The most profitable street in Moscow is now losing tenants. In the past few months Danone and Samsung have abandoned Tverskaya, Euroset has closed its store at 17 Tverskaya. According to retail operators, high lease rates are no longer profitable, and maintaining a shop just for the image is a costly affair today.

Gravy Train

Getting a store on Tverskaya Street is like making the Forbes list of top commercial operators. If you have a shop on the main shopping street of the capital, it means that your company is successful. “We do not care about the price,” said the retailers as they counted stacks of bills with Ben Franklin’s face. According to Colliers International, the pre-crisis lease rate for one square meter on Tverskaya was $16,300 per year. Almost the same price that for a shop at the Champs Elysees. Only Fifth Avenue in New York was more expensive than Tverskaya. On this New York Street one square meter of commercial area went for $18,300 per year. And nevertheless, there were no vacant areas on Tverskaya. If for some reason the premises were not put up for sale (which happened very rarely), its price rose up to $80,000 per sqm. “On Tverskaya there was always a difference of 10-20% between the publicly announced and real lease rates,” believes Maxim Karbasnikoff, Director for Europe, Russia and CIS, head of the retail areas department for Jones Lang LaSalle. “The lease rates on Tverskaya, which were made public, were higher than actual. Before the crisis they were $6,000-10,000 per sqm per year. There were landlords, who asked more, but there still were no transactions for 8,000-10,000 euro, because those rates were exaggerated.” Retailers willingly mastered other commercial corridors of the capital as well: Arbat, the Garden Ring, the Kuznetsky Bridge, Petrovka and Myasnitskaya Streets, Stoleshnikov Lane, Tretiyakovsky Passage, Leninsky and Kutuzovsky Prospects. There the cost of leasing, depending on pedestrian and automobile traffic, no longer need to be advertised and there is no longer any need for a flagship store on Tverskaya .

“The case of Danone is specific,” explains Maxim Karbasnikoff. “The premises that they lease are located in a building owned by the city. The right to lease was bought by the company from the city on very favorable terms. And now they have subleased their premises and are getting profit from it. Danone’s shop on Tverskaya has not been very profitable, now it does not make sense to keep a store that brings little profit.” Danone’s place was taken over by an Express retail store, which is developing a network of 57 stores under the brand Perekrestok Express. The company has invested about 6.5 million rubles in the opening of their food supermarket on Tverskaya with an area of 104 sqm. The lease agreement, as it was announced by the X5 Retail Group N.V., will be good until 2012.

“The shop on Tverskaya is of interest to us and to shoppers for many reasons: there are very few grocery stores offering fair prices and a good range of products in this area, and we can deliver this in the morning, not during peak hours,” says Svetlana Vitkovskaya, head of public relations at X5 Retail Group N.V. “The lease rate is above average for Moscow, but we expect that it will be compensated by the higher turnover of the store. We are also planning to transfer the shop into the social category, thereby reducing our lease payments. The image component is of course very important, but our approach to the opening of this shop has more of a pragmatic nature than mere image-making.” Euroset has closed its store at 17 Tverskaya. “Even the high sales in this store could not compensate for the unreasonably expensive rental payments per square meter. Therefore, we decided to close the shop,” says Artyom Perevozchikov, vice president for development at Euroset. “As for our plans with respect to other shops, the most important criterion for evaluating the any shop, regardless of where it is located, on Tverskaya or in Kuzminki, is its efficiency. So if we need to close an inefficient store on the main street and open it in another, not central, but more effective location, we will do it.” To be fair, we should note that operators are leaving other commercial corridors too. Diesel boutiques were closed not only lines of houses, distance from the subway, the availability of shopwindows, separate entrance was $3,000-6,000 per sqm per year.

