fai said many chains are developing their businesses in the hope of selling them to a multinational corporation in the future.

Nonetheless, the largest foreign players generally prefer to build their own premises. This is what IKEA, Metro, Ramenka and Auchan have all done.

A shopping mall construction boom began two years ago to give the retail market room to expand beyond the city center.

"There are very few streets downtown with buildings that have large windows," Fai said. Companies have often been willing to pay more for spots on Tverskaya Ulitsa, Kutuzovsky Prospekt, Novy Arbat and Prospekt Mira, he said.

Retailers often open a store on Tverskaya, for example, not to only to sell goods, but to act as the firm's business card, Fai said.

The difficulties of the capital's market have made retailers look to the regions.

"Last spring, we only worked in Moscow. Today we have agreements signed for projects in Krasnodar, Novosibirsk, Tolyatti, Rostov-on-Don and Perm," Shiryayeva said. "And there are about 10 other regional projects. I get the impression that retail centers averaging 20,000 square meters are being built in every reasonably large city."

She said Ramstore, Starik Khottabych, Sportmaster and L'Etoile and several others were most active in the regions.

Most experts predict that retail leases will continue to fall. Shiryayeva said deals signed this summer were approximately 10 percent lower than last spring. And the head of one of the main operators on the retail real estate market, who asked that his name not be used, said that in six months, the rates at the least successful retail centers would fall by half.

Sergei Yeliseyev, director of marketing with the Inkom real estate company, made a more cautious forecast. "There will be either stagnation or a drop in prices," he said.