Offices Nearing Pre-Crisis Rates

VedomostiBusiness centers are being built, but not enough to meet demand.
Office prices raced up over the summer as demand neared a level not seen since before August 1998 -- and analysts say rates will reach pre-crisis levels by next summer.

Real estate developer Mosenka has boosted prices by $50 per square meter per year, a 7 percent to 10 percent hike. Similar gains can be seen across the real estate industry.

On average, prices have gone up 10 percent since the beginning of the year for all classes of office space, according to Penny Lane Realty, and the trend isn't slowing.

Developers whose sites are due to be completed by next summer are offering space in their buildings for $700 per square meter, betting on continued price increases throughout the year. Currently, furnished class A office space is going for $550 to $650 per square meter.

"High-quality office space demand is growing at a rate of 3 percent to 5 percent a month," said Alexei Andrianov, head of commercial realty at the Moscow Realty Investment Agency. "In the near future, demand for class A sites will continue to grow."

Local Demand

Before 1998, 75 percent of demand for high-end office space came from Western companies, according Penny Lane data. The current ratio of demand between foreign and Russian companies is 50:50.

"The typical client today would be a mid-sized Russian company in need of about 300 square meters of office space," said Vyacheslav Aksyonov, an office real estate expert at Penny Lane.

The rise in demand also has made tenants demand higher standards, Andrianov said. Their conditions are almost without exception a parking lot with a specified number of places, a specified number of air conditioners, a fiber-optic telecommunication system and a security system.

Inexpensive quality office space, usually class B, is also in high demand, according to Penny Lane Realty. When it does appear, it is rented out immediately. Penny Lane says it could rent out an office center on Pushkarev Pereulok within a single quarter, whereas a year ago it would have taken four to six months, if not longer.

Demand for class C space never falls because in Russia's developing market the deciding factor for a lot of companies is price. However, owners of class C buildings are bringing their sites up to standard by modernizing telephone systems and renovating their offices.

Among the more notable recent purchases are the World Bank's acquisition of the 6,000-square-meter Novinsky Sad office building and Exxon Mobil's purchase of a 1,186-square-meter property on Malaya Ordynka Ulitsa. In addition, a European Commission delegation has leased 3,437 square meters on the centrally located Kadashevskaya Naberezhnaya, and Aeroflot is leasing 1,500 square meters in the Zapadny Most complex on Leningradsky Prospekt.

Building companies

In the second quarter of 2001 alone, 44,000 square meters of high-quality office space were added to the market, according to Colliers International. Another 250,000 square meters are expected by the end of the year.

This includes Berlin House on Petrovka Ulitsa, a business center on Dolgorukovskaya Ulitsa and complexes at 7 Mokhovaya Ulitsa and 5 1st Tverskaya-Yamskaya Ulitsa -- all class A locations. In addition, the 28,500-square-meter Brestsky Complex on Brestskaya Ulitsa is due to be completed by the end of the year.

Russian companies and, less frequently, foreign companies building their own sites account for the rest of the space. Alfa Group, for example, is developing a site on the Arbat, Russian Aluminum is building another on Rochdelskaya Ulitsa and Siberian-Urals Aluminum Co. is developing on Bolshaya Ordynka Ulitsa. Because these buildings aren't on the market, details are scarce, but each of them is likely to have an area close to 10,000 square meters.

Nevertheless, the unprecedented number of new buildings being opened for lease is not covering demand, and analysts at Colliers International indicated that only 150,000 square meters will hit the open market.

Going West

Demand for office space is moving to the west of the city, where most office workers live, Aksyonov said. The area is easily accessible, environmentally clean and close to the Rublyovsko-Uspensky, Minsky, Kievsky, Novorizhsky and Leningradsky highways that lead to out-of-town residences. In this area, buildings are scarce and office space is limited -- perhaps the reason that Tower 2000 on Tarasa Shevchenko Naberezhnaya sold out so quickly.

Refurbished industrial buildings are helping fill the demand. The former Badayevsky factory administration building at 12 Kutuzovsky Prospekt was successfully rented out within a month.

There are about 10 other such buildings being reconstructed in the same area. New buildings are being developed as well -- for example, the IKEA shopping complex at the intersection of Kutuzovsky Prospekt and the yet-to-be-completed Third Ring Road, and the Mercedes Plaza at 39 Leningradsky Prospekt.

Tenants are no longer demanding that offices be located within the Garden Ring or near the metro, Aksyonov said. Now the borders of the office zone span the whole inside of the Third Ring Road, and proximity to the metro is far from a deciding factor when choosing a site.