. Last Updated: 07/27/2016

Boom for Retail Centers Far From Exhausted

The helter-skelter construction extravaganza that is bringing two mammoth retail centers to downtown Moscow for next year's 850th anniversary bash is in no danger of exhausting itself, real estate agents say.

"Supply of Western-style retail spaces will probably outstrip demand at some point," said Brett Bobo, retail leasing agent at S+T Handels GmbH, "But not anytime in the near future."

Cranes and construction workers now are busily toiling away on two of the most prominent projects, the $330 million city-backed Manezh underground mall and the $300 million renovation of the 19th-century Gostiny Dvor, both just off Red Square.

The 40,000 square meter Manezh project and the 11,000 square meter Gostiny Dvor -- both just a stone's throw away from the GUM retail mall -- will significantly augment prime shopping space in the city center. But while Moscow is full of new office space, agents said the retail market is still lagging behind and that they did not expect cutthroat competition among the three arcades.

"There is a tremendous shortage of quality retail space in Moscow," said Marc Treves, retail manager at Jones Lang Wootton. "And these projects will by no means saturate the market."

Manezh managers, at least, were unfazed by the prospect of retail rivals.

"There is space for everyone, at least in the center," said Manezh investment manager Maria Kozyreva. A spokeswoman said the mall has already received bids from more than 150 companies to set up shops within the complex.

Stephane Frappart, commercial director of brokers HIB Ltd., said Moscow had less than one-tenth the retail space per capita of major European cities. At least 7.5 million square meters would be needed on top of an existing 700,000 square meters of "high-quality retail space" -- a figure which excludes, say, unreconstructed Soviet-style storefronts -- to bring the Russian capital up to snuff, he said.

Nevertheless, if city hall has its way -- which it usually does in the Moscow real-estate world -- the retail building boom will not be indiscriminate.

"The shopping complexes are part of the general city development plan," said Leonid Bibin, president of the Moscow government's city center construction department. "We closely study the requirements of an area before giving the green light for construction," he said, adding that such review would prevent the possibility of an excess of retail space in any particular area.

Linda Breitel of S+T Handels estimated there are currently almost 90,000 square meters of major retail projects in the planning stages, including S+T's 36,000 square meter site on Tverskaya Ulitsa, the Four Winds Plaza.

Treves attributed the boom in retail construction to developers finally catching on to the needs of the city, although he added that not all the projects conceived on paper would materialize. His company Jones Lang Wootton is currently involved in the massive Moscow City complex near the Expo Center on Krasnopresnenskaya Naberezhnaya. Moscow City, the first phase of which is due to be completed by the end of the century, will have 60,000 square meters of retail space alone, he said.

With space in Moscow at a premium, prices for retail space have soared to levels higher than those of most world capitals, ranging from $250 to more than $5,000 per square meter a year, depending on location. Retail space at the Manezh Square project, for example, will go for $2,000 to $4,500 per year, said Kozyreva.

Developers said prices are set to stay high for at least the next five to 10 years, because construction is a long-term process and because consumer demand for goods and services will pick up with economic revival.

Real estate experts noted two trends that are changing the contours of the market.

One, Treves of Jones Lang Wootton pointed out, is that developers are increasingly steering away from office buildings and instead planning shopping malls or mixed-use complexes, where offices, apartments and stores are incorporated in a single building.

A second is that, while central locations remain the most profitable, developers are realizing the need to take retail mall construction to the suburbs.

Breitel of S+T, which is involved in putting up retail-connected projects on Leninsky Prospekt and near the Baltschug-Kempinski Hotel, believes cheaper retail space in non-central locations will be profitable if leasers are able to attain the "right price, merchandise and atmosphere mix." Surveys had shown demand for increased retail space was strong all over town, she said.

Some new malls, such as one in Shchyolkovskoye Shosse built by Russian company CIED, are indeed targeting middle-class Russians. Another ambitious project is a 6,000 square meter "Western-standard" shopping center near Paveletskaya metro station, that HIB's Frappart says will yield high profits despite lower rents.

"Moscow requires a lot more middle-range shopping space," said Treves. Although most developers now "are concentrating only on posh up-market areas," he said the trend will soon turn to building outside the Garden Ring.