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15 Марта 2011, 9:48
Office Demand Rebounds
According to all the signs out there, the office real estate market is heading for another spiral – this time upwards, as both the demand for quality spaces and the number of transactions keep growing. However, developers are still playing it safe, as are investors. The delicate balance in the commodities markets, on which the demand for office real estate depends, is easy to upset. In spite of that, experts are optimistic about the future and expect 2011 to become a year with a record-breaking number of transactions.
The main positive trend in 2010 was the growth in demand for high-quality office spaces. According market experts absorption in the office leasing and sales market shot up by approximately 30–35% from the previous year.
In the leasing market, both Russian and Western companies are very active today. The areas of premises that are in demand vary from 2,000 to 20,000 sqm. At the same, for the first time in the last eighteen months, several large transactions, involving premises larger than 15,000 sqm, have been concluded. The most significant of these was the leasing of almost 37,000 sqm by TNK-BP in the Nordstar Tower.
“It is remarkable that the number of companies, which are now looking even at projects under construction and planned for commissioning two or three years from now, is growing,” noted Olga Pobukovskaya, director of office realty at Colliers Int.
In addition, while tenants were once in pursuit of the cheapest offers, now they are once again starting to pay attention to the quality of objects. According to Grigory Dluga, chief sales officer at the MR Group, one of the main trends in 2010 and one which continues to guide market development in 2011 is price differentiation and the achievement of higher occupancy rates by developers who offered well-located and high-quality products.
At the same time, the tendency for a substantial decrease in volumes of completed construction is still present. In 2010, the amount of office spaces built was 60% lower than that in 2009.
However, this trend will be an advantage for the players who remain in the market where the competition is becoming weaker. For example, Dmitry Kiritopulo, first deputy general director of Central Properties, admitted that the reduction in new supply has allowed the company to successfully complete its realization of the Pavlovsky Business Center. The object was commissioned in February 2010, and by September it was already more than 90% occupied. The relatively small number of new facilities is also helping Central Properties to continue leasing out its Dvintsev Business Center. “These trends allow us to be more optimistic about further extension of our office project portfolio in 2011,” notes Dmitry Kiritopulo.
Accompanying all this, the situation in the construction market improved in 2010 compared to 2009. The work on many projects that were suspended earlier began again. By way of example, we could mention such business centers as Olympia Park, Metropolia, Oruzheyni 41, Nagatino i-Land, Skyline, Valovaya 24 and the multi-purpose complex at Olimpiyski Passage. This suggests that both developers and lending institutions are optimistic about the prospects they see in office market development.
The growth in absorption volumes has resulted in reduced vacancy rates in the office market. According to Colliers International, while in late 2009, the vacancy rate in class A business centers stood at 20.9% and for class B office buildings at 16.9%, by late 2010 these figures dropped to 14.3% and 11.6%, respectively. “We estimated the average share of vacant spaces in the market at about 17%, while in our company this figure is about 5%,” says Sergey Kalinin, CEO of KR Properties.
“Throughout 2010 we also witnessed that the confidence of leaseholders and building owners was growing, accompanied by rising rental rates,” comments Olga Pobukovskaya. Nevertheless, tenants still have sufficient leverage today, according to the owners.
Nonetheless, leasing rates for commercial real estate have grown by an average of 10–12% over the last six months. “We expect them to grow by another five percent by the end of the year,” forecasts Sergey Kalinin. He estimated that leasing rates for offices within the Garden Ring Road, at present, vary from $600–700 for class A, and from $400–500 for class B premises. In the Third Transport Ring (TTR) area the figures for class A premises are $500–600 and for class B – $350–450 per sqm per year, respectively.
Political risks
In the next year, we should expect further stabilization of the market. However, every expert has noted, to be on the safe side, that growth is only possible when there is no substantial economic or political disturbance. “Further development may well be hindered by the constant uncertainty in the macroeconomic climate in the country and world over, as well as the continued review of strategies by tenant companies. Tenants will be more careful as they remember recent developments, and they will be more conservative in forecasting their own growth rates,” says Denis Kurakin, vice president of asset management at the PromSvyazNedvizhimost.
We should note that the balance of power has also been influenced by the replacement of the mayor of Moscow, which may result in considerable changes in the rules of the game. “There were declarations that construction of office and shopping complexes in the city center should be limited; there are certain changes in the way the Moscow City project is being viewed now, and in the approach to the transportation component of the city. We believe that all these factors, collectively, may influence the further development of Moscow as a whole and that of the capital city’s office real estate market in particular,” argues Olga Pobukovskaya.
