View From Within: The Splendor and Misery of Top Class Offices

A certain share of Moscow’s class A office centers – 43 per cent, according to Jones Lang LaSalle – are projects that were commissioned before the 1998 financial collapse, i.e. only a few years after the country moved towards building a market economy. But although real estate experts unanimously agree that the quality of supply is increasing each year, on the whole it leaves much to be desired, and this is true even for recently commissioned projects.

“Today many office buildings in Moscow fall short of international standards,” says Sergei Riabokobylko, executive director at Stiles & Riabokobylko. “If Moscow class A office buildings were moved, say, to Paris, very few of them would survive the competition there.” Darrell Stanaford, senior director of corporate and industrial services at Noble Gibbons / CB Richard Ellis, agrees with Riabokobylko. In Stanaford’s opinion, office space in Moscow bears no comparison with that in London.

“Very often offices positioned as class A fail to meet even the minimum requirements. A small number of players abuse the terms, especially as there is still no generally accepted classification of office buildings,” says Kirill Subbotin, office real estate manager at the Kapital Grupp development company.

Constructive Defects

Inefficient layout is one of the problems tenants in class A office buildings are most often confronted with in Moscow. Although recently developers have sought to increase bay spacing to the maximum, far from all office centers offer flexible layouts. An analyst, who asked for his name to be withheld, cited the Paveletskaya Tower office building as an example of a poor design solution, where the circular shape of its floors make it very inefficient.

In addition to that, the tower has other disadvantages such as meter-square columns installed too close to the windows creating zones of unused space. Enka – the developer of Paveletskaya Tower – refused to comment on those complaints.

Experts at one real estate consultancy firm criticized the design of the office center at 31, Novinsky Bulvar [Boulevard] where, considering the floor depth (18m) and with some of the windows facing the atrium, natural light fails to meet the required standards. Stolny Grad, the company that developed the project, claims the office building does meet illumination standards due to its location and spacious atrium.

Experts also cite the building at 8-10, Arbat Street as an example of ineffective design. The floors in that building are not rectangular, which makes its layout less convenient for tenants because the area cannot be used in full.

Minland Development, a company that co-owns the building, told Vedomosti that “[the property at] 8-10, Arbat was designed, built and commissioned at one of the most difficult, cramped and very expensive sites in the Central Administrative Okrug [District] of Moscow; architects employed every means possible to use each square meter to the full. The problem is that quite often the future tenants of multifunctional complexes are not known during construction.”

Inefficient layout adversely affects the labor conditions of the tenants’ employees, as well as their budgets, because, in addition to the regular charges they pay for their office space, they are also forced to pay for the rent of spacious lobbies, staircases and atriums.

“While in the West the share of unused office space within the total space leased amounts to 12 per cent or less on average, in Russia even 20 per cent in new buildings is considered good,” says Maksim Kunin, head of real estate at Fleming Family & Partners.

According to market analysts, the atriums in buildings at 31, Novinsky Bulvar, 41, Novoslobdskaya, and even in such successful projects as Usadba and the Berliner House are too large, and as a result a large part of the space remains unused. Stolny Grad claims “that opinion is purely subjective and does not conform to reality; the competence of the architects who designed the buildings mentioned cannot be questioned.”

Other flaws named by analysts are small windows (e.g. the Riverside Towers business center), insufficient numbers of lifts (according to Stanaford, Gals Tower has three inconveniently located groups of lifts) and cramped parking areas. Representatives of a company renting office space at 7, Mokhovaya, said, speaking on condition of anonymity, that the building does not have enough parking spaces and employees are forced to park their cars three deep in front of the building; there are only three lifts in the building one of which is a cargo lift, while smells from the garage and the canteen fill the ground floor.

One analyst says that Paveletskaya Tower has such an acute shortage of parking spaces that many employees have to leave their cars in neighboring streets, although there is a 3-level parking area inside the office center. A shortage of parking space is also registered at 22, Ovchinnikovskaya Naberezhnaya [Embankment], says Subbotin.

