When Work Is a Celebration!

Indifferent to clowns and balloons, morе creative methods are needed these days to impress the general public. On one hand, this is simpler for the business­center owner: clerks appreciate the working quiet and don’t require entertainment. In addition, in the age of high demand for quality space many business complexes have waiting lists and can dictate the terms and conditions of potential renters. Still, the managing offices of business centers need to think about delicate business practices like customer loyalty, and some even plan center­events around this concept.

Shops in Elegant Wrapping
“Today, the viable resources on the St. Petersburg shopping center market are different from 3­4 years ago,” comments Adamant Marketing and Advertising Director Elena Marincheva. “Back then, we were practically monopolists in this market. We offered minimal services and were completely satisfied with the results. At some point the situation drastically changed. Consumers suddenly had choice of quality goods. As a result, for the past year Adamant increased its advertising and promotions significantly. In a few centers we run six to eight major advertising campaigns per year, targeted not only on neighborhood residents but aimed at the entire city. The size and budgets of these campaigns just keep getting bigger. For example, this autumn we are launching five major advertising campaigns simultaneously.” (Presently Adamant has 12 shopping centers, spread out across the “sleepy” regions of St. Petersburg, with a total of 586,600 sqm.)
Promotion of a shopping center begins with its opening, a date that may not correspond with the end of construction on the project. “We had an opening of a shopping center where customers walked in to see building going on—this isn’t uncommon. After this, you can be quite certain that person isn’t coming to the next opening. Ideally, there should be a couple of weeks to a month and a half between completion of building and opening of the center to the public. This time allows the developer to iron out any problems and launch the advertising campaign,” explains Elena Marincheva.
“The opening of a center—it is an event that, abroad, is planned for six months. Here, we usually have two to three months to prepare. It can take up to 3­4 months, and as a result we have this kind of cross­graphic, where we fit everything from events to administration and renting all into one timeframe. All are grouped around one event—the big opening,” explains Elena Andreeva, Retail Director of IB Group. (IB Group operates three centers in St. Petersburg—Yuzhny Polus, Rumba and Gallery 1814.)
The long­awaited shopping center opening doesn’t always mean that every retailer opens their doors at the same time. For example, in Grand Canyon, one of the largest shopping centers in St. Petersburg (with nearly 75,000 sqm), the first stores, cafes, and nine­screen movie theater, Cinema Park, were already working in December 2005, while on the other hand, some of the renters didn’t manage to open in time for the official launch on February 11, 2006. “Our advertising campaign didn’t end on our opening day, but carried on for another two months. The opening of new stores coincided with a few local holidays and placement of ads in media and on billboards,” comments Irina Konyakhina, deputy director of PR for Solomon (the developer and managing company for Grand Canyon.)
The main opening usually consists of a few events for VIPs and other guests. In May 2006 at the opening of Varshavsky Express (Adamant), after the official part with the city mayor and speakers from the local administration, there was a closed party for partners and the town’s business­elite. There was an evening concert outside in front of the center. “In the end, 10 television channels covered our event, and most of the city heard about it,” says Elena Marincheva.
In February 2006 Yuzhni Polus had 18 000 visitors in the span of two days. In addition to the main stage, set up near the entrance to the center, inside the complex there were also four themed areas: sports, makeup salon, fashion and style (with a fashion show) and video games. Each area had a main sponsor and several tenants, and each area was aimed at one or more of the center’s target audiences. “The organizer’s task at one of these events is to come up with ways to get customers to make their first purchases in the shopping center,” explains Elena Andreeva.
Involving the tenants in the celebrations and events is the fine art of the management company and organizers. “We try to work with the tenants when planning the openings. But usually they are quite focused on getting their store ready and open for the big day,” explains Elena Marinicheva.
In total, 80% of stores participated in the Yuzhni Polus opening celebrations, a figure that is a very good indicator of superb organization. The budget of the opening was decided upon between the partners of the shopping center and tenants with at least a 60x40­sqm space. In “Grand Canyon” that size was 50x50 sqm. Each store operator contributed a set amount to the total celebration that was proportional to their rental space. The developer’s contribution went towards preparations for the event, including a press conference, fees for performers, etc. The advertising campaign was paid for from the tenants’ contribution.
Management companies prefer to keep quiet about the amount spent on celebrations and openings. For Adamant the minimum is $30,000. IB Group was more open about budgets. “The budget of Yuzhni Polus, a classic one­aisle mall with a size of 35,000 sqm and tenants with very affordable goods, we spent $400,000 in total. It was the first such complex in the “sleepy” region of Kypchino, and so therefore the expenditure was quite high. But this budget didn’t reach European standards (where 2­3% of the building budget is spent on openings),” explains Elena Andreeva.

