The format of the multifunctional complex has been gaining definition in the Moscow retail-office center market. In its compexity, it has allowed developers to diversify risk and make maximum use of space. As the market changes, evermore complex and capitalized formats are taking precedence in well-planned, well-utilized space of retail centers, hotels and residential quarters.

Defining the Format
On the Moscow commercial real estate market, nearly any building that serves more than one purpose is referred to as a multifunctional center or complex. It is worth considering first of all the defining characteristics of the format. In international practice, mixed use developments are understood as large-scale structures in which retail, office, hotel or residential purposes are served simultaneously. At present, there do not exist any buildings in Moscow that meet all of the abovemetioned criteria, though plans for “Moskva-Siti” include complexes that approximate the given format. The principle of maximized value of one or another combination of functions is unrelated to a multiple-residence building with several offices and retail spaces—that format is based on the infrastructure of residential complexes and the efficient use of additional space. The given format is an integral part of the residential market. There is at least one office-residential complex in the city—Park Place. Additional residential space in business centers is likewise based on its own unique infrastructure that comes into play in the creation of hotel space, the specific management of which transforms a business center into a multifunctional complex.
Obviously, the composition of retail and entertainment spaces has already become a norm in the commercial real estate market, where the combination is regarded as an appropriate and efficient retail complex conception, rather than a multifunctional format per se. There are two distinct formats at work in Moscow’s commercial real estate market—office-warehouse copmplexes located in technoparks and oriented toward the industrial market segment, and retail-office centers that are closer to the abovementioned international standards and form the core of Moscow’s mixed-use format.

Proposal
Retail-office centers can be further divided into two groups, depending upon the strategy of their creation: office centers occupied by retail space, and retail centers with offices on the upper stories.

Outline of “business-center plus”

The first step of this plan integrates the requirements of an office complex in the infrastructure—the creation of food venues, retail bank services,etc. The addition of several retail spaces serving the building’s professionals furthers the concept. As analysts at Jones Lang LaSalle have noted, there are quite a few such business-centers in the city. They cannot be strictly considered muti-use as the retail space is provided as part of the infrastructure, and not substantial enough to raise revenue.
The need to expand the building’s infrastructure takes on strength. Growing competition among quality office complexes has introduced a widening variety of additional services as part of a building’s infrastructure, including retail, dining, leisure and business services.
The final step is the division of the structure into retail space on the lower levels and offices on the upper levels. This gives retailers prime location. If office space is located on the entrance level, retailers will end up paying a significantly higher lease for locations on the lower level than will the office tenants. If retail dominates the lower levels of a building, then companies leasing offices usually prefer to occupy the upper levels.
Analysts at Colliers International note that in the creation of retail galleries it is important that higher leasing rates on retail space compensate for the loss of revenue due to public-use space that goes unleased.

Multifunctionality from another direction, or “retail center plus” on a lesser scale

It is a relatively simple matter to devote several thousand sq meters to office space even in a large-scale retail center: the practice can be found in regional retail-entertainment centers, where chain retailers use the office space for their own personnel. Consultants cite “Kaluzhsky” retail-entertainment center, where a part of the building is being used for office space, as an example.
The most logical plan during the rennovation of a building that has more levels than necessary for a retail center: retail space is not profitable above the fourth or fifth level. Upper levels are therefore given over to office space.

The high cost of land and engineering, and the expense and complication of development as a whole in Moscow, especially in the center, call for means to maximize a project’s returns by increasing the utilized meterage. The strategy runs as follows: retailers’ leasing rates are reduced by half for every floor above the first, so that putting in office space becomes the most profitable solution in a multi-storey complex, as companies pay according to an opposite scheme—the higher the level, the more desireable it is as office space, thus, companies pay more where retailers would pay less.
Some developers have a more basic approach—why not simply combine retail and office space? Thanks to them, several mixed retail and office space buildings have appeared in the city. Specialists place the number of authentic retail-office centers somewhere between 8-12 buildings (see table 1), including Smolensky and Novinsky Passazh, Berlinsky Dom and Arkadia. The total area of these buildings is somewhere in the range of 400 thousand sq meters. Using looser criteria, analysts at Vesco Consulting count 29 retail-office centers, making up a total area of 732 thousand sq meters. They add 8 buildings currently under construction to the list of retail-office complexes, with a total area of 410 sq meters.
Specialists at Prime City Properties count 9 projects in the construction stage, several of which approach the international standard of multifunctionality (3 of the buildings are part of the “Moskva-Siti” project). The projects that conform to Moscow’s retail-office center standard make up a total area of 150 thousand sq meters. In sum, all of the city’s multifunctional buildings, both planned and already functional, have a total area of 1.5 million sq meters. Analysts at Colliers International note that the number of retail-office complexes is not constant, but changes according to the introduction of new buildings and the retirement of old ones. There are already examples of the replacement of retail space with offices (“Tverskaya Zastava” and “Alfa Arbat Tsentr”).
In the case of combined office and hotel space, the Moscow authorities have been the driving force behind the projects. On one hand, the creation of hotel space is usually the investment responsibility of a developer. That was the arrangement that brought such projects as hotel Novotel Moscow Centre near business-center “Meierkhold” and Swissotel Krasnye Kholmy near Riverside Towers (though these were sooner cases of separate objects of the hotel market). On the other hand, the desire of Moscow authorities to replace old hotels with new ones, and to build hotels on empty lots has led to mixed complex projects. To build hotels in Moscow in view of the long wait on returns and comparably low profitability—is not the most attractive venture and in order to secure the profitablity of the project, office and retail space have been factored in. The most well-known examples here are the planned acquisition of the site of hotel “Rossia” and the project for a multifunctional complex on the site of hotel “Sport”.
Of course, it is not always necessary to force a developer to initiate hotel projects. In the opinion of specialists at “Miel-Nedvizhimost”, there is a notable interest being shown in the office-hotel format. A large part of investment is being directed at the potential market for office real estate and the additional investment in hotel structures significantly improves the infrastructure and attractiveness of a business-center (this is a different matter from conference halls provided for meetings, presentations and seminars, that are lacking in many office buildings). Finally, given availability of means, attractive location of the future complexes and protection from the risk of low occupancy (usually a buisiness-center occupies no more than 20 percent of the total space of the complex), the developer can try to take advantage of the current lack of hotel spaces. The problems of management are usually handled through subcontracted international hotel management chains. Although this divides profits, it also reduces risk and ensures quality management.