Knight Frank – the exclusive marketing and leasing agent of that complex – said that as yet only the first part of the building has been commissioned, with some 377 square meters of leased space per parking place. Also, there is a 30-space parking lot near the building; however, after the second phase is completed there will be 99 square meters of leased office space per parking place.

At the same time, says Nikolai Karetnikov, deputy head of the real estate investment department at Fleming Family & Partners, a landlord may claim the number of parking spaces is enough, but in truth they will prove to be so small it is impossible to squeeze in a decent-sized car, or the parking area is so cramped that larger cars have difficulty moving around it freely.

In the opinion of Ryabokobylko, serious flaws in relatively new office buildings are the result of outdated designs prepared by architects who knew little if anything of the future tenants’ requirements. In part, this legacy from the Soviet school of architecture is in evidence at the Paveletskaya Tower and Paveletskaya Ploshchad office centers and the buildings of the office complex at 52, Kosmodamianskaya Naberezhnaya, facing the embankment.

Many developers prefer to keep the facilities already in place at the site they have secured for development. Otherwise, preparation of a new project can take a couple of years, plus another six to eight months would be spent on getting the go-ahead from the authorities, while in the present market conditions waiting for such a long time to commission the building entails huge losses.

“Of course, when the architectural concept of developing a site has already been prepared, it may be at variance with the tenants’ requirements,” says Ryabokobylko. “In particular, Gals Tower’s low ceilings, abundance of main walls and shortage of parking spaces can be explained by the fact that initially construction of a residential estate was planned for that site.” Constructive defects of the business center at 31, Novinsky Bulvar – for example, the excessively spacious floors – stem from the fact that initially the building had been designed as a hotel.

The assistant general director of Sistema Gals, Andrei Zakrevsky, reported that the number of parking spaces at the Gals Tower business center fully conforms to all the requirements that class A office buildings are supposed to meet. He also noted that the building has no main walls, which is explained by its constructive characteristics – the bearing structures are pylons and columns. Zakrevsky also noted that the building is equipped with six passenger lifts which are arranged in such a manner that each tenant has access to any of them.

However, in the opinion of Kunin, while the layout issues tend to improve over the course of time, the quality of construction remains low. “Low-grade concrete and poor-quality insulating materials are used. Cracks appear in the stucco after two or three years; it peels off and has to be applied anew,” he says.

Kunin notes that unlike their colleagues in the United States where office complexes are built, for the most part, with steel frames, Moscow developers use reinforced concrete which considerably protracts the period of construction. According to Stanaford, the quality of insulation in a certain “truly high-quality” class A office building proved so bad that window-sills were coated with ice in winter.

By Candlelight

In contrast to the construction defects, engineering communication lines can be upgraded regularly for the property to keep up with market requirements, but such upgrades are not yet widely practiced in Moscow. The only exceptions are Dukat Place II (where a second chiller plant was installed and ventilation power was increased some time ago) and McDonald’s on Tverskaya Street.

Moscow offices fall behind those in the West in terms of electrical power and power supply reliability, says Stanaford. For example, while high class offices in London have a power supply of 90 Watts per square meter of useful space, in Moscow it is 50 Watts. At the same time, in the opinion of Yulia Maksimova, director for marketing and business development at the EkoProg engineering company, class A offices need a power supply of at least 100 Watts for all the engineering systems and equipment.

According to Tatiana Romantsova, PR-manager at M+W Zander Facility Management, Moscow offices often lack high-quality ventilation and conditioning systems. “They are expensive systems and landlords are reluctant to increase the cost of construction,” she says. “Often a building that positions itself as class A does not have a sufficient power supply for air conditioning,” says Karetnikov.

Interestingly, a recent survey has revealed that the opinions of market participants differ on the purpose of using UPS (Uninterruptible Power Supply) in the office, which proves a lack of clear understanding of quality standards for office buildings. Some respondents said UPS was to ensure normal operations for all the tenants, while others assumed it served only for the uninterrupted operation of emergency systems.

