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27 Декабря 2010, 13:27
Moscow Office Market Results for 2009
Having reviewed the results of the first year of the crisis, office market players can finally breathe in with relief, or at least acknowledge that the worst expectations never really came through – the drop in leasing rates and vacancy rates for offices didn’t turn out as catastrophic as forecasted. The predictions for this year are somewhat more optimistic, without however any major recoveries.
General Situation The Federal Service for Employment and Labor Relations does not exclude the possibility that the unemployment rate may reach as much as 10%. This forecast does not necessarily relate to the capital, but it is clear that even if companies stop laying off their employees, they won’t be hiring intensively either. And this is why no one is really expecting any major activities on the market for the coming year, but perhaps a relative stabilization.
According to Jones Lang LaSalle, the volume of investments in Moscow’s office sector in 2009 represented $2.3 billion, just 14% less than in 2008, and twice as much as in 2007. And this concerns transactions in real estate, including development projects.
Last year was marked with a series of projects that became the property of the banks, and these are some of them:
• Alfa-Bank inherited a series of projects from Kopernik Group, the former MIAN Group of Companies, including the Severnoye Siyanie;
• Sberbank took over part of Capital City from Capital Group, and this year it already received half of the Crystal Towers project from Coalco Development;
• VEB-Invest, following the reorganization of the Globex Bank, inherited the Novinsky Passage, a development project on the grounds of the Slava Factory, and others.
The expected massive clearance of real estate assets by the banks and the subsequent collapse of the market, which was predicted by many experts, haven’t happened yet. Furthermore, by becoming shareholders of development companies, the banks are in no hurry to position themselves as property owners, and in order to avoid a mood of uncertainty among tenants.
There were quite a lot of office sales transactions last year, and the following are some of the most notable:
• It became known in February 2009 that Sberbank purchased the Southern Port from Midland Development with a space of 57,000 sq m located in the 2nd Yuzhnoportovy Proezd;
• Horus Capital sold the Luch Business Center to Inter RAO UES with a space of 35,000 sq m located on Bolshaia Pirogovskaya for $140 million;
• AFI Development sold the Espace Office Complex located on Lusinskaya St. (111,800 sq m). The value of the transaction - $195 million.
• Open Investments (OPIN) sold the Domnikov Business Center located on Prospect Akademika Sakharova to a group of investors (132,000 sq m);
• Structures under the control of BINBANK and BIN Group purchased for $270 million a share of the Horus Capital assets (four business centers and two construction sites);
• The Siemens Real Estate (SRE) purchased from Legion Development the Legion II Business Center located on Bolshaya Tatarskaya St. (27,900 sq m) for the Siemens Russia Head Office;
• The British Evans Randall investment group purchased from RP Capital Group the Silver City Business Center (56,000 sq m) for 190 million euro (about $272 million).
While the first quarter of 2009 was really quiet for the office market, by the summer time announcements regarding transactions of office facilities reappeared. Among the major leasing transactions we can mention the following:
• Aeroflot leased 7,000 sq m in the Midland Plaza located on Arbat;
• Two major transactions spaced in the fall regarding the Dvintsev Business Center that belongs to Central Properties – Samsung Electronics Ltd. And Halliburton International Inc. occupied 2,200 and 2,600 sq m accordingly. It also became known that Technoserv which was planning on occupying 23,000 sq m backed off from its plans to move;
• Olympstroy leased about 11,000 sq m in the Solutions Business Center located on Teatralnaya Alley, and left its former head office located on Nametskin St. because of a refusal by the property owner to lower the leasing rate;
• It became known in December that Sportmaster and its sub-division O’Stin would lease 16,700 sq m in Capital Group’s Aviator Business Center;
• The Russian sub-division of Unilever, leased 9,355 sq m in the Marr Plaza Business Center with a term up to 2020;
• In early 2010, a transaction became known for the lease of the DS Development’s NordStar Tower located on Begovaya to Deutsche Bank, of 7,000 sq m for a term of seven years, for the IT Department of the Investment Group.
The Supply In early 2010 in Moscow, the total quality of office spaces being offered represented 10.2 million sq m (according to Knight Frank there were 1.8 million sq m of Class A spaces, 5.6 million of Class B+ and 2.8 million of Class B-) to 11.7 million sq m (Jones Lang LaSalle estimates 1.65 million sq of Class A, 5.94 million Class B+, 4.14 million of Class B-).
