GUIDING LINES: The Forgotten Letter C

In practice, however, the overwhelming majority of Moscow employees work in companies housed namely in such low-cost office buildings. Experts estimate the total space of offices in the city at 11 million square meters, with class A and B properties accounting for less than 4 million square meters. The rest is occupied by class C offices, which is most in demand.

The vacancy rate in class C office buildings is the lowest, at nearly 0 percent.

It would be erroneous to assume that consulting experts take no interest in statistics on class C offices and never deal with such properties. There are other problems, though. Class C properties, for the most part, do not require the development of any concept, marketing promotion, presentations, etc. They are modest buildings of former scientific research institutes, administrative institutions, factory management offices, schools, kindergartens, and sometimes – first-floor apartments in residential buildings. Besides, there is a division of labor in the market. The class C segment is the domain of agents and brokers working in that niche.

Professional consultants focus on clients representing major businesses and on more expensive buildings. But at times those different spheres intersect. Sometimes large international companies seek spacious class C premises where a staff of 500, 1,000 or more people could be seated (while the company’s executives may occupy a class A office in a downtown area).

In such cases a company can address a well-known market consultant. To work on such projects consultants need to have at least a general understanding of the situation in the class C sector. Although some experts do have some kind of statistical data at their disposal, the figures are often far from accurate and fail to correspond to reality. Gathering data is extremely difficult.

The owners of cheap office space prefer not to divulge information about themselves or their properties, as most of their transactions are effected under ‘gray’ schemes. Agreements on the lease of class C properties are very rarely registered with the authorities, and are usually short-term. Occupants often find it convenient to pay landlords in cash.

Such deals are impossible in the class A and B segments, because they are illegal. Many consultants are used to dealing with the civilized market, although, they all admit that brokering deals in the class C segment can be particularly profitable because of the large volumes of transactions.

Another interesting tendency has emerged of late. Some enterprising people have started making money by re-equipping class C properties to make them class B offices. Such projects also require advice from the consultants. According to market experts, scores of developers and investors are lining up to secure promising buildings. A class B office can be sold for $2,000-3,500 per square meter, whereas the price for a class C office does not exceed $1,500. Annual rental rates for upgraded properties will amount not to $200 but to $500 per square meter, and even higher.

There is a special demand for class C office buildings situated near large thoroughfares, such as the Third Ring Road. Re-equipping may cost from $200 to $700 per square meter. Adding those figures to the sale price of one square meter of class C office and its total space it is possible to imagine the advantages of upgrading properties.

Companies like Rosbuilding, for example, have built a reputation, and a fortune, on such reconstruction projects. Meanwhile, class C offices are sometimes rented even by major developing companies planning to upgrade their status and to move to more prestigious class C offices. Such a step is believed to be necessary for companies that want to expand their business.

Quite a different category of tenants and buyers are entities opting for cheaper properties because of the specifics of their activities. They are, for example, large publishing houses such as Berator and Pronto, who need offices close to warehouses or industrial properties on the outskirts of the city, or Protek, the famous pharmaceuticals distributor.

But large companies prefer buying office properties or renting them out for several years at a time, whereas the volume of transactions in the class C sector is still growing mostly at the expense of small businesses who rent offices of about 100 square meters for a short period of time.