It is quite symbolic that, having called a company renting an office at the class A Cherry Tower office building, Vedomosti received the following answer from a secretary: “I cannot put you through, we have a blackout throughout the entire 16-story building and we are using candles.”

House-Managers

However, according to brokers, the level of comfort in the office depends not so much on the quality of construction as on the management company. In the opinion of an analyst who refused to give his name, the quality of buildings developed by Enka can hardly be called high, but the company provides prompt services to their tenants.

Aleksandr Gurganov, commercial real estate director at GVA Sawyer, notes an opposite trend: “Quite often the joy of renting an office in an attractive building is overshadowed by the unsatisfactory work of the management company.” According to Subbotin, there are so few truly professional management companies involved in the market that you can count them on the fingers of one hand.

Experts emphasize that problems in the operation of engineering systems occur in the West, too. However, a professional manager is able to protect tenants from any possible damage that such problems may entail. In Moscow, “many owners of the class A office space, seeking to cut costs, either set up a management company of their own or hire a cheap one,” says Evelina Ishmetova, chief consultant at GVA Sawyer.

Stan Kotov, customer service manager at the Jani cleaning company, cites an example illustrating a landlord’s desire to economize: “Our company was contacted by the owner of about a dozen office buildings in Moscow, who asked us to make a calculation of cleaning office premises; after that, we – a cleaning company – were asked to make a calculation of managing an office building.”

According to the assistant director general of Forum Property Management, Andrei Shmelkov, “A client may move to an office building in downtown Moscow only to learn that the entrance hall is only cleaned every thirty minutes, while in winter with people entering the building from the street on to a marble floor, this is hardly enough.”

A Mythical Class

Unlike the Western practice that stipulates regular revisions of the rating of office premises and downgrading of dated properties, Moscow has witnessed just a few such precedents. Real estate agents revise property ratings for their own purposes, but they rarely publish the results of their work.

One of the few exceptions to that rule is the case of the two office centers Mosenka I and II. At the time those properties were commissioned in 1995 to 1996 they were rated as class A, but as new and more sophisticated office centers were built both Mosenka complexes were officially downgraded to class B.

In the opinion of Tatiana Romantsova, buildings like Riverside Towers and Cherry Plaza could be downgraded to class B, because in many ways they have long become inferior to newly-built office centers. Stanaford agrees that some of the office buildings in Moscow offering class A office space fail to meet that level, but refused to name any of them.

Many office buildings are still rated class A purely on the basis of their prime location, although their engineering systems have long become obsolete, says Ishmetova. “Russia, unlike other countries, does not have a single appraiser who would monitor the development of each building and register changes in its category. By offering his premises for lease or sale a landlord presents them as class A just because he wants them to be so.”

The high demand for premises in a certain building cannot serve as a mark of their quality, considering the current market situation. “An owner of a low-quality building can demand high rental charges and still attract tenants simply because he has vacant space to offer,” says Ryabokobylko.

A system of office space classification proposed by the Moscow Research Forum is, in the opinion of many market participants, has too many conditions. “There is not a classification that would be generally accepted by all the market participants… while, at the same time, there are properties failing to meet the criteria, which are, nonetheless, misleadingly advertised (as top class office space),” says Subbotin.

“I think that today the concept of a class A office building has become similar to the idea of what is referred to in Russia as renovation European style – everyone understands what it is about but no one can explain what it actually means,” says Andrei Golovin, head of the collective members of AVOK. He also notes that the same can be said today of the concept of a “smart building”.

Tatiana Romantsova, too, points out the weak sides of the proposed classification. “That classification fails to take into consideration the engineering component of real estate properties. Today several specialized organizations are involved in that kind of work, for example AVOK, which unites experts in engineering systems.” In Romantsova’s opinion, once engineering standards are introduced the existing classification will undergo considerable changes.