According to the final results for 2009, we can say that developers surpassed all expectations with 1.7 million sq m of offices. According to Colliers International, the offer of Class A spaces increased by 373,800 sq m, Class B+ by 742,250 sq m, Class B- by 572,800 sq m. The increment in the offer was a little lower than in 2008 (2.1 million sq m), but higher than in 2007 (according to various sources the increment represented some 1.2 to 1.5 million sq m).
Among the most notable business center inaugurations in 2009, we can mention Monarch (total space of 152,900 sq m, offices - 76,000 sq m), NordStar Tower (total space 147,000 sq m, leasable space – 80,000 sq m), White Square, buildings A and B ( total space of 58,000 sq m, leasable – 56,000 sq m), Capital City (office spaces of about 80,000 sq m), Metropolis, Phase III (total space of 52,000 sq m with 36,000 sq m of offices), Dvintsev (total space of 58,000 sq m and 49,500 sq m of offices) and others.
Considering that since the beginning of the crisis there were no new announcements of any new office projects, we should expect that the number of new office spaces inaugurated will just keep on decreasing. According to DTZ, there will be some 650,000 sq m of offices inaugurated in 2010. Experts at Jones Lang LaSalle note the fact that the inauguration of a great number of projects was postponed from 2009 to 2010 and estimate the expected increase in the offer of 1.8 million sq m.
An important trend of the last few months is the practice of leasing spaces that are fully renovated and equipped. As noted by Cushman & Wakefield, not all property owners are willing to fully equip their premises with their own resources but many have adopted a new strategy in the last year whereby they try attracting a greater number of tenants that have no resources for extended renovations. For instance, Central Properties (the developer of Dvintsev, Pavlovsky and others), is offering potential tenants all possible variations of renovations, the developer being ready to complete the premises himself or with the resources of the tenant, finance the renovations to be executed by the tenant, and even to a pre-crisis scenario when the tenant conducts and funds the work on his own. According to Capital Group (developer of multifunctional projects with offices such as Capital City, Imperial House, Avenue 77 and others), most offices are leased as shell & core.
As indicated by Jones Lang LaSalle, in cases when the finishing of the project is assumed by the property owner, the costs are assumed by the tenant over a period of time and which is reflected in the leasing rate. “The chances of finding a tenant interested in shell & core and without any resources or discounts for finishing the premises are very low – such transactions did take place last year but no more than five.”
In order to attract resources, many business center property owners began offering their facilities in smaller parts. According to experts at RRG, the sectors where this was most widely adopted were the Class B- and C, and buyers of blocks would simultaneously become the actual end-users (with the existing tenants) and investors as well.
The Demand According to data from Cushman & Wakefield, there were some 700,000 sq m of quality office spaces that were either sold or leased in 2009 (only new transactions without lease renewals). This is substantially less than in 2008, when some 1 to 2.5 million sq m were occupied. But the occupancy rate substantially exceeded expectations: according to the results of the last few months of 2008, occupancy rates in 2009 wouldn’t exceed 300-400 thousand sq m.
In the pre-crisis period, the major share of offices being leased were dedicated to the expansion of companies, while today the new lease transactions are being concluded for the same or lesser spaces, with differing level of quality, depending on the financial situation of the companies that are leasing. Once they move, the companies leave behind vacant spaces that property owners aren’t necessarily capable of leasing.
Certain increases in vacancies among quality office spaces where present before the crisis - in 2007-2008, but until the third quarter of 2008 these ratios didn’t surpass 5-6%. In the last months of 2008, the ratio grew to 14-15%, and in mid 2009 it surpassed 25% in Class A offices. In the second half of 2009, the vacancy rates stabilized somewhat, and in January 2010, according to data from Cushman & Wakefield, in the Class A segment there was 24% vacancy rate, in Class B+ about 18%.
In the newly inaugurated in 2009 business centers, about half of the spaces are vacant. While in the past almost all spaces were leased ahead of time before completion of the actual facilities, now absolutely all leasing agreements are signed once the facility has been completed. This is caused by the reluctance of tenants to risk delays in the construction and the large availability of spaces and operational business centers, including some with fully renovated spaces.
