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. Last Updated: 07/27/2016

McDonald's Adds Office Buildings to Its Menu

The triumphal "golden arches" keep expanding in Moscow. After the first McDonald's restaurant on Pushkin Square became a Moscow landmark when it opened in January 1990, six new outlets, including a drive-through, have popped up at other busy locations around the capital.

Unusually for the hamburger giant, McDonald's is not just about fast food in Moscow. On Gazetny Pereulok off Tverskaya Ulitsa, it combines a fast-food restaurant with prestigious office space in what has become commonly known as the McDonald's office building.

"This idea [of property development] grew out of the city planning reality," said Moscow-McDonald's general director Marc Winer, explaining that the company did not originally plan any real estate development.

Instead, the venture stemmed from an association with the Moscow city government, with which McDonald's formed in 1988 one of the first joint ventures in Russia, with McDonald's Canada holding 49 percent. The arrangement was for McDonald's to open 20 restaurants in the city.

Pushkin Square, the first site, remains the busiest McDonald's in the world, handling 40,000 customers a day.

When McDonald's looked for further sites, it came upon Gazetny Pereulok. "We thought it was an excellent location for a restaurant," Winer said, "but the Moscow city wanted a high building." So the idea of an office development was born.

The city provided the site, while almost all the funding came from McDonald's. The $60 million all-glass tower was completed by the Finnish company Terasbetoni in June 1993 and opened the same day as the restaurant, the second set of golden arches in Moscow.

The success of this project was almost guaranteed, because of a shortage of Western-style office space in Moscow and its extremely convenient location. Other Moscow office developments, without big corporate backing, were often bogged down by financing difficulties as foreign banks shied away from the risky Moscow business environment.

The Gazetny Pereulok building was filled almost immediately. Currently 15 big Western companies, including such blue chip clients as ABB and McCann-Erickson, rent offices there, paying an average of $850 per square meter a year.

A significant portion of revenues from the restaurant is used to cover building maintenance and management.

"If you look at the economics ... It turned out to be a good decision," Winer said.

The formula of fast-food restaurant plus office space was repeated at the city's most recent McDonald's, at Krasnaya Presnya. Three floors of office space were added to the original plan, again on the request of the Moscow city government. "It was built to blend in with the environment, in conformity with the architectural integrity of the area," Winer said.

All three floors, a total 2,220 square meters, have been taken by the Dutch ING Bank. The first floor, however, has been sublet.

Between the first and second ventures, McDonald's changed its status in Russia and has become a Russian-registered joint-stock company, rather than a joint venture. McDonald's Canadian subsidiary holds 80 percent, and the Moscow City government 20 percent.

Moscow-McDonald's holds a 49-year lease on each of its sites, paying the Moscow city authorities commercial rates, Winer said. A Western real estate expert, who asked not to be identified, said land-lease rates in the center of the city are typically $1,200 to $1,500 per square meter per year.

McDonald's has built six of its seven Moscow fast-food outlets from scratch, the exception being that on Stary Arbat, where an existing building was renovated. The company also has invested $50 million in Russia in a food processing plant.

Three new Moscow restaurants are now under construction and due to be completed in the last quarter of the year.

However, none of the new buildings will contain any retail or office space. Investment in office buildings in Moscow was an exception for McDonald's, said Frank Talluto, a real estate expert at property agents The Western Group.

Despite profitability of the real estate developments, they will not be repeated, Winer said. McDonald's is in the food business, not in real estate, and its focus remains the quality of its hamburgers, he said.