Most retailers considered their premises on Tverskaya as image projects. Despite the high pedestrian and automobile traffic, most of the stores were not profitable, due to, among other things, high lease rates. “Most retailers did not expect to earn much profit from shops on Tverskaya,” said Maxim Karbasnikoff. “Exceptions to this, were only a few fashionable brands. For example, the Zara store on Tverskaya has a fairly high turnover.” The crisis has reduced lease rates on the main street of the city as well. “It looks like rates on Tverskaya have decreased from 30 to 50%,” notes Diana Zaznobina, a senior consultant for Magazin Magazinov in association with CB Richard Ellis. “They range from $2,000 to 2,500 per square meter (the section from Pushkinskaya to Mayakovskaya) to $3,000-3,500 (from Pushkinskaya to the Kremlin).” However, despite the attractive rates, commercial operators are leaving Tverskaya. According to Colliers International, just during the 1st quarter of 2009 the level of vacant premises of the main shopping corridor of the capital had reached 15.7%. Experts believe that by the end of the year the share of vacant premises on Tverskaya may increase to 25%.

Retailers Not So Hot for Tverskaya

After the expiration of its lease term, Samsung Electronics, which occupied a four-story gallery on Tverskaya, with a total area of 1,774 sqm, did not renew its contract with the owner. This was the biggest store that the company had in Moscow. According to experts, Samsung had been paying at least $2,000 per sqm per year, i.e., spending at least $3 million per year. Apparently, the revenue of the store has decreased during this crisis, and the company decided to close its main store. Danone has closed its only retail store in the world, one which had been operating on Tverskaya since 1992. Back then the company was developing their Russian market presence, and a shop on the main street of the city served as the kind of calling card of the company. Now, Danone says, the company’s products on Tverskaya, but on Petrovka Street and Leninsky Prospect as well. This is due to the lower profitability of the chain during the crisis and the high lease rates on the expensive streets of Moscow. The main reason for the growth in the vacancy rates on the main shopping streets of the capital is because during a crisis retailers are not willing to pay for mere image.

“The main reason for tenants to leave their premises is the cost of lease. Even if this is reduced, given the current lower turnover of goods, a number of tenants still find lease rates to be unreasonably high,” says Olga Yasko, regional director, analytics department at Colliers International. “In addition, very often attempts to negotiate with the owner for a reduced lease rate, causes the latter to agree to a minor correction (10-15%) and he immediately starts looking for another tenant to replace the current one (as a rule, warning him about this). This was one of the reasons why a number of premises offered for lease, most of which are occupied by current tenants, has recently increased.” Another reason for the increase in the number of vacant areas, according to Olga Yasko, was the need to close gambling establishments, which led to an increase in the supply on a number of shopping streets (in particular, on Novy Arbat).

In Search of a Compromise

Today commercial premises at attractive rates are offered on Tverskaya, and there are a number of tenants who are interested in retail space on the street. However, it is extremely difficult for tenants and owners to agree. “Mostly it is the new brands, entering the market, which plan to open on main street. For them, in terms of lease prices, this time is the most attractive. But that is where the conflict starts, as the brands require contracts for an average of 7 years,” says Diana Zaznobina. It is not profitable for tenants to enter into one year agreements, as investments into repairs do not pay off within a year, but the owners are not ready to enter into long lease agreements. As Diana Zaznobina says, at the end of 2008 most owners, having received twice less offers than in the previous six months, were ready to sign a contract for 1 year, but no-one was interested. Currently the best possible lease term on Tverskaya is 3 years. Such a term is a compromise for both parties. Methods to resolve the problem depend on the willingness of the parties to agree. For example, one can add special conditions to the extension clause of the contract. According to Maxim Karbasnikoff, from the point of view of the owner, there is no sense in signing a contract for three years, because after some time, the rates may change.

“Now we are approaching the bottom limit of rate reductions,” says Maxim Karbasnikoff. “This has been seen in recent months as the market has become more active. Today, both the tenant and the landlord of the premises understand that rates will not be reduced any further. Last month saw the conclusion of as many agreements as in the previous five months combined. I think that the crisis in commercial real estate is over. However, rates on Tverskaya will not return to their old levels any time soon. It seems that it will take a long time, at least three years, to get back to the pre-crisis level – because they used to be extremely high back then.”