Keeping the Music Playing
Long after the band has stopped playing the celebration continues, thanks to the planned PR activities for the center. At the shopping center Sennaya, for example, the PR plan is set at least a year in advance.
At Grand Canyon, the program focuses on the “red” calendar days: St. Valentine’s Day, March 8th, the 1st and the 9th of May, City Day, September 1st and New Year. Other specific reason for celebrations crop up: the opening of a restaurant section of the mall, sport competitions, etc. On average, one major celebration per month takes place in the center, accompanied by one or two local celebrations. Each month tenant representatives meet in order to plan activities and discuss their participation. If, for example, they are preparing for a fashion show, the interested tenants pay for models. If the show is showcasing a certain brand, that brand pays for the expenses associated with it.
In the center of the discount store Rumba located in the Kirovsky district, jazz plays every Friday. This has already attracted a following among the public, who come to listen to jazz over a cup of coffee. “The main point of an event like this is to create a space in the shopping center where you can do things other than make purchases—a natural place to relax. These events expand the attention of patrons. For example, at the club evening in Rumba, young people not only from the immediate area, but also from different regions participate. They may visit the center for the first time for the disco, but they come back later to make purchases in the stores,” explains IB PR Director Inna Shinto.
The second category of activities is focused on capturing new customers. For example, during summer at Yuzhni Polus a Graduates’ Day was put on, with invitees from the Frunzensky district. Each graduate was eligible for a present, with the best students receiving special prizes from the tenants. For example, M­Video gave medalists computers and printers. Those who didn’t come were incredibly disappointed. Phone calls to friends from other regions spread the word about the shopping center.
The effect of these events aren’t always direct and immediate, but sometimes, if the event is well­organized, they can very positively affect sales. At Grand Canyon the complex didn’t even feel the usual summer lull in traffic. Each month, the monthly traffic increased by 2000 people. This was helped by free busses to the center from several metro stations.
“During the promotion activities a center can increase traffic by 100 – 200%. It is imperative during this time that the level of services at the center remain the same as always—that everything runs smoothly, tenants have enough supplies, and there is a pleasant atmosphere in the center. Otherwise, all your efforts are wasted and the customer leaves, never to return,” explains Elena Marinecheva. “If you can keep your standards high, then within two months after the promotional act the traffic of the store will be up to 30% higher than it was before the promotion.”

Troublesome Weekdays
Tenants and management never stop vying for consumer loyalty in the stores and shopping centers. Daily work first and foremost consists of managing the advertising campaigns for the centers. For centers with smaller budgets, advertising consists of outdoor billboards and signs. Other centers use television and radio. Wealthier centers produce expensive glossy magazines. Whether the management attracts tenants to help with advertising campaigns depends on the politics of the shopping center. Tenants at AiBi Group projects are obligated to participate in the general promotion program. (Advertising budget of Yuzhni Polus is $25,000 per month.)
Another important part of weekday promotion in the shopping centers is maintaining the corporate Internet site, the work of the information service, and producing advertising circulars for distribution. The Svetlanovsky shopping center plans to produce a full­color glossy magazine for New Year's, with subsequent quarterly issues.
Without question, the largest amount of energy and resources are spent on creating a discount program. This kind of program demands a huge amount of organization to produce. For example, a discount program is in place at the shopping complex Ozerki (Adamant). “It took a long time to explain to tenants why such a program was needed. Many stores already have their own, and so it raises the question of how to combine store discounts with corporate center discounts. Nonetheless, we put in the necessary equipment from our own budget, did most of the start­up work, and as a result half of our tenants signed up for the discount program. The card is given out upon purchase of 2000 rubles or more from any participating shop. Cardholders join a club. For example, for New Year we organize a musical evening for cardholders,” explains Elena Marincheva.
Svetlanovsky signed up all its tenants to last year’s December promotion “Shopping World”. The minimum discount was 5%. “Each store gets a certain amount of cards, and we also send cards out to everyone in our database,” explains Elena Zaharova, commercial director at Svetlanovsky.

