Moskva-City Heads To Finish in Mature Market

Igor Tabakov / MT

Climbing and curving their way skyward, the fantastical towers in the Moskva-City business district have long been exclamation points in Moscow's flat skyline. Emerging from the capital's western section, the district literally punctuates the city with glass skyscrapers reaching more than 50 stories.

Yet the district is a metaphorical question mark: With Moskva-City nearing completion in a city radically different from the one in which it was conceived more than 20 years ago, just who is going to fill the offices ?

The topic is becoming more relevant as Moskva-City developers try to fill the 85,000 square meters of office space now available and add more than 500,000 square meters of leasable office space in the next three years. Even in a capital that already has 15 million square meters of Class A and Class B office space, the volume of workspace to be introduced by the soon-to-be-completed construction at Moskva-City will be huge.

As to whether that space can and will be absorbed, market observers say yes, pointing to various types of businesses as potential buyers and lessees. They say this will happen without major changes to the other sub-markets in Moscow, such as the central business district. What's more, this final stage of Moskva-City's implementation is occurring in a maturing Moscow office market, suggesting that both the district and the city as a whole are reaching a new stage.

"Historically, Moskva-City has not had a big effect on the CBD," said Darrell Stanaford, deputy general director for strategic development with RD Management Services and a longtime real estate executive in Moscow. Instead, as more office space comes online in Moskva-City, the district will be "a buffer" for office prices, "preventing the prices from the CBD from going too high," he said.

Several market watchers said Moskva-City, which is formally called the Moscow International Business District, will attract a mix of companies, including foreign ones.

CBRE research analyst Marina Novikova said the district will receive major international firms and large Russian companies, including those that would prefer the CBD but cannot find a large enough location there.

We call Moskva-City a prime location. It's not prime in terms of rental rates, but prime in that it's fancy.

"We can call Moskva-City a prime location," Novikova said. "It's not prime in terms of rental rates, but it's prime in that it's fancy."

Novikova said it appeals to companies seeking "a prestige location." CBRE is brokering leases and sales of floors of Moskva-City buildings.

Moskva-City offices "will be filled with all sorts of tenants," said Vladimir Sergunin, business development director for Colliers International, which leases offices and retail parks at the gleaming high-rise district.

He said the next wave of occupants will include major Russian companies already in Moscow, small and medium-size Russian companies in the Moscow suburbs and other regions, foreign companies and even St. Petersburg firms that want to set up a Moscow representative office.

At present, about 20 percent of the available offices in Moskva-City are vacant. However, because businesses tend to upgrade their work locations, "this volume could be absorbed shortly," Sergunin added.

Stanaford is predicting that the remainder of the Moskva-City office space will mostly be soaked up by Russian individuals looking to invest their companies' profits. "It'll mainly be Russian tenants and buyers," said Stanaford, whose company is doing facilities management for Evolution Tower but isn't invested in the district.

The new occupants will be owners of small and medium-size businesses in Moscow and the Moscow region, and will use the space as their personal representative office, put their company's head office there or lease the space to another party, he said.

The current tenant mix in Moskva-City is like that in the CBD, a dense circle of commercial buildings at the heart of the capital, analysts said.

Finance, consulting, IT, telecoms, pharmaceuticals and the auto industry all are heavily represented, CBRE said. In the CBD, companies in those sectors account for roughly 70 percent of Class A offices ― those in the same tier as Moskva-City's towers.

Occupants of Moskva-City include state-owned banking heavyweight VTB, investment group Renaissance Capital, auditing and consulting firm KPMG, and drug company Pfizer.

For potential buyers and renters, one consideration is the limited commuter options for Moskva-City, which is reached by metro stations that branch off main lines and difficult connections to the city's highways. It also lacks adequate parking.

With land owned by the Moscow city government and buildings constructed by private companies, Moskva-City gained the benefit of  two metro stations, Mezhdunarodnaya and Vystavochnaya, in the mid-2000s, at the time its first tower was completed.

The next station serving the area is expected to launch at the end of this year and will be part of the Yellow Line, said CBRE's Novikova. That will allow metro passengers to travel into the area without changing stations and waiting for trains. Another line will connect in 2017.

A drastic increase in the number of parking spots is planned, with places set to double to about 12,000 by the end of 2014, CBRE said. In addition, Moskva-City, which lies just within the Third Ring Road, will get another access road in 2018.

In addition to the anticipated upgrades, the relatively lower rents are an attraction for would-be renters. Moskva-City rents are ranging from $650 to $950 per square meter per year versus rents in similar offices of $650 to $1,150 in the CBD, according to Jones Lang LaSalle . There is competition, however: Rates in the area between the Third Ring Road and the MKAD highway at the capital's edge are just $450 to $700 for Class A.

Because of its scale Moskva-City holds a whopping share of the leasing and selling market. According to Jones Lang LaSalle's latest quarterly report, Moskva-City contained 16 percent of the capital's vacant Class A offices, or about 85,000 square meters. That is out of 516,000 square meters of vacant Class A office stock for the whole city.

However, a massive uptake will be required to fill the special district's skyscrapers, and that will have to happen in a real estate market new to Moscow: a calmer one. The office market has posted tame numbers so far in 2013. Novikova said both rental rates and occupancy rates are relatively stable. "It's an overall conservative market situation," she said.

In its latest quarterly report, CBRE said first-quarter rental rates were stable, as in 2012. "Rental rate growth is not expected in 2013. Rents in both Class A and B as well as across Moscow submarkets are expected to remain flat." CBRE also forecast that the Class A vacancy rate would be 15 percent this year ― the same as last year's. Jones Lang LaSalle forecast "a modest increase" in prime rents in 2013.

Sergunin, who described the office market as "quite active" in the first quarter, said it has been showing signs of slowing down compared with previous years of heady construction and deal-making.

Stanaford sees the capital's office market entering a cooling phase, saying it will be "flat" in 2013. "Last year was the first stable year. This year is going to reinforce that," he added.

"It's fine if we have a stable market in Moscow for a few years," he argued: lower activity makes the office market more predictable for buyers, sellers and investors and widens the pool of participants.

These signs of market maturity come as Moskva-City enters its last lap, with the orange-tinged Mercury City Tower and the MFC City Point complex expected to be delivered this year. By the end of 2015, the OKO, Eurasia Tower, IQ-Quarter and the double-helix-like Evolution Tower also will be finished, CBRE estimates.

Those will add to about 500,000 square meters of total leasable office space in the six business complexes that have been finished thus far, for a total of more than 1 million square meters of offices. There also could be up to 300,000 square meters for retailers and 780,000 square meters for apartment buyers and hotels ― another part of the Moskva-City take-up challenge.