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. Last Updated: 07/27/2016

City Presses Ahead With New Financial District

VedomostiThe Moskva City site on Krasnopresnenskaya Naberezhnaya. The city has now found investors for the remaining projects.
As City Hall's Moskva City project finally looks like it's becoming a reality, discussion is intensifying about the impact it will have on the city's real estate market.

At a meeting with the European Business Club last week, Moscow's Deputy Mayor Iosif Ordzhonikidze brought investors and realtors up to speed with the project's progress and attempted to reassure its skeptics.

City Hall launched the ambitious development on Krasnopresnenskaya Naberezhnaya behind the Ukraina Hotel in the early 1990s with the intention of relocating Moscow's commercial and administrative center to the site.

But the multibillion project -- which is to include 2.5 million square meters of office, retail and residential space; new City Hall and City Duma buildings; hotels; new metro stations; rail connections to Sheremetyevo and Vnukovo airports as well as a water park and other leisure facilities -- was stalled for much of the last decade.

To date, only the 30-story Tower-2000 -- which opened in 2001 -- and the Bagration Mall pedestrian bridge, completed in 1997 to connect the site to the Expocenter on the opposite side of the Moscow River, have been built.

It was not until mid-2003 that the City found investors for the ambitious project, enabling development of the 60-hectare site to begin in earnest. In September, Turkish construction giant ENKA began construction of a 220,000-square-meter office complex, consisting of three buildings 16-, 27- and 52-stories high. The first building, which has already been pre-leased to IBM and Eli Lilly, is scheduled for a September 2004 opening, while the entire office complex should be completed by 2008.

ENKA was soon joined by two Russian companies -- Capital Group, which is working on the $250 million, 64- and 53-story "Moscow" and "St. Petersburg" skyscrapers, and construction firm Stroimontazh, which is responsible for the $500 million, 92- and 44-story high Federation Towers.

The city has already found investors for the remaining projects, including the $600 million, 648-meter-high Russia Tower, which, if completed, will be the tallest skyscraper in the world, Deputy Mayor Ordzhonikidze told the European Business Club.

The only project that still lacks financing is the $500 million rail connection between the development and Sheremetyevo and Vnukovo airports, he added.

The bulk of the first stage of Moskva City should be completed by 2007.

Ordzhonikidze addressed the fear of some market watchers that the completion of Moskva City may lead to the collapse of Moscow's office market, as the large amounts of new quality Class A space might crash prices.

"Over a million square meters [of office space] sounds a little bit terrifying, but it will not affect the market in any significant way," he said.

"Every year an average of $7 billion is spent on shopping center construction -- last year it was even $9 billion -- but the market is far from being saturated, because of the initial significant imbalance. It is the same with offices," the deputy mayor added.

He said that even after the Moskva City project is completed, as much as 3 million square meters of quality office space would still be lacking in Moscow.

"Only after that will the [office] market stabilize for many years," Ordzhonikidze said.

Michael Lange, European director of Jones Lang LaSalle agreed with Ordzhonikidze.

"Last year alone the level of office absorption in Moscow was over 600,000 square meters. A million [square meters] over a period of several years is really not that much," he said.

Ordzhonikidze said that while he personally wanted Class A office prices to fall to $250 per square meter from their current level of $550 to $600, Moskva City would not be a catalyst for such a drop.

However, others said the addition of large volumes of quality space would not go unnoticed by the market.

"Although the influence of an additional million square meters of offices on the market will not be radical, it will be significant," said Ilya Shershnev, development director of Swiss Realty Group. "We predict that prices will fall by 10 percent to 20 percent, or $50 to $100 per square meter per year," he said.

Olga Arkhangelskaya, head of real estate advisory services at Ernst & Young, also agreed that completion of Moskva City would lower prices, but said that "the speed and significance of the lowering of prices will greatly depend on the schedule of new projects entering the market."

Arkhangelskaya also said that because Moskva City is a high-profile project, it was affected by non-market factors, both political and administrative.

It is also possible that the completion of Moskva City will lead to the stratification of the quality office market, as demand for class A offices in other parts of Moscow will be determined by different factors, Arkhangelskaya said.

It is the very scale of the project that creates additional investment risks, said Oleg Myshkin, director at Colliers International.

"Note how ENKA, a very experienced developer, is only realizing the first two stages of its project and gradually adds new space to the market. Their project is divided into phases in order to minimize risks," he added.

Projects with more than 100,000 square meters of office space that enter the market at once will find it more difficult to compete, Myshkin said.

One aspect that will set Moskva City apart from many other business districts in the world, in addition to its roughly 1 million square meters of office space, is that it will have elite housing and leisure and entertainment facilities.

"We do not want dark and empty skyscrapers to scare people at night," Ordzhonikidze joked. "Therefore we needed projects that would ensure that the City was working nonstop."

For example, a huge square -- "2 1/2 times the size of Red Square" -- will be used for holding public events.

Although the idea of mixing offices with entertainment raised some eyebrows, Jones Lang LaSalle's Lange said it made sense.

"You don't want it to die down on weekends. [By adding nonbusiness facilities] you can give constant life to the complex 24/7," he said.