Essential factors in the location of multifunctional complexes:

Most of them are located in the city center. This is due in large part to the scale of the retail-office center format. This format is an integral part of a central business district mixed with boutiques and the first wave of mass construction of business-centers. Obviously, it makes sense to create a significant volume of retail space in areas with high concentration of auto and foot traffic. The location of a retail-office complex in the city center is all the more crucial due to its parking facilities in a segment that is primarily pedestrian.
Retail-office centers outside of the Garden Ring are likewise succesful. Office space is usually class B, and the retail segment is oriented to a lighter flow of shoppers, however, the volume of projects is significantly larger. Examples of this are Cherry Tower and “Gvozd 2”. Outside of the city limits, demand is growing for retail facilities to rival the major modern retail-entertainment centers.
New projects similar to the international format are appearing in the districts around the Third Ring Road and on major radial highways. A uniquely promising district is without a doubt “Moskva-Siti”

Demand
Reasons for demand of the multifunctional format were covered in part above. The format of retail-office complexes, according to analysts at Colliers International and Noble Gibbons / CB Richard Ellis, lie in their unique ability to hedge and diversify risk: growth in one market segment can correct laxity in another to stabilize the cost of the object as a whole. Diversifying risk is relevent for large-scale complexes with large investment volumes, as well as for small projects in which an owner has invested a large part of his own capital. The Creation of retail space costs less on average, and, thanks to its saleability, it gives a quicker rate of return on investment, according to analysts at Prime City Properties, who note that although it is thought that investing in retail real estate is riskier, the addition of an office component reduces the risk of the whole. Including a residential element allows an almost immediate return on investment, and risks associated with hotel construction are offset by the addtion of office and retail elements. The fixed pricing of the retail real estate market as well as demand for office centers in an ever-expanding infrastructure and lack of quality means of finding a location at an affordable price have influenced the market. Specialists at Noble Gibbons note a higher coefficient of land use for multifunctional centers (“Smolensky Passazh”, for example). In response to the increasing cost of realizing projects in the central business district, the strategy of maximum diversification has arisen. Thus, movie theatres were included in “Dvoryansky Dom” and “Arkady”, and the retail segment was expanded with the addition of a supermarket that, to date, had not been a feature of retail-office centers.
Retail and office elements work in tandem with their corresponding markets. Leasing rates are set according to location, traffic and potential for retail space, and sccoring to quality, location and accessibility for office space.In existing retail-office complexes, leasing rates correspond to the norms of the district. Office space usually fall into class A and B+, class B is more usual in projects ouside the city limits. There are examples of the creation of class C office space in multifunctional complexes, but these are exceptions. Most office space in multifunctional complexes is considered high-quality. The retail space is fairly prestigious due to the location of the complexes. Average leasing rates run around $1500 per sq meter per year for retailers and from $500 to $700 per sq meter per year for offices in the central business district, a rate fully in line with the market average.
The synergy of the multifunctional format lies in the satisfaction of the office professionals with the availablitiy of services provided by retail operators. Retailers, for their part, can count on a guaranteed customer base. Naturally, the combination is not decisive in the choice of a location. As the director of the retail space department at Noble Gibbons, Jeff Kersho, has noted, a crucial factor for potential retailer tenants may be the relatively low level of competition in the retail-office centers: “Retail centers with quality conceptions and a good range of tenants can present retailers with higher sales in a single location, excluding the cases when most profits result from proximity with office spaces.”