In early 2009, market experts were noting the growth in the demand for secondary markets including sub-leasing – such facilities do not require renovations investments and can meet the requirements of small enterprises looking for small spaces. According to CB Richard Ellis, 50% of the total number of transactions on the market in 2009 were finalized for secondary spaces, which brought about a substantial growth in vacancy rates in shell & core premises. Towards the end of the year, many new facility property owners, attempted to adapt to the new requirements and designed some new packages for the primary market, fully finished facilities with varying spaces at attractive rates.
The Rates By the end of 2009, the average leasing rate in the Class A segment, according to Colliers International, represented $620/ sq m/year (in early 2009 - $1,170), and in the Class B+ segment, the average rate dropped to $330/sq m/year ($660 in the beginning of the year).
The developers questioned by CRE indicated no interest in possible reductions in leasing rates, but spoke of initial free leasing months, lower deposits and so on. Nevertheless, according to data from analysts, since the beginning of the crisis, the decrease in leasing rates according to various estimates represented some 30-70%.
The sale and purchase market was also subjected to some changes in pricing. The prices for office spaces in modern day business centers, according to RRG, decreased by 34-36% on an average. In December 2009, offices in quality business centers were offered at $4,420/ sq m/year beyond the Garden Ring and at $7,120/sq m/year within the Garden Ring. With regard to operational costs, they practically remained the same during all of last year, representing $100150/sq m/year for Class A and $60-110 for Class B (data from DTZ).
The construction cost of one square meter of quality office according to Central Properties in Moscow varies between $1,500 and $2,000. As noted at the company, the witnessed drop in the cost of certain constructions was leveled by the increased cost of engineering systems, with an overwhelming number being imported from abroad.
Office Real Estate Expansion Trends
• Upon exploring new facilities, the class of the leased space is no longer a priority, while the price and location are at the forefront;
• Companies prefer leasing offices that are finished without any requirement for additional renovation expenses;
• Many developers with projects under construction prefer postponing their inaugurations due to a lack of resources and lack of potential tenants;
• In the framework of the stabilizing debt difficulties, there is an increasing number of banks that are becoming shareholders in development companies;
• A number of developers are increasing their cash positions and raising financing through the sale of their business centers in blocks.
The Forecasts The new year should bring us a continuing stabilization. The experts aren’t excluding the possibility of a decrease in vacancy rates, but only for Class B facilities – there will be sufficient demand to occupy the expected new Class A spaces. In the second half of the year, we should expect a certain increase in the average leasing rates. There are no new business complexes expected this year. This should bring about a slower rate of new office buildings being inaugurated, which conditional on a stable economic environment, will consequently produce a stable growth rate in occupancy and leasing rates for offices in 2011-2012.
According to Jones Lang LaSalle, the volume of investments in Moscow’s office sector in 2009 represented $2.3 billion, just 14% less than in 2008, and twice as much as in 2007. And this concerns transactions in real estate, including development projects.
Last year was marked with a series of projects that became the property of the banks, and these are some of them:
• Alfa-Bank inherited a series of projects from Kopernik Group, the former MIAN Group of Companies, including the Severnoye Siyanie;
• Sberbank took over part of Capital City from Capital Group, and this year it already received half of the Crystal Towers project from Coalco Development;
• VEB-Invest, following the reorganization of the Globex Bank, inherited the Novinsky Passage, a development project on the grounds of the Slava Factory, and others.
The expected massive clearance of real estate assets by the banks and the subsequent collapse of the market, which was predicted by many experts, haven’t happened yet. Furthermore, by becoming shareholders of development companies, the banks are in no hurry to position themselves as property owners, and in order to avoid a mood of uncertainty among tenants.
There were quite a lot of office sales transactions last year, and the following are some of the most notable:
• It became known in February 2009 that Sberbank purchased the Southern Port from Midland Development with a space of 57,000 sq m located in the 2nd Yuzhnoportovy Proezd;
• Horus Capital sold the Luch Business Center to Inter RAO UES with a space of 35,000 sq m located on Bolshaia Pirogovskaya for $140 million;
• AFI Development sold the Espace Office Complex located on Lusinskaya St. (111,800 sq m). The value of the transaction - $195 million.
• Open Investments (OPIN) sold the Domnikov Business Center located on Prospect Akademika Sakharova to a group of investors (132,000 sq m);
• Structures under the control of BINBANK and BIN Group purchased for $270 million a share of the Horus Capital assets (four business centers and two construction sites);
• The Siemens Real Estate (SRE) purchased from Legion Development the Legion II Business Center located on Bolshaya Tatarskaya St. (27,900 sq m) for the Siemens Russia Head Office;
• The British Evans Randall investment group purchased from RP Capital Group the Silver City Business Center (56,000 sq m) for 190 million euro (about $272 million).
