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. Last Updated: 07/27/2016

Moscow Office Developers Becoming Hoteliers

VedomostiWith a glut of office space in Moscow, developers are reworking projects as potentially more lucrative hotels.

With new Class B office space in Moscow available for rent at an annual $50 per square meter, developers of business centers — both planned and under way — are seriously considering a new direction, particularly remodeling as hotels.

New office buildings in Moscow are like a memorial to development — possible tenants walk around outside, sizing things up, but not many bother going in. The city’s average occupancy rate, according to Knight Frank, is 80 percent, but that includes older buildings with long and solid rental histories.

Yelena Denisova, from the office department at Jones Lang LaSalle, described the situation diplomatically. “There are difficulties signing contracts in buildings where the construction hasn’t finished,” she said.

Demand for Class A business centers has fallen sharply, brokers say. Clients are now mostly interested in Class B properties available for minimal prices compared with their precrisis levels. Kira Smirnova, of GVA Sawyer, said Class B space was being rented at the end of the first half of this year for $200 to $550 per square meter, excluding value-added tax and maintenance, while Class A offices were being offered for $550 to $800.

But those were average prices. A square meter in the Nagatino i-Land technical park could be rented for just $50 per year with an agreement to rent 1,700 square meters, and the company is willing to make other concessions, said Alexei Chertkov, head of Nagatino i-Land’s commercial department. For the first year or two, tenants can move into finished space for just the cost of utilities.  

“The choice now is so big that landlords are being forced to offer all kinds of things: discounts, interior work, rent holidays, longer contracts,” said Anzhela Kuzmina, director of the commercial property department at Unicor. She is in “active talks” with Western companies that Unicor hopes will become the main tenants in the office space (19,000 square meters) of the Summit complex, which is planned for completion in late 2010.

“Requests from renters have become much more modest,” said Anzori Khasia, an adviser to the president of Otkritie-Real Estate. “Some are leaving office space, others are cutting back on what they have.”

Generating revenue streams that will satisfy investors has become much more of a challenge. “Offices have really sagged,” said Vladimir Poddubko, director of Unicor’s hotel department. When the company started working on Summit in 2005, its office component was the largest. Now the project is turning into a hotel, and InterContintental is on board as its operator.

And they’re not alone. Many developers are thinking about converting office centers into hotels, said Grigory Zvenigorodsky, of OPK Development.

A former office building on the property of Danilovskaya Manufaktura has become a hotel in the Azimut chain, said Alexander Gendelsman, chief of Azimut Hotels Company.

He said virtually any office building can be redone as a hotel — the only question is how effectively it can operate. His company is interested in buildings with at least 5,000 square meters that could house no fewer than 90 rooms, as well as restaurants, conference halls and so forth.

Natalya Sazonova, of Knight Frank, said in one such project, which the company is studying as a consultant, the costs for redeveloping and launching as a hotel would be higher than the losses from finishing a business center without tenants. Gendelsman said Azimut Hotels Company also sized up one Moscow office, but ultimately the owner decided to redevelop it alone.

Coalco, which is officially opening the White Square office center in October, also has not ruled out changing some of the space’s use. “It’s a normal practice for any developer, which is trying to optimize the use of space,” the company’s press service said.

Demand to buy office space, according to GVA Sawyer, has almost halved, and the volume of deals signed has fallen by several ties,” Smirnova said. Buildings are being handed over for cash or for debt.

Valery Savelyev, chairman of Yekaterinburg’s AVS Group, said his company was in the process of taking over a mansion being used for office space in central Moscow in exchange for debt. “It will break even in about 13 years under the current rates,” he said.

One of GVA Sawyer’s spaces available for purchase is the Spartakovsky 2 business center, which has 14,000 square meters. Smirnova said the company was offering either small blocks or the rights to reconstruct the entire building. The latter option is going for $1,000 per square meter.

AFI Development sold the Na Kosinskoi business center in August for $195 million, “which is $40 million more than the consultants’ estimate for the complex,” the company’s press service said.

Mos City Group, or MCG, has also started looking to sell office space, commercial director Dmitry Chertkovsky said. The company is completing construction of the Imperia Tower in Moskva-City, which has 70,110 square meters of offices. In May, MCG signed its latest loan agreement with VTB to finish construction — this time with ownership rights as collateral.

“The oversupply of commercial space built during the investment boom will be evident for a while yet,” Chertkovsky said.