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. Last Updated: 07/27/2016

'98 Brought Giant, Landmark Projects to City

When the financial crisis hit Russia in August, Moscow's construction boom hit the skids with it. While the market for commercial space - with its heavy reliance on the financial firms that were most affected by the storm - saw demand dry up quickest, the residential and retail sectors were hit with shock waves as well.

Nevertheless, numerous high-profile projects were completed in 1998, some coming on stream through sheer momentum, while others seem to be built on firmer foundations, aiming to answer long term needs.

Retail Space

By far the most dynamic sector of the real estate market this year was retail space. Even as the crisis thinned out shoppers at some of the prestigious new stores completed last year, new capacity became available and was leased with what at first glance seemed to be surprising speed. However, the buying public's enthusiastic response to 1998's two flagship projects made it clear that retailers who leased space in either the second Ramstore or the Smolensky Passage complex knew what they were doing.

The openings of these two shopping centers in November were definitely the biggest events of 1998 in the retail sector. Turkish company Ramenka spent $45 million on the 32,000-square-meter Ramstore mall in northern Moscow. The complex includes a 20,000-square-meter food hypermarket, 80 boutiques and several fast-food outlets, complete with the ubiquitous fried chicken eatery Rostiks.

The hypermarket has been a roaring success. After floods of customers caused traffic jams on the store's first two weekends, trade has settled down, with 12,000 customers a day visiting the center, according to Ramenka.

Tapping into the remaining middle and upper class market, Finland's Kalinka-Stockmann opened Moscow's first Western-style department store, a $12 million, 6,700-square-meter outlet in the Smolensky Passage center on the Garden Ring. The fact that the 40,000 square meter complex boasts an anchor store - Stockmann - sets it apart from other major downtown complexes such as GUM, TsUM and the Manezh Square shopping center. Smolensky has about 40 boutiques, many of them either occupied or in the process of being fitted out for tenants.

Constructed by Skanska of Sweden, the building also offers 20,000 square meters of class A office space, most of which remains empty for now.

Some officials near to the project say the complex is owned by a firm called Tema. But industry sources say the Moscow city government and Sberbank are now the ultimate owners. The building is valued at more than $100 million.

Office space

While the crisis caused many of the construction sites across town to fall silent, several buildings were completed in the second half of 1998 with highly acclaimed first generation class A office space that can truly be called Western standard. These projects included 11 Gogolevsky Bulvar, an 8,000-square-meter building put up for CS First Boston, and major developer S+T Group's two latest projects - 5,000 square meters at 3 Sadovnicheskaya and 8,700 square meters at 24 Timura Frunze.

While the construction costs for these three remain under wraps, all of Moscow is well aware that the respective landlords are feeling the pinch of an office market gone more than merely sour.

Rents across Moscow for class A space have tumbled from the $700 and $750 per square meter per year being asked last summer to about $600. S+T and CS First Boston are asking $575 to $600 per square meter for rent, and they are also willing to negotiate deals such as special fitting-out arrangements and rent holidays.

Despite such generosity, the spaces remain gleamingly empty, mostly thanks to the glut of sublease space unloaded onto the market by companies forced to downsize by the economic downturn.

Gogolevsky, owned by CS First Boston, stands nine stories and is located across the street from the Kropotkinskaya metro station in downtown Moscow. The building is among the new office projects this year to start offering parking space proportional to the amount of space being leased.

This complies with changes to the building code ordered by Moscow Mayor Yury Luzhkov in a bid to alleviate the capital's abysmal car to parking space ratio. Three of the city's 2 million cars currently fight for every available spot, according Noble Gibbons real estate agency.

Residential Space

While much could be said about spanking new city-sponsored apartment complexes such as the ultra-modern Olympic Village, the most grandiose and celebrated housing project to open in 1998 was the landmark $100 million Pokrovsky Hills mini-suburb in west-central Moscow.

Families have already moved into almost all of the 70-odd three- and four-bedroom homes on the 15.7-hectare site 13 kilometers west of the Kremlin, and about 190 more townhouses are under development. The completed houses have been snapped up by multinational companies that are here for the long haul, such as CS First Boston and United Technologies. The U.S. Embassy has also leased 40 homes.

The project caused a stir in Russia because it broke new ground by being the largest local undertaking of its kind and by being the first Russian development to attract investment from normally conservative U.S. pension funds.

The $100 million investment is one of the largest ever for the $410 million fund known as Hines, Dean Witter, TCW Emerging Market Real Estate Fund, which finances projects worldwide.

U.S. company Hines, which manages the project and leased the site from the city, donated one-third of the land to the Anglo-American School, sponsored jointly by the British, Canadian and U.S. embassies, and construction on the 20,000-square-meter building began in late September.

Meanwhile, at the other end of the market, City Hall has set up a mortgage scheme to shift some of the thousands of newly built apartments it has on its hands. Even after the crisis killed off Western interest in funding the scheme, the Moscow city government launched its mortgage program in late September, offering 10-year mortgages at 10 percent annual interest, with a 30 percent deposit up front.