Prices Rise for Scarce Office Space

As the economy picks up momentum, many companies are looking for options to increase their office space.

The post-crisis fall in the tempo of business center construction has, however, played a mean trick on tenants: Leasing vast swathes of class A office space is an unrealistic proposition.

If they are unable to expand into more space in the building where they already lease space, then they must face the unpleasant fact that new contracts for premises in different business centers must be concluded at a higher price.

Prices recently increased by 5 percent to 10 percent, then stabilized, said Nadezhda Belikova, consultant on office space at leading local realtor Stiles & Riabokobylko. The tendency is for further rises in the future, she added.

According to global realty firm Jones Lang LaSalle, the number of applications for office space in Moscow has doubled from 100,000 square meters at the start of the year to 200,000 square meters at the end of the third quarter. Stiles & Riabokobylko has noted that there are virtually no class A and class B office premises left on the market.

On average class A premises are leased for $490 to $530 per square meter per year, not counting value-added tax and overheads for making the space useable that can mean an extra $70 to $95 per square meter per year, according to Jones Lang LaSalle.

Class B space goes for $370 to $450 per square meter per year, while class C is leased at $200 to $250 per square meter per year.

Research by another leading local realtor, Colliers HIB, shows that financing business-center construction projects was renewed only at the start of 2000. In the first half of the year only 39,000 square meters of office space was leased. But this didnТt influence the market particularly: Demand was dispersed over all of Moscow, as each individual object was no more than 2,000 to 2,200 square meters.

The situation is expected to improve in the future.

On Wednesday the first stage of the TsarТs Garden multifunctional complex opened.

Vladimir Neretin, director of the real estate management department with Keistounm, the company that is building the complex, said that its first clients will move into the 6,000 square meters of office space already completed in the first quarter of next year. In total, 25,000 square meters is to be allocated for office space.

As well as TsarТs Garden, several other major objects are planned to be brought into use in the near future.

Colliers HIB say that these new premises could increase the total office space on offer in Moscow by 17 percent Ч from 2.4 million square meters to 2.8 million square meters.

About 15 objects are being built by major corporations for their own use.

"This can be explained by the fact that there arenТt many modern buildings in Moscow that satisfy the requirements of major Western corporations," said Sergei Riabokobylko, director of Stiles & Riabokobylko.

Another tendency of recent months has been the rapid increase in sales among office space deals.

Rising lease prices as well as the comparatively low sale price of the buildings has led to the fact that premises purchased break even after three to four years, said Yulia Nikulicheva, an analyst with Jones Lang LaSalle.

"In general Russian companies are buying their own buildings. The majority of foreign firms are not prepared to demonstrate so clearly that they are here long-term," Nikulicheva said.