Investment
According to analysts’ figures at Vesco Consulting, retail-office complexes require from 10-15 percent more investment than similar single use structures. The terms of return are comparable with those of office projects—4-7 years, on average. Extra requirements in the construction of retail-office centers arise during planning and conception. A maximum value retail complex requires serious investment for large-scale parking, and a convenient separate entrance must be provided for office tenants. As specialists at Jones Lang LaSalle have noted, providing aqequate parking may prove to consume the majority of the investment. Definite problems arise in dividing the bsuiness parking from the retail parking. In managing the complex, complications arise in connection with retail space—a substantial marketing department is necessary and higher salaries are required by the qualified personnel of a management company.
Analysts note that, while diversifying and hedging risk are attractive, most investors still prefer single use space that is easier to analyze and has higher liquidity. In the Moscow market with a limited range of investment in attractive buildings, a project’s details are very important.
Of all the aforemtntioned buildings, ten are considered the most attractive to investors (see table 1). This has much to do with their advantageous location and exclusive nature of the projects. It is too early to say that the multifunction center format itself can guarantee success in the near future, that depends in large measure upon Moscow’s market and the relative stability of the format.
On the whole, market analysts believe that at present it is more effective to invest in modern retail-entertainment centers that have a well-considered consumer base, or else in an office building. On the other hand, the initiave of a number of market players has put a freeze on the availablity of definite sites. In that case it is cheaper to build a multifunctional building with a single infrastructure and engineering system.

Trends in Historical Context

The practice of multifunction utility of a commercial real estate buiding began as an economy measure and came to the market as hotel space under offices. In 1992 Park Place, an office-residential complex, to this day the only one of its kind here, was built on Leninsky Prospekt,” reports the development director at Swiss Realty Group, Ilya Shershnev.
In 196-97, the retail-office format came into being. The first objects were the “Smolensky Passazh”, “”Arkadia”, Cherry Tower and “Galereya Akter”. They represented both new construction and rennovated buildings. As deputy director at Jones Lang LaSalle, Yulia Nikulicheva, notes, if developers are hesitant to turn to the multifunctional format today, at the end of the ‘90s, when the market was in its infancy and there was a lack of information, developers were willing to take chances. And objects from that period are still considered exclusive.
General director of Vesco Consulting, Aleksei Averyanov notes that under present circumstances, when little interest and few convenient sites remain along retail corridors and in the city center, developers cannot perpetuate the old format of retail-office centers: “If multifunctional complexes built at the end of the ‘90s offer a roughly equal proportion of retail and office space, then less profitable portions of the retail elements should be transformed into auxiliery options.”
In recent years retail-office complexes have not only suffered from a lack of locations in the city center. Economical options for erecting competitive multifunctional centers similar in format to international facilities outside of the city’s central buisness district have appeared.
Most consultants consider the Third Ring Road to be the new area of concentration of multifunctional centers. Major city thoroughfares also represent great potential in this regard: “If the northwest distirict currently suffers from a lack of transport access, still the west, south and possibly southeast districts are very attractively accessible district for such complexes,” says deputy director of “Miel-Nidvizhimost”, Elina Zanida.
“Increasing scale of development projects is another trend in the multifunctional format’s developemt connected with general market decentralization,” observes Regina Lochmele, chief analyst of office real estate at Colliers International.
The office-center format itself may undergo changes. Presently, developers are finding possibilities to expand the retail portion and create entertainment zones (“Arkady” and “Dvoryansky Dom” serving as prime examples), and even hotel space (the Lotte & Lotte object on Novy Arbat). The Cherry Tower example has shown that the format is competitive even downtown.
In cases where competition on the retail real estate market is growing, unsuccessful retail models may give way to office facilities. There are already examples of this phenomenon: chief analyst of retail real estate at Colliers International, Olga Yasko, notes that retail space may be redefined if it suits a building’s construction code, leaving street retail with retail banking and dining facilities.
“General trends in the commercial real estate market are a relative maturity, high demand in various sectors, accessability of investment resources as tools of development projects able to stimulate interest in the multifunctional format,” said Yulia Nikulicheva. Although this means the gradual phase-out of the described format of retail-office centers, they will be replaced by buildings more in keeping with the international format.

Prognosis
Changes in the market do not suggest that the old retail-office format will become obsolete: a series of such complexes are slated for construction in the city center. However, it is apparent that an increase in demand for retail complexes will lead either to heavy investment in retail structures, or to their downgrade to auxiliery status. The future holds potential prototypes not only in realized projects like “Sport” hotel, but also the drafted format of Cherry Tower. Buildings combining office, hotel and retail space will emerge simultaneosly on the market. The introduction of a maximum value format for complexes containing residential elements is entirely possible in the near future. Capital City and “Severnaya Bashnya” should become exclusive examples of complexes to watch, whether they succeed in becoming prototypes for future developemnt remains to be seen.

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