Money-Growing: Stary Arbat’s Secrets

Almost every shop on Arbat is more than a mere retail outlet, but a historic building, too. This is what makes the street so special and at the same time so difficult to access for real estate developers. City hall rarely sanctions the lease, rent or redevelopment of its historic buildings. Few retail formats or brand names succeed in taking root here. But rental rates and sale prices still soar, with no vacant properties available.

Many investors would be happy to buy or rent space here though properties on Stary Arbat are, for the most part, small and situated on the ground floors of buildings requiring renovation, says Yulia Drovyannikova, retail real estate consultant at Jones Lang LaSalle.

All the drawbacks aside, there are still virtually no commercial properties available for lease or sale along Stary Arbat. The target customers here are