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. Last Updated: 07/27/2016

Brick by Brick: Office Space Growing Scarcer In Large Blocks

Office accommodation in Moscow is widely considered to be oversupplied, but there are signs this could quickly change as take up increases and because of the limited number of large units available for immediate occupation.

Much of the space on the market is available to sublet. The result of this is that buildings, which at first sight appear to have a significant amount of vacant space, are often unable to accommodate a large single user who needs contiguous accommodation. There are several buildings that remain largely vacant. It must, however, be acknowledged that in some cases this is due to either poor design or unreasonable pricing. For properties that are well designed, provide flexible accommodation and are properly priced there remains a reasonable level of demand.

There is a limited amount of supply in the pipeline. Financing has been even more difficult to obtain since the 1998 financial crisis, and where it is available it is often at very high rates. This, along with lower rental rates, has in many cases prevented developers from proceeding with planned projects as the projected returns have fallen below the required level. It is thought that in 2000 and 2001 there will be a fairly limited supply of newly built accommodation, although as rent prices harden we may see some developers resume work on previously delayed projects.

Those developers who choose to proceed without delay may be rewarded not only by increased rents, but also by the possibility to secure large occupiers who in the immediate future may have few available options. Although rental levels are unlikely to reach their pre-crisis level of $750 plus operating expenses for shell and core units, it is likely that there will be some modest increase along with the abolition of some tenant benefits such as a standard fit-out included at no extra cost.

For occupiers this will mean planning any move early, as it could well be that no completed space will be immediately available to fit their requirements. Even if tenants wish to remain in their existing space lease, renewal negotiations should be undertaken in a timely manner, since no landlord will give the best possible deal to a tenant who has left it too late to acquire alternative premises.

For smaller occupiers the situation is a bit easier. Many will find space available to sublet that is able to accommodate their requirements. Although some tenants have concerns about security of tenure, and for this reason prefer to take a direct lease, it appears in many cases that this fear is unfounded. An experienced real estate lawyer will be able to minimize risks. In many cases a landlord will be willing to take back excess accommodation once a new tenant is identified and will grant a direct lease.

Some smaller tenants may find that it will become a little more difficult to secure accommodation in newly built properties. If demand for larger units increases some landlords may become less willing to subdivide properties to provide many small units. Although subdivision is likely to achieve slightly better rents, and prevents the risk of one tenant moving and leaving a property largely vacant, it also makes the management of the property far more intensive and the income stream far less certain.

Although the office market seems on the surface to be far from healthy, there are signs of improvement in the economy as a whole. If this trend of gradual improvement continues we may in the foreseeable future find an undersupply of true Class A space, and tenants may once again find themselves compromising on quality and paying increased rental rates.

Amanda Spring is the managing director of DTZ Zadelhoff Tie Leung in Moscow.