Moscow Center

Lease Market
Several office micro­markets – the Central Business District (CBD), Zamoskvoretsky (ZAM), Frunzensky (FRU), Shabolovsky (SCH), a portion of Belorussky (BEL) and Novoslobodsky (NOV) – are included within the central district. Moscow’s office market as it stands today actually began to form in this district, with the first class A buildings, for example, the Actor’s Gallery, being built here as early as 1995. Currently, this district has the highest concentration of office premises in Moscow. Additionally, a specific feature of this sector is the broad range of lease rates, the differences in supply and demand between zones close to the center as well as close proximity to the 3rd Ring Road.
At the same time, the densely constructed area does not allow for the construction of any new large office complexes, thus limiting the availability of office space. In addition, construction in the central part of Moscow is somewhat complicated by the lack of plots for development and the development of decentralized zones. Given the current trend, the appearance on the market of the ready­for­outfitting, class A Balchug Plaza business center (total area: 27,000 sqm) was a significant event for the office real estate market.
The center of Moscow is traditionally the most prestigious area for allocating office space. Indeed, financial and investment companies, as well as consulting services, are particularly prevalent in this area.
Limited supply and high demand mean there are very few vacant premises in this district, especially class A office space. On average for August 2006, there was a vacancy rate of 2.24% for class A and B office space. Consequently, as a result of the limited supply of class A office space, many tenants are reviewing the possibility of lowering their requirements.
Companies that are expanding also use class B premises for extra offices. The majority of class A office space is pre­leased. For example, one of the buildings in the White Square business complex was fully pre­leased to a single tenant, Deloitte.
The total amount of quality office space in the district is currently 3 million sqm, of which 1 million sqm is considered to be class A. This district also possesses the best quality office space, of which class A comprises 33%. The amount of class A premises increased by 19.3% in 2005 and by 0.05% in the first half of 2006. In addition, there has been a drop in development in this district, as construction activity has begun on plots outside the 3rd Ring Road and on territory of Moscow City territory. In the future, there will be a decline in the amount of class A space in the CBD, as the existing buildings will gradually be re­classified as class B, and the rate of new construction will not be as active. Furthermore, the areas in direct proximity to the Garden Ring will be consistently and actively developed. Moscow City’s close proximity to the western and northern sections of this zone is another factor contributing to the attractiveness of these sections. Conversely, the office sector in the southern section will not witness any significant changes.
The volume of new construction within the Garden Ring will tend to decrease throughout 2006. Indeed, in the first half this year, only 332,000 sqm of class A and B office premises entered the market. Additionally, it has been announced that 200,000 sqm of office space will enter the market from the end of 2006 to the beginning of 2007. The lack of land plots and the limits on development in the center of Moscow (limits on floor number and conception and the presence of underground levels) detracts from the central district’s attractiveness for developers. Nevertheless, supply will continue to be met in this district, as new projects in the northern and northwestern sections – White Square, Four Winds Plaza, Lotte Plaza, etc. – come onto the market.
The volume of new construction for class B office premises will exceed that of class A. Indeed, the current trend is explained by new development zones beyond the 3rd Ring Road, as exemplified by such projects as Big City and Greenwood and Khimki business parks, respectively.
Lease rates in the center are the highest in Moscow, exceeding the mid­market indicator by 14­30%. This trend is due to the high portion of class A buildings on the market and the prestige of the area, which, in turn, leads to higher demand for such premises. Consequently, lease rates in class A buildings exceed $700/sqm per year, with 2005 in particular witnessing a sharp increase in lease rates for class A premises in this district. Indeed, throughout the year, lease rates rose by more than $100, settling at the $700­plus level.
Specifically in this district, lease rates for class B office space exceed the average for Moscow, as there is a concentration of quality, detached private houses (former mansions) in the class B category contributing to the increased demand. Therefore, this explains the narrow difference of $80/sqm (the market average is $170) in lease rates for class A and B buildings, based on 2005 figures. However, according to the results for the first half of 2006, the difference between the lease rates in class A and B buildings has increased to $170­$300 and more, which is explained by office premises in uniquely­located, exclusive buildings with high lease rates ($850­$1,500/sqm per year) entering the market.
Lease rates are increasing because of the decreasing number of available premises coupled with high demand. It should be pointed out that southern districts enjoy less popularity and lease rates correspond to the mean value for the city overall ($580­$650/sqm per year).