Another doubtful criterion is the age of the building. Contrary to the widespread belief, truly successful projects, such as Berliner Haus, the 11, Gogolevsky complex, the Daimler-Chrysler building, or Baltschug Plaza, do not risk losing in quality in a couple of years just because they might grow “morally obsolete”, experts say.

In the opinion of Ryabokobylko, the McDonald’s office building in Tverskaya Street, built a decade ago, still remains one of the most attractive properties on the market. In the West the age of a building is not regarded as a critical factor, either. Several top class office buildings in Canada were built in the 1930s, says Aleksandr Gurganov; later they underwent renovation and were furnished with state-of-the-art equipment.

Maksim Kunin notes that several years ago the Seegram Building office skyscraper, erected half a century earlier, was sold in New York at a price exceeding its average market value, as its high quality and functionality had withstood the test of time.

Landlords Rule the Market

None of the approximately 20 companies renting class A office space in Moscow, contacted by Vedomosti, agreed to give any official comment. Having initially promised “to tell a lot”, respondents later claimed they were satisfied with their office conditions.

“Today tenants have practically no rights and cannot even assert them, as the supply of class A and B office space is very low. What we are facing is a situation where landlords rule the market, and that factor is crucial in shaping the position of tenants at the negotiating table,” says Gurganov. Darya Afanasyeva, head of the research department at Hines, confirmed that today the office real estate market in Moscow is “a landlord’s market, not a tenant”.

Karetnikov explains what any disagreement with the landlord can mean for a tenant. “No one is interested in any tensions,” he says. “Otherwise, you can wait for a week before a fused bulb is replaced or the temperature of the air supplied to your office returns back to normal. Problems can arise later when discussing rental charges and the prolongation of the lease agreement, which may be terminated altogether.”

Romantsova notes that moving to a new office is such a complicated measure that tenants only use it as a last resort. “Moving to a new office is a very costly measure in terms of transportation. Therefore, most companies are forced to put up with difficult conditions until the scheduled date of relocation arrives. Naturally, companies do not usually vacate good offices and even try to expand their premises by ousting smaller neighbors.”

At the same time, for some of their ‘housing problems’ tenants only have themselves to blame. This is partly because they try to use every inch of available space. “In modern offices the projected office space is 12 square meters per person, while tenants often plan a higher density which means the power of air conditioning, ventilation and other systems are insufficient,” says Sergei Tumansky, an expert with Stiles & Riabokobylko.

A representative of a development company notes that tenants often have unrealistic expectations. “They move into a class A office building thinking it is supposed to offer every possible and impossible option, without even reading the lease agreement, and only afterwards, upon taking a look at the agreement, find out what they have the right to count on,” he says.

Nikolai Karetnikov agrees: “Most often companies who move into class A from class B are the ones to suffer, as they have no experience and no idea about what should be included in the contract, like for instance, a prior right of lease extension,” he says. Major foreign companies working through authorized agents, on the contrary, present landlords with detailed lists of requirements.

“In truth tenants can protect themselves,” says Gurganov. “Large tenants, especially foreign companies, act as they would in the West. They include all the possible technical parameters in the contract, stipulating the landlord’s liability for any problems that disrupt normal operations of the company, including details like the temperature of tap water or a permissible number of working lifts.”

Experts note that more and more tenants are learning to assert their rights for quality maintenance at the initial stage of drafting a lease agreement. Nevertheless, many tenants often forget to inquire about the name of the management company running the building.

According to Noble Gibbons, in 2004 the supply of vacant class A office space in Moscow remained as low as 5 per cent. Stiles & Riabokobylko insist that figure is even lower – in June it amounted to 3.24 per cent. Jones LaSalle anticipates a considerable increase in supply in the years 2005-2007; for the time being, as a result of the high demand and poor supply many agreements are concluded before office space is commissioned, and the share of vacant properties remains very low.