When the widely discussed regulations of the Moscow government, prohibiting construction of new business centers within the Third Ring (TTR), goes into effect, it will have a substantial influence on the Moscow office real estate market. In the first place, the leasing rates for office premises within the Garden Ring Road and TTR will grow, and that will result in quick recovery of the class A office segment. In the second place, positions of the existing objects beyond the TTR will become stronger, and the interest in them will increase the demand for vacant areas. We may also assume that new projects beyond the MKAD may also receive a new impulse for their development in the long-term perspective, as well as individual office buildings, which today cannot compete with new business centers, even though developers have provided high-quality reconstruction work.
Another year of construction
According to Colliers International, by the end of 2011, about 800,000 sqm of office premises should be commissioned. However, in 2010 and 2009 no new significant construction projects had been announced. So today, we are talking about objects that have been suspended when the recession hit. Now developers are restarting these and investing money into their completion.
Sergey Kalinin estimates the readiness of most such objects at 50 – 70%. “In any case, most of them will not be commissioned in 2011 – they will have to wait until late 2012 – early 2013,” he asserts.
So we may conclude that if everything goes well with the economy and demand in the year 2011, we should expect a certain deficit in class A and B+ office markets.
“This deficit will also last throughout the entire 2012,” believes Sergey Kalinin.
The main projects that should be commissioned in 2011 are Legenda Tsvetnogo business center in the Central Administrative District and Eko on Mironovskaya Street. We may also expect an office and retail complex to open at Oruzheiny Lane and Belye Sady (White Gardens) to enter the market, though the exact dates of their commissioning have not been announced yet.
Most market players managed to solve their funding problems and continued their construction works in 2010. Accordingly, their projects will not be completed earlier than 2012. With all this, everybody strives to complete their construction as soon as possible, trying to take advantage of this period of a relative deficit of premises.
“By the end of this year and throughout all of next year, KR Properties will be busy finishing the construction of the Danilovskaya Manufaktura Loft Quarter. We are going to commission as many as 50,000 sqm. Commissioning of this rather bulky office space should not influence the general picture in any possible way; and we are trying to complete the Danilovskaya Manufaktura before the period of relative deficit of spaces and high demand on the part of tenants ends. We have already signed contracts for a number of areas that are still to be commissioned,” says Sergey Kalinin, General Director of KR Properties, commenting on his company’s strategy. “Our company is also planning to start construction on two phases of the Krasnaya Rosa business quarter, with a total area of 60,000 sqm. We hope to complete these objects by the end of 2012, when a number of newly re-started objects will enter the market. So it is difficult to predict what the situation in the market might be at that moment,” he added.
We should note that supply will mostly include buildings beyond the Garden Ring Road. Consequently, the amount of supply in the city center will remain rather limited, which means the prices for such objects will increase even more.
Demand for class А
According to all predictions, the demand for class A offices will be the first to grow, if the positive development vector is maintained. At the moment, the share of class A business centers in the total amount of office premises supply is about 15%. Approximately one-third of the office spaces announced for commissioning by the end of 2011 is in the class A segment, while the rest of the spaces are class B. “Such a relatively insufficient availability of new class A buildings in the market, given the condition of a steady demand in this segment, allows us to assume that these buildings will enjoy a higher demand on the part of tenants when they enter the market. Against the background of general revitalization on the market, this may become an additional factor for leasing rates in class A buildings to increase. As a result, we may expect that the increase in class A business center leasing rates to be higher than the average market figure,” assumes Olga Pobukovskaya.
Dmitry Kiritopulo also believes that the year 2011 will be characterized by predominance of demand over supply. He estimated demand in 2011 to be about 1,300,000 – 1,500,000 sqm, while new spaces will be commissioned at the 2010 level – around 1,000,000 sqm. This means that we should expect further decrease in the vacancy rates (10–13%) and a growth in leasing rates.
As to the level of office space absorption, we may assume it will amount to about 1.5 million sqm in 2011, thanks to the market recovery and increasing demand. The vacancy rate will probably remain around 3–4% for class A business centers and 7–10% for the market in general.
According to the estimates of Grigory Dluga, rental rates in class A business centers will increase by about 10%, and in the class B segment they may increase by 7%. Denis Kurakin believes that class A leasing rates will remain within the range of $500 to $1,000 per sqm, and class B rates – from $300 in the outskirts to $600 for large or significant objects in the city center. Class C leasing rates will probably vary from $150 per sqm in the outskirts to $500 per sqm for favorably located objects in the Central Administrative District.
Given these considerations, we should remember that leasing agreements of most tenants terminate in 2012. That is why in 2011 we expect a steep increase in the number of deals involving office spaces (there is every likelihood that their volume will double). Many market players even speak of 2011 as the year of incredible activity in the office real estate market (which might be true if oil prices do not drop).