While the first quarter of 2009 was really quiet for the office market, by the summer time announcements regarding transactions of office facilities reappeared. Among the major leasing transactions we can mention the following:
• Aeroflot leased 7,000 sq m in the Midland Plaza located on Arbat;
• Two major transactions spaced in the fall regarding the Dvintsev Business Center that belongs to Central Properties – Samsung Electronics Ltd. And Halliburton International Inc. occupied 2,200 and 2,600 sq m accordingly. It also became known that Technoserv which was planning on occupying 23,000 sq m backed off from its plans to move;
• Olympstroy leased about 11,000 sq m in the Solutions Business Center located on Teatralnaya Alley, and left its former head office located on Nametskin St. because of a refusal by the property owner to lower the leasing rate;
• It became known in December that Sportmaster and its sub-division O’Stin would lease 16,700 sq m in Capital Group’s Aviator Business Center;
• The Russian sub-division of Unilever, leased 9,355 sq m in the Marr Plaza Business Center with a term up to 2020;
• In early 2010, a transaction became known for the lease of the DS Development’s NordStar Tower located on Begovaya to Deutsche Bank, of 7,000 sq m for a term of seven years, for the IT Department of the Investment Group.
The Supply In early 2010 in Moscow, the total quality of office spaces being offered represented 10.2 million sq m (according to Knight Frank there were 1.8 million sq m of Class A spaces, 5.6 million of Class B+ and 2.8 million of Class B-) to 11.7 million sq m (Jones Lang LaSalle estimates 1.65 million sq of Class A, 5.94 million Class B+, 4.14 million of Class B-).
According to the final results for 2009, we can say that developers surpassed all expectations with 1.7 million sq m of offices. According to Colliers International, the offer of Class A spaces increased by 373,800 sq m, Class B+ by 742,250 sq m, Class B- by 572,800 sq m. The increment in the offer was a little lower than in 2008 (2.1 million sq m), but higher than in 2007 (according to various sources the increment represented some 1.2 to 1.5 million sq m).
Among the most notable business center inaugurations in 2009, we can mention Monarch (total space of 152,900 sq m, offices - 76,000 sq m), NordStar Tower (total space 147,000 sq m, leasable space – 80,000 sq m), White Square, buildings A and B ( total space of 58,000 sq m, leasable – 56,000 sq m), Capital City (office spaces of about 80,000 sq m), Metropolis, Phase III (total space of 52,000 sq m with 36,000 sq m of offices), Dvintsev (total space of 58,000 sq m and 49,500 sq m of offices) and others.
Considering that since the beginning of the crisis there were no new announcements of any new office projects, we should expect that the number of new office spaces inaugurated will just keep on decreasing. According to DTZ, there will be some 650,000 sq m of offices inaugurated in 2010. Experts at Jones Lang LaSalle note the fact that the inauguration of a great number of projects was postponed from 2009 to 2010 and estimate the expected increase in the offer of 1.8 million sq m.
An important trend of the last few months is the practice of leasing spaces that are fully renovated and equipped. As noted by Cushman & Wakefield, not all property owners are willing to fully equip their premises with their own resources but many have adopted a new strategy in the last year whereby they try attracting a greater number of tenants that have no resources for extended renovations. For instance, Central Properties (the developer of Dvintsev, Pavlovsky and others), is offering potential tenants all possible variations of renovations, the developer being ready to complete the premises himself or with the resources of the tenant, finance the renovations to be executed by the tenant, and even to a pre-crisis scenario when the tenant conducts and funds the work on his own. According to Capital Group (developer of multifunctional projects with offices such as Capital City, Imperial House, Avenue 77 and others), most offices are leased as shell & core.
As indicated by Jones Lang LaSalle, in cases when the finishing of the project is assumed by the property owner, the costs are assumed by the tenant over a period of time and which is reflected in the leasing rate. “The chances of finding a tenant interested in shell & core and without any resources or discounts for finishing the premises are very low – such transactions did take place last year but no more than five.”