Retail Property
The Central District (within the Garden Ring) includes a large portion of the 12 best retail avenues, such as Pyatnitskaya, Tverskaya, New Arbat, Kuznetsky Most, Petrovka and Arbat streets, as well as a section of the Garden Ring. Consequently, the highest lease rates are prevalent within this zone, while these areas are also the most profitable for retail centers.
Additionally, within this area there is a number of large shopping centers, such as Detsky Mir (Children’s World), GUM and TsUM. The majority of the projects in this area entered the market from 1994­1999 (Okhotny Ryad, the Actor’s Gallery, Smolensky Passazh and others), then there was a drop in the volume of new construction. However, there are a number of new projects, such as Lotte Plaza and Romanov Dvor (phase 3), expected to enter the market in 2007­2008.
The area within the 3rd Ring Road is bordered by the Garden Ring, which separates the area from the Central District. The territory of the 3rd Ring Road contains the shopping avenues of Prospekt Mira, Leningradsky Prospekt, Leninsky Prospekt, Kutuzovsky Prospekt and 1st Tverskaya­Yamskaya St., which are included in the 12 best shopping avenues in Moscow. Also on the territory are the main commuter hubs of Leningrad, Yaroslavl, Kazan and Kursk train stations.
Even though the submarket is close to the center of Moscow, it is still in the developmental phase. Active development of the area began in 2004 with the opening of the Mosmarket and Tverskaya Zastava shopping centers. At this time, many retail projects are under way on the territory of the 3rd Ring Road, including Moscow City Central Core.
The average weighted lease rate, for retail centers located in the Central District, in the second quarter of 2006 was $1,849/sqm per year, which was a 7% decrease compared with the first quarter. However, in connection with the decrease in the percentage of vacant premises in July (to 0.8%; in June, the figure was 3.97%), lease rates increased significantly and the average weighted lease rate was $2,218/sqm per year. The low number of vacant premises also caused an increase in the lease rates to $1,143/sqm per year in the area of the 3rd Ring Road, and the level of quality vacant premises was zero in July.
The number of vacant premises on the 12 best shopping avenues doubled in the second quarter of 2006 versus the previous quarter, equaling the level for 2005. As a result, the average weighted lease rate decreased by 22% to $1,397/sqm per year versus the previous quarter. One of the highest vacancy levels in July was found on Kutuzovsky Prospekt (9.5%), which is explained by several relatively large premises suddenly entering the market.
Although there is an increase in the volume of supply in modern retail centers, demand for space on the 12 best shopping avenues is not decreasing. Indeed, the growth in the number of vacant premises and the decrease in lease rates in the second quarter is more likely a seasonal factor than an overall trend.

Buy and Sell Market
According to data gathered via monitoring by the Russian Research Group in the analyzed region, 38% of the commercial real estate units were put up for sale within the past 2 years, since August 2004. The overall value of these units was $11.2 billion dollars, or 45% of the overall number of offers, and the total space was 25%.
This district is first and foremost a business and retail zone. Additionally, it was specifically here, during the afore­said period, that 28% of the overall number of retail premises in Moscow was offered at a total value of $1.7 billion, as well as 52% of all the offers for Moscow office real estate was made for $8.1 billion.
According to data for July of this year, 327,000 sqm of commercial real estate was proposed for sale in this district, at a total of $1.6 billion, or more than 40% of the total market volume in value terms. The declared sale price is nearly double that of the rest of Moscow overall ($4,759/sqm and $2,794/sqm, respectively). The reason for this seems clear, as the analyzed territory encompasses the traditionally expensive central districts within the Garden Ring as well as the majority of the streets between the Garden and 3rd Ring Road. And it is here that recently the main demand for the largest segment, office real estate, has shifted.
At more than 90% of all space, office and retail real estate play the dominant role in the market for sales. Indeed, for the past two years, office space consistently comprised nearly three fourths of all offers. Also, the portion of retail premises has gradually squeezed out production and storage real estate. For example, in the third quarter of 2004, the space exhibited for retail and production and storage real estate was nearly the same at 9% and 8%, respectively; however, in the past two years, this ratio has shifted to 17% and 3%, respectively. Additionally, given the current redevelopment of the industrial zones, it is very likely that this trend will continue and the production and storage segment in the afore­said district will become even less significant.
When talking about the shift in sales in the market over the past year, it can be said that it reflects the overall trend in the Moscow market: the gradual decrease in supply and the resulting increase in price per square meter and market volume in value terms. Beginning in July 2005, the offer price for the sale of commercial real estate on the edge of the territory rose by 32%, while, at the same time, the total area of units offered decreased by 21%.
Specifically in this district, the rate of price increase on office and retail property is virtually the same. For example, although the sales price on office space in the far reaches from the center of Moscow exceeds the price increase on retail property, the respective rates are comparable in the analyzed district: office space increased in price by 33% (from $3,500/sqm in August 2005 to $4,670/sqm in July of this year), while the cost on retail premises rose by 30% from $4,650/sqm to $6050/sqm for the same period.