We should keep in mind though, that nobody expects many investment transactions in 2011. Spaces are in demand by end-consumers only. In the next year, the market will be recovering, objects will be completed, vacant areas occupied. With all this activity, market players are still being rather careful for now. Therefore, a new increase in speculative operations and grandiose projects can only be expected closer to 2012.
In the leasing market, both Russian and Western companies are very active today. The areas of premises that are in demand vary from 2,000 to 20,000 sqm. At the same, for the first time in the last eighteen months, several large transactions, involving premises larger than 15,000 sqm, have been concluded. The most significant of these was the leasing of almost 37,000 sqm by TNK-BP in the Nordstar Tower.
“It is remarkable that the number of companies, which are now looking even at projects under construction and planned for commissioning two or three years from now, is growing,” noted Olga Pobukovskaya, director of office realty at Colliers Int.
In addition, while tenants were once in pursuit of the cheapest offers, now they are once again starting to pay attention to the quality of objects. According to Grigory Dluga, chief sales officer at the MR Group, one of the main trends in 2010 and one which continues to guide market development in 2011 is price differentiation and the achievement of higher occupancy rates by developers who offered well-located and high-quality products.
At the same time, the tendency for a substantial decrease in volumes of completed construction is still present. In 2010, the amount of office spaces built was 60% lower than that in 2009.
However, this trend will be an advantage for the players who remain in the market where the competition is becoming weaker. For example, Dmitry Kiritopulo, first deputy general director of Central Properties, admitted that the reduction in new supply has allowed the company to successfully complete its realization of the Pavlovsky Business Center. The object was commissioned in February 2010, and by September it was already more than 90% occupied. The relatively small number of new facilities is also helping Central Properties to continue leasing out its Dvintsev Business Center. “These trends allow us to be more optimistic about further extension of our office project portfolio in 2011,” notes Dmitry Kiritopulo.
Accompanying all this, the situation in the construction market improved in 2010 compared to 2009. The work on many projects that were suspended earlier began again. By way of example, we could mention such business centers as Olympia Park, Metropolia, Oruzheyni 41, Nagatino i-Land, Skyline, Valovaya 24 and the multi-purpose complex at Olimpiyski Passage. This suggests that both developers and lending institutions are optimistic about the prospects they see in office market development.
The growth in absorption volumes has resulted in reduced vacancy rates in the office market. According to Colliers International, while in late 2009, the vacancy rate in class A business centers stood at 20.9% and for class B office buildings at 16.9%, by late 2010 these figures dropped to 14.3% and 11.6%, respectively. “We estimated the average share of vacant spaces in the market at about 17%, while in our company this figure is about 5%,” says Sergey Kalinin, CEO of KR Properties.
“Throughout 2010 we also witnessed that the confidence of leaseholders and building owners was growing, accompanied by rising rental rates,” comments Olga Pobukovskaya. Nevertheless, tenants still have sufficient leverage today, according to the owners.
Nonetheless, leasing rates for commercial real estate have grown by an average of 10–12% over the last six months. “We expect them to grow by another five percent by the end of the year,” forecasts Sergey Kalinin. He estimated that leasing rates for offices within the Garden Ring Road, at present, vary from $600–700 for class A, and from $400–500 for class B premises. In the Third Transport Ring (TTR) area the figures for class A premises are $500–600 and for class B – $350–450 per sqm per year, respectively.
Political risks
In the next year, we should expect further stabilization of the market. However, every expert has noted, to be on the safe side, that growth is only possible when there is no substantial economic or political disturbance. “Further development may well be hindered by the constant uncertainty in the macroeconomic climate in the country and world over, as well as the continued review of strategies by tenant companies. Tenants will be more careful as they remember recent developments, and they will be more conservative in forecasting their own growth rates,” says Denis Kurakin, vice president of asset management at the PromSvyazNedvizhimost.
We should note that the balance of power has also been influenced by the replacement of the mayor of Moscow, which may result in considerable changes in the rules of the game. “There were declarations that construction of office and shopping complexes in the city center should be limited; there are certain changes in the way the Moscow City project is being viewed now, and in the approach to the transportation component of the city. We believe that all these factors, collectively, may influence the further development of Moscow as a whole and that of the capital city’s office real estate market in particular,” argues Olga Pobukovskaya.
When the widely discussed regulations of the Moscow government, prohibiting construction of new business centers within the Third Ring (TTR), goes into effect, it will have a substantial influence on the Moscow office real estate market. In the first place, the leasing rates for office premises within the Garden Ring Road and TTR will grow, and that will result in quick recovery of the class A office segment. In the second place, positions of the existing objects beyond the TTR will become stronger, and the interest in them will increase the demand for vacant areas. We may also assume that new projects beyond the MKAD may also receive a new impulse for their development in the long-term perspective, as well as individual office buildings, which today cannot compete with new business centers, even though developers have provided high-quality reconstruction work.
