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. Last Updated: 07/27/2016

Retailers Struggle for Vacant Space

MTDarnell of Monsoon-Accessorize
For Natalia Darnell, a franchisee of British-based fashion chain Monsoon-Accessorize, finding a suitable spot to open an Accessorize outlet in the city center proved impossible.

She finally settled on a 50-square-meter shop space on the city's outskirts, in IKEA'S soon-to-be-completed MEGA mall.

"Places with big human traffic are very few and they are selling like hotcakes," Darnell said. "For my company, which is just starting out, we need a small shop -- a maximum of 100 square meters. But such spaces are very difficult for us to find."

Demand for prime retail space in Moscow far exceeds supply, despite a considerable surge in the construction of new shopping centers.

The shortage of quality space combined with the ambitious expansion plans of local and international retail giants has resulted in high occupancy rates -- and sky-high rents.

On Tverskaya Ulitsa, Moscow's main thoroughfare, retail rents can reach $3,300 per square meter per year, according to Jones Lang LaSalle.

Anna Molodtsova, head of tenant relations at international real estate advisor DTZ, named street-level spaces on Kuznetsky Most, the beginning of Kutuzovsky Prospekt and Novy Arbat among the most sought-after retail locations.

"Coffee shops and slot machine arcades are snapping up any available space for any amount of money," Molodtsova said. "It's impossible to compete with them."

She added that banks, beauty salons and airline ticket offices are also "aggressively" searching for first-floor locations in the city center.

On the other hand, rents for spaces in malls have stabilized due to an increased supply.

Natalya Osipova, retail director with Colliers International in Moscow, said rents remain high only in unique shopping centers such as GUM, Okhotny Ryad and Atrium.

She estimated that ground-floor stores in major fashion streets and in large malls both in the center and beyond the Moscow Ring Road could fetch $1,800 to $2,500 per square meter per year. Shops on other floors in malls and on less popular streets can go for $700 to $1,200 per square meter per year.

Moscow's shopping scene has changed enormously in the past decade, with foreign developers giving retail construction a boost.

"The opening of Ramstore near Molodyozhnaya metro station became the starting point for running a professional business for many retailers," Osipova said, referring to Ramstore's first shopping center in Russia which opened in November 1997.

Hakan Karlsson, CEO, founder and owner of Centrumutveckling, a leading Swedish mall developer, said consumers' preferences are changing.

"Modern shopping centers will steadily increase their market share of the total retail sales during the decades to come," he said. "It will probably take a little more than a decade until the open markets and small food stores become more or less history."

An increasing number of retailers are looking to expand their business in residential areas with high population density. Molodtsova said retail chains may have plans to open new outlets at a rate of 100 a year -- but there is no available space for them. As a result, chain stores are no longer oriented to the city center, she said.

Space may be less of an issue on the outskirts near the MKAD, where developers have been quick to construct sprawling malls.

Osipova said that despite its location far from the city center, IKEA's MEGA mall is likely to have high rental rates, comparable with rents on first-floor properties in GUM, because of its importance as a regional trade center. However, she warned that rising land prices and increased competition could lower the net yield for other, new projects.

Some observers expect rents in some centers to fall. The Vedomosti daily reported in September that after a weak summer for the retail sector, some shopping centers were experiencing an exodus of tenants and were offering discounts on rent. "Some market participants are even forecasting that in six months rental prices at some less well-located shopping centers could drop by a third," the daily reported.

Colliers' Osipova said the surge in construction of retail complexes beyond the Garden Ring could cause several less successful shopping complexes to adjust their prices, while Yulia Nikulicheva from Jones Lang LaSalle said she expected the rents on retail outlets in residential areas to drop by 10 percent to 15 percent in the next two to three years. However, Molodtsova of DTZ disagreed, saying she did not see how rental prices could change in that time span.

Still, the market potential remains largely untapped. According to the Russian Council of Shopping Centers, about 1 million square meters of open markets are to be closed or transformed into "civilized" retail centers within the next four years, and 50 modern shopping centers totaling about 2.5 million square meters are to be built in the next five years.

"We expect this boom to continue for the next five years," said Nikulicheva of Jones Lang LaSalle.

Despite all the malls mushrooming around Moscow, Darnell of Monsoon-Accessorize said the inner city still needs well-defined shopping areas -- places like London's Oxford Street, King's Road, or Knightsbridge.

"We don't really have anything here besides Tverskaya," she said.

"We were struggling to find an appropriate space in the city center. If you know the brand, it's a very high-street brand, it should be located on the high street."