Retail Leads Booming Commercial Real Estate Market in St. Petersburg

SPTGalereya shopping center in St. Petersburg

St. Petersburg was the "breakthrough of the year" on the world's commercial real estate market in 2011, as the investment volume here increased almost 10 times to $2.1 billion, according to Global Capital Flows research published by Jones Lang LaSalle. As a result, St. Petersburg, which had never been ranked among the top 100 cities in terms of real estate investment volume, entered the list in 34th place.

Whereas the research showed that the office sector continues to be favored by investors worldwide, this segment accounted for just 6 percent of transactions on the St. Petersburg commercial real estate market, according to Colliers International data.

Instead, the most dynamic St. Petersburg real estate sector is retail, which accounts for 70 percent of the total investment volume, according to Colliers International. This sector may soon see Russia's largest real estate deal ever: A Morgan Stanley real estate fund agreed to buy the Galereya shopping center in central St. Petersburg from Meridian Capital CIS Fund for about $1.1 billion, Bloomberg reported in January.

The deal "proves that in spite of the worries of international investors concerning Russian projects and real estate assets, a quality and attractive investment project can be interesting to large foreign investors," said Nikolai Pashkov, general director of Knight Frank St. Petersburg.

One trend in retail is a distinct pattern of shopping areas that has gradually formed in the city, including the boutique street Bolshaya Konyushennaya Ulitsa, the fashion hub Bolshoi Prospekt on the Petrograd Side, the restaurant street Ulitsa Rubinshteina, shoe-store streets Vladimirsky Prospekt and Zagorodny Prospekt and the jewelry street Mikhailovskya Ulitsa. Sadovaya Ulitsa has historically been popular as a medium and lower price shopping zone.

With the opening this year of a luxury shopping complex on Bolshaya Konuyshennaya Ulitsa, Nevsky Prospekt will lose its image as the main upscale shopping street, analysts said. The number of stores in the top price segment on Nevsky has decreased since the onset of the economic crisis.

Nevertheless, the rental rates for the retail segment on Nevsky remain at the level of European cities, said Natalya Kireyeva, senior analyst in the consulting and valuation department at Maris, part of the CBRE affiliate network.

Although in most European cities the rental rates have returned to pre-crisis levels, St. Petersburg, where rates fell by almost 50 percent, will reach former figures only by the end of this year, experts believe. By the end of 2011, the rental rates on Nevsky Prospekt varied from 3,000 to 8,000 rubles ($100 to $268) per square meter per month, according to Maris experts.

"The forecast for street retail is stable high demand for retail premises that will lead to steady further growth of rental prices," Kireyeva said.

"On average growth will not exceed 7 [percent] to 10 percent per year," she added.

Currently, about 25 projects — both new and previously frozen ones — representing 650,000 square meters for rent are planned to be opened between 2012 and 2014, according to Colliers International experts.

As for the office real estate market, last year saw growth in rental rates and a decrease in the volume of empty premises. This year, six new Class A business centers and 12 new Class B ones are due to open, according to Maris. Almost half of these premises are located in the Moskovsky district.

Meanwhile, only one warehouse terminal was opened last year. In the absence of new offers yet faced with high demand, the market saw a lack of available premises in quality warehouse complexes. Just over 500,000 square meters of quality warehouse projects are currently under construction or planned, compared to 2 million square meters before the crisis, according to Maris experts.