Another year of construction
According to Colliers International, by the end of 2011, about 800,000 sqm of office premises should be commissioned. However, in 2010 and 2009 no new significant construction projects had been announced. So today, we are talking about objects that have been suspended when the recession hit. Now developers are restarting these and investing money into their completion.
Sergey Kalinin estimates the readiness of most such objects at 50 – 70%. “In any case, most of them will not be commissioned in 2011 – they will have to wait until late 2012 – early 2013,” he asserts.
So we may conclude that if everything goes well with the economy and demand in the year 2011, we should expect a certain deficit in class A and B+ office markets.
“This deficit will also last throughout the entire 2012,” believes Sergey Kalinin.
The main projects that should be commissioned in 2011 are Legenda Tsvetnogo business center in the Central Administrative District and Eko on Mironovskaya Street. We may also expect an office and retail complex to open at Oruzheiny Lane and Belye Sady (White Gardens) to enter the market, though the exact dates of their commissioning have not been announced yet.
Most market players managed to solve their funding problems and continued their construction works in 2010. Accordingly, their projects will not be completed earlier than 2012. With all this, everybody strives to complete their construction as soon as possible, trying to take advantage of this period of a relative deficit of premises.
“By the end of this year and throughout all of next year, KR Properties will be busy finishing the construction of the Danilovskaya Manufaktura Loft Quarter. We are going to commission as many as 50,000 sqm. Commissioning of this rather bulky office space should not influence the general picture in any possible way; and we are trying to complete the Danilovskaya Manufaktura before the period of relative deficit of spaces and high demand on the part of tenants ends. We have already signed contracts for a number of areas that are still to be commissioned,” says Sergey Kalinin, General Director of KR Properties, commenting on his company’s strategy. “Our company is also planning to start construction on two phases of the Krasnaya Rosa business quarter, with a total area of 60,000 sqm. We hope to complete these objects by the end of 2012, when a number of newly re-started objects will enter the market. So it is difficult to predict what the situation in the market might be at that moment,” he added.
We should note that supply will mostly include buildings beyond the Garden Ring Road. Consequently, the amount of supply in the city center will remain rather limited, which means the prices for such objects will increase even more.
Demand for class А
According to all predictions, the demand for class A offices will be the first to grow, if the positive development vector is maintained. At the moment, the share of class A business centers in the total amount of office premises supply is about 15%. Approximately one-third of the office spaces announced for commissioning by the end of 2011 is in the class A segment, while the rest of the spaces are class B. “Such a relatively insufficient availability of new class A buildings in the market, given the condition of a steady demand in this segment, allows us to assume that these buildings will enjoy a higher demand on the part of tenants when they enter the market. Against the background of general revitalization on the market, this may become an additional factor for leasing rates in class A buildings to increase. As a result, we may expect that the increase in class A business center leasing rates to be higher than the average market figure,” assumes Olga Pobukovskaya.
Dmitry Kiritopulo also believes that the year 2011 will be characterized by predominance of demand over supply. He estimated demand in 2011 to be about 1,300,000 – 1,500,000 sqm, while new spaces will be commissioned at the 2010 level – around 1,000,000 sqm. This means that we should expect further decrease in the vacancy rates (10–13%) and a growth in leasing rates.
As to the level of office space absorption, we may assume it will amount to about 1.5 million sqm in 2011, thanks to the market recovery and increasing demand. The vacancy rate will probably remain around 3–4% for class A business centers and 7–10% for the market in general.
According to the estimates of Grigory Dluga, rental rates in class A business centers will increase by about 10%, and in the class B segment they may increase by 7%. Denis Kurakin believes that class A leasing rates will remain within the range of $500 to $1,000 per sqm, and class B rates – from $300 in the outskirts to $600 for large or significant objects in the city center. Class C leasing rates will probably vary from $150 per sqm in the outskirts to $500 per sqm for favorably located objects in the Central Administrative District.
Given these considerations, we should remember that leasing agreements of most tenants terminate in 2012. That is why in 2011 we expect a steep increase in the number of deals involving office spaces (there is every likelihood that their volume will double). Many market players even speak of 2011 as the year of incredible activity in the office real estate market (which might be true if oil prices do not drop).
We should keep in mind though, that nobody expects many investment transactions in 2011. Spaces are in demand by end-consumers only. In the next year, the market will be recovering, objects will be completed, vacant areas occupied. With all this activity, market players are still being rather careful for now. Therefore, a new increase in speculative operations and grandiose projects can only be expected closer to 2012.
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