Tenants Increasingly Demand Quality And Professionalism From Landlords

Developers have yet to capitalize upon the dreams of price-sensitive occupiers for campus-style working environments close to the city limits, and within walking distance of the metro.

Kate McMurtie

National Director, Head of International Client Services, Corporate Solutions Group Jones Lang LaSalle


Rents remain unchanged and tenants are focused on price but they still looking for a little more: attention from their landlords, a quality working environment,  and an escape from Moscow's interminable traffic.

Occupier trends

The most important points for occupiers in the market today remain price, locations with good public transport access, landlord professionalism, and building quality. In terms of quality, corporate tenants are more and more focused on buildings that are efficient and provide for more cost-effective space layouts. Thankfully, we now have more projects like this in the market and new options on the way. Regarding tenant-landlord relationships, tenants are interested in longer-term partnerships with landlords who can demonstrate commitment to and delivery of consistently good quality building services and tenant support. Many tenants have been disappointed in the past by empty promises of landlord professionalism and definitely want to improve this element in their real estate portfolios. As for location, aside from tenants who for different reasons remain "captive" to the city center, I know that many corporate tenants in Moscow are still dreaming of campus style office buildings just beyond the TTR that would be more cost effective, provide a better working environment, within walking distance to the metro and away from the traffic hotspots. This is still quite a tall order for Moscow.

Decentralization

Historically, there are some business sectors that have been very tied to the city center and the Kremlin area. We have seen some growing flexibility and desire from these sectors to consider moving further afield in search of lower costs, but rarely an outright step away from the Central Business District. The rest of the business world is much more open to the opportunities to decentralize. We have some great examples of decentralized Class-A projects that occupiers would like to see replicated: like Krylatsky Hills, Metropolis and Olympia Park.

Tenant relations

In terms of the relationships between landlords and occupiers in 2013 I think there are still significant differences between landlords in terms of quality and approach to tenants. We now have a group of landlords in this market who are really pulling away from the pack and showing what they are able to do in terms of offering stable professional working environments for their clients and ensuring that building and tenant services are delivered to a higher standard — and this is very encouraging. Our corporate clients would clearly like to see more of this trend and this is undoubtedly also linked to the development of an institutional investment market as well. Landlords should look at corporate tenants as long-term business partners as opposed to short-term sources of revenue. Within this group of forward-thinking landlords, I'd say we've seen some very positive improvements and we believe it's going to continue. Beyond this main group, there is still considerable room for improvement, but I trust this new group will be setting the pace for the rest to follow.

Rents

Without a doubt price sensitivity will continue to be a major factor driving real estate decisions for tenants in 2013, in contrast to 2007 and 2008 when tenants had very little choice in the matter. Today, 10 out of 10 of our clients are watching their costs in a much more careful manner and reconsidering their workplace strategies. Most corporates are also more sophisticated in terms of their experience in procuring real estate in Russia and are better equipped to understand the analysis of their present and future real estate costs beyond just the headline financial terms in a landlord's offer.

Prime rents in Q1 remained unchanged at the level of USD 1,000 to USD 1,150 per square meter per year. Overall CBD Class-A rents were recorded at levels between USD 650 and 1,150. Moscow City represents a growing opportunity for occupiers with rents varying from USD 650–950. Attention to cost is increasingly driving tenants towards lower-cost options outside the CBD space. In this respect, decentralized locations (TTR to MKAD) displayed the most attractive rents with USD 450–700 for Class-A premises.

I think that a number of landlords may still underestimate how important cost optimization is to corporate tenants and if we see that this trend continues, we may see more tenants re-thinking their priorities in terms of location and opening up further to the idea of alternative locations. Despite this sensitivity to cost, I think most international businesses will still look to Russia as an area for growth and profitability.