In order to attract resources, many business center property owners began offering their facilities in smaller parts. According to experts at RRG, the sectors where this was most widely adopted were the Class B- and C, and buyers of blocks would simultaneously become the actual end-users (with the existing tenants) and investors as well.
The Demand According to data from Cushman & Wakefield, there were some 700,000 sq m of quality office spaces that were either sold or leased in 2009 (only new transactions without lease renewals). This is substantially less than in 2008, when some 1 to 2.5 million sq m were occupied. But the occupancy rate substantially exceeded expectations: according to the results of the last few months of 2008, occupancy rates in 2009 wouldn’t exceed 300-400 thousand sq m.
In the pre-crisis period, the major share of offices being leased were dedicated to the expansion of companies, while today the new lease transactions are being concluded for the same or lesser spaces, with differing level of quality, depending on the financial situation of the companies that are leasing. Once they move, the companies leave behind vacant spaces that property owners aren’t necessarily capable of leasing.
Certain increases in vacancies among quality office spaces where present before the crisis - in 2007-2008, but until the third quarter of 2008 these ratios didn’t surpass 5-6%. In the last months of 2008, the ratio grew to 14-15%, and in mid 2009 it surpassed 25% in Class A offices. In the second half of 2009, the vacancy rates stabilized somewhat, and in January 2010, according to data from Cushman & Wakefield, in the Class A segment there was 24% vacancy rate, in Class B+ about 18%.
In the newly inaugurated in 2009 business centers, about half of the spaces are vacant. While in the past almost all spaces were leased ahead of time before completion of the actual facilities, now absolutely all leasing agreements are signed once the facility has been completed. This is caused by the reluctance of tenants to risk delays in the construction and the large availability of spaces and operational business centers, including some with fully renovated spaces.
In early 2009, market experts were noting the growth in the demand for secondary markets including sub-leasing – such facilities do not require renovations investments and can meet the requirements of small enterprises looking for small spaces. According to CB Richard Ellis, 50% of the total number of transactions on the market in 2009 were finalized for secondary spaces, which brought about a substantial growth in vacancy rates in shell & core premises. Towards the end of the year, many new facility property owners, attempted to adapt to the new requirements and designed some new packages for the primary market, fully finished facilities with varying spaces at attractive rates.
The Rates By the end of 2009, the average leasing rate in the Class A segment, according to Colliers International, represented $620/ sq m/year (in early 2009 - $1,170), and in the Class B+ segment, the average rate dropped to $330/sq m/year ($660 in the beginning of the year).
The developers questioned by CRE indicated no interest in possible reductions in leasing rates, but spoke of initial free leasing months, lower deposits and so on. Nevertheless, according to data from analysts, since the beginning of the crisis, the decrease in leasing rates according to various estimates represented some 30-70%.
The sale and purchase market was also subjected to some changes in pricing. The prices for office spaces in modern day business centers, according to RRG, decreased by 34-36% on an average. In December 2009, offices in quality business centers were offered at $4,420/ sq m/year beyond the Garden Ring and at $7,120/sq m/year within the Garden Ring. With regard to operational costs, they practically remained the same during all of last year, representing $100150/sq m/year for Class A and $60-110 for Class B (data from DTZ).
The construction cost of one square meter of quality office according to Central Properties in Moscow varies between $1,500 and $2,000. As noted at the company, the witnessed drop in the cost of certain constructions was leveled by the increased cost of engineering systems, with an overwhelming number being imported from abroad.
Office Real Estate Expansion Trends
• Upon exploring new facilities, the class of the leased space is no longer a priority, while the price and location are at the forefront;
• Companies prefer leasing offices that are finished without any requirement for additional renovation expenses;
• Many developers with projects under construction prefer postponing their inaugurations due to a lack of resources and lack of potential tenants;
• In the framework of the stabilizing debt difficulties, there is an increasing number of banks that are becoming shareholders in development companies;
• A number of developers are increasing their cash positions and raising financing through the sale of their business centers in blocks.
The Forecasts The new year should bring us a continuing stabilization. The experts aren’t excluding the possibility of a decrease in vacancy rates, but only for Class B facilities – there will be sufficient demand to occupy the expected new Class A spaces. In the second half of the year, we should expect a certain increase in the average leasing rates. There are no new business complexes expected this year. This should bring about a slower rate of new office buildings being inaugurated, which conditional on a stable economic environment, will consequently produce a stable growth rate in occupancy and leasing rates for offices in 2011-2012.
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