Against the Office Routine
In comparison to typical activities of shopping center colleagues, life in a business center can look pretty dull. Practically all specialists asked insisted that nothing increases tenant loyalty more than keeping up the level of service for customers.
“Tenants need to see that the management of the center more often than just on rent day. Many managers grow accustomed to there office premises and will not choose to move without external factors, such as repeated emergency situations at the office and indifferent building administrators. Sending birthday and holiday greetings, putting on corporate events for tenants, etc., can be helpful, but such tools are only supplementary,” comments Anna Derkatch, general director of Praktis PFM (Petersburg Real Estate). “If clients are strategically important for the business center, we can offer extra services for maintaining and increasing consumer loyalty (cleaning, renovation). Once we were even asked to move a small bank to different offices, because one of these kind of tenants needed to quickly expand their space. The store bought the bank new furniture,” explains Elena Afinogogenova, general director of Becar. According to her, one of the problems with office centers that have been around for a while is attracting tenants in the current conditions. The task of the managing company is to vary the office conditions for tenants. Sometimes it is enough to change the restaurant operator, put personnel in different uniforms or play music in the halls of business centers.
The smaller the business center, the homier and the more the management pay special attention to detail. For example, in one of the oldest Petersburg business centers Inform Future (class B) where they have foreign tenants, the management started congratulating tenants on their own national holidays. “This became part of our corporate program that we are currently working under,” explains Helve Zaikina, director of Inform Future.
At the Swedish House (class A) once a quarter the management prints a small newsletter that covers the work of management of the center and includes an interview with one of the tenants on any topic. “We have a family atmosphere in our business center, and the relationship between people in the center reflects that. We really try to support our tenants. For example, our oldest tenants get a discount on their rent,” explains Tatiana Pokrovskaya, head of the evaluation department of Zinovev and K, which manages Swedish House.

St. Petersburg’s Office Market
Rising economic indicators are attracting companies from Moscow and abroad to St. Petersburg to open their representative offices, while developing local companies also seek to increase their amount of office space. As a result, despite the active growth in supply, the city faces a serious deficit of quality office space.

Overall situation
According to analysts, St. Petersburg’s office market lags Moscow’s by 3­4 years. This concerns the scale of projects, their concept, preferences with regards to location and the technologies employed. However, with its growing economy and investment attractiveness, St. Petersburg’s business activity is also rising, encouraging the office market’s dynamic development. Demand for quality office premises is rising while the requirements of office tenants and buyers are becoming stricter. Experts believe that the northern capital’s office real estate market will not stabilize until the end of the decade.
A greater proportion of released buildings corresponds to class B and above. Experts’ data indicates that in the last half year demand for class C office premises has virtually remained unchanged, whereas according to different estimates, the size of the market for class A premises has grown between one and a half and two times.

Among the events of the first six months of 2006, we would highlight the following:

• St. Petersburg City Authorities approved the new Petersburg City development project in Krasnogvardeisky district on the Neva’s right bank. The complex’s dominant feature will be Sibneft’s administrative building. The site to be developed is approximately 70 hectares, and the total area of the premises should reach 300,000 sqm. Construction is scheduled for completion in 2016.
• The St. Petersburg holding RBI and German Deutsche Bank announced the creation of a joint investment fund worth approximately $500 million. The fund’s resources are intended for investment in residential and commercial real estate projects in St. Petersburg.
• The Nevskie Berega (Neva Banks) confectioners decided to relocate their plant outside the city. The factory on Makarova Embankment will be rebuilt as a business center.
• Likewise, Unimilk Holding’s milk processing plant Petmol will also be relocated outside the city. The plant occupies 11 ha on the corner of Moskovsky Prospekt and Obvodny Canal Embankment and will relocate to the industrial zone in Parnas. A new business district will be erected on the plant’s former site.
• The pneumatic and hydraulic equipment factory located on Vasilievsky Island will also be reconstructed by Imperia Holding to be replaced with a class B business center with an area of 40,000 sqm. The first phase of this project is scheduled for delivery before the end of this year.
• A tender was announced for the construction of the Gazprom City office complex in the context of which Gazprom intends to build by 2010 a complex of office buildings with a total area of approximately 300,000 sqm.
• DMD announced their intention to build a 30­storey office and shopping complex of 43,000 sqm on Constitution Square. The first ten floors are intended for the shopping and entertainment zone and the next twenty floors will be occupied by the business center. It was also disclosed that Vneshtorgbank intends to finance this project.
• Vneshtorgbank also announced their intention to build a business district with a total area of up to 200,000 sqm in the Central district not far from Smolny. The complex will include a 3­tower building with a height of 47 meters and 11 stories, one of which (approximately 40,000 sqm) will be occupied by some of the city authorities’ committees.
• The company Arsenal Nedvizhimost announced its project to build a 150­m­tall office tower in Primorsky district on Yakhtennaya Ulitsa with a total area of 30,000 sqm, as part of a complex with a shopping center.

Despite the fact that the volume of office space is rising at a dynamic pace, the market’s office segment in the last six months lagged behind the pace of retail and warehousing real estate development. According to data from GVA Sawyer, this year the volume of released office space is just 13% of released shopping real estate and 88% of released warehousing space.
Analysts estimate that the average return periods for office buildings are 6­8 years, depending on each project’s particular features, and average rates of return, according to data from the Central Real Estate Agency, are 10% for class A business centers and 14­15% for class B and C centers.

Supply

In the last half year, class A and B office premises were released on the market:

• according to data from Knight Frank – 50,300 sqm (15,500 sqm of class A and 34,800 sqm of class B);
• according to data from Colliers International – 88,000 sqm (33,000 sqm of class A and 55,000 sqm of class B).

At the same time, market experts note the growing proportion of class A premises in the new supply in comparison to last year: ASTERA ONCOR analysts’ data indicates that new supply in this first half year was represented 40% by class A and 60% by class B (compared to 6% class A and 72% class B in 2005). Most analysts agree that the first six months of this year have seen virtually no new supply of class C office space.
According to data from GVA Sawyer, approximately 86% of the new supply came from redevelopment projects, involving full building reconstruction while maintaining buildings’ historical facades.
Becar Group estimates that the total volume of office premises at the end of the first half of 2006 reached 1 million square meters. By the end of the year, the total supply, according to valuations by London Consulting & Management Company (LCMC), will reach 1, 185,000 sqm.
Most quality office projects most are located in the historical city center and adjacent districts, but market experts refer to the growing construction activity on Vasilievsky island and in the Petrogradsky district, while business zones are also forming beyond the central district’s boundaries. Specialists of ASTERA ONCOR refer to the high potential of the Moskovsky, Vyborgsky and Primorsky districts.
Key projects planned for delivery in the second half of this year (Knight Frank data) include:

• the Veda­House business center on Petrogradskaya Embankment (class A, total area 21,000 sqm);
• Langenzilen business center on Kamenoostrovsky Prospekt (class A, 12,000 sqm);
• Regent Hall on Vladimirsky Prospekt (class B, 11,600 sqm);
• Stels business center on Borovaya Ulitsa (class B, 10,000 sqm).

Demand
The demand for office space is growing at a stable pace on account of Moscow and foreign companies opening their representative offices in St. Petersburg. Russian firms prevail among the companies forming the demand for St. Petersburg’s office premises. According to data from London Consulting & Management Company (LCMC) since the beginning of the year, the proportion of local companies in the structure of demand has also risen: 65.8% in comparison to 47.1% in 2005. The proportion of Moscow firms was 10.5%, while foreign firms represented 23.7%. At the same time, foreign companies dominate in the demand for class A office space. Their proportion in this category, according to GVA Sawyer data, is approximately 60%.
As previously, demand prevails for office spaces of less than 500 sqm. ASTERA ONCOR data shows that in class A and B, the most liquid offices have areas of 200­500 sqm. Data from the company Praktis (Peterburgskaya Nedvizhimost) indicates that in the class C segment, premises of up to 50 sqm and between 50 and 100 sqm are most in demand, which the company specialists believe is the most suitable size for small businesses. At the same time, market experts note a trend of rising demand from large tenant companies to rent premises of several thousand square meters.
For tenancy agreements concerning class A premises, it is standard to have rent contracts signed in advance, as the line of tenants forms quicker for large­size quality premises.
Among purchase­sale deals, Praktis specialists estimate that up to 30% represent investment buys, whereas the remaining are acquired by buyers to satisfy their companies’ own demand for space.
The level of vacant premises in the first half of this year remained extremely low, and according to analysts’ valuations represented just 2­4% on average. For class A premises, this indicator, according to Becar group of companies, reached only 0.5%. Central Real Estate Agency data indicates that the greatest demand and, consequently, the lowest indicator for vacant premises are characteristic for business centers located in the vicinity of Nevsky Prospekt.

Rates
Praktis estimates that lease rates grew on average 1­2% in the last half year, whereas Colliers refers to 3­4% and approximately 7­8% is the growth rate quoted by Becar’s specialists. Becar group of companies’ analysts believe that the high rate growth in this period “is mainly due to the change in monetary units used for accounting, inflation and the rising cost of construction”. The varying estimates of lease rate growth dynamics could be due to the differences in currency used for accounting. Market experts note that due to the instability of the dollar rate, landlords prefer to quote in euros or in an average figure between the euro and dollar rate.

Trends
The deficit of sites in the central part of St. Petersburg is leading to the active development of territories adjacent to the city’s historical central district and also to the development of zones on the embankments of the river Neva and various city districts and territories near to the airport (Moskovsky district). In coming years, the development of other outlying districts is expected thanks to the influence of main roads, transport links, and construction of significant real estate buildings.
Industrial zones are the only reserve of land near the historical city center. Because of this, the commercial real estate market, including office real estate, is looking at the relocation and redevelopment of sites of former industrial firms.
The tendency to postpone building handover dates is glaring: experts estimate that up to 50% of announced buildings open with delays.
Market experts note the trend to increase the scale of buildings under construction, and likewise the increasing popularity of high­rise construction, although height restrictions under city regulations do not always allow developers’ ambitions to be realized.
Among new trends in the office real estate segment, we would refer to the emergence of projects for “sector­specific” business centers. In particular, the offices under construction in the business center at Ligovsky Prospekt 140 are intended for renting out to shipping industry companies; the existing Konstanta business center is rented to RAO UES structures; and the large Russoft business complex in Primorsky district is being built especially for IT companies.

Forecast
In the second half of 2006, a large number of the buildings coming online will be class B (60­70%); however, the proportion of class A will rise considerably in comparison to 2005, and according to various estimates will represent 25­40% of the total structure of announced premises. Nonetheless, class C will continue to prevail in the total volume of supply for at least the next two years, although it will gradually be forced out by class B – the most dynamically developing and promising segment of St. Petersburg’s office market. The total volume of supply by the end of 2006 according to analysts’ valuations will exceed 1,100,000 sqm. The volume of newly delivered buildings will continue to rise each year, which will be facilitated by the larger scale of announced projects and appearance on the market of large new investors and developers with big plans to develop the city.
Due to the fact that a number of state and private companies are moving their head offices to St. Petersburg, in 2006­2007 we can forecast a rising number of large tenants.
By the end of this year, the occupancy level of business centers will remain high, reaching 100% for А class premises.
Lease rate growth in 2006 – 2007, will be stable and represent 7­10 %. In forthcoming years, the pace of growth in lease rates is expected to decline gradually as a greater number of large­scale projects come online.
Analysts do not expect the market for quality office premises to become saturated at current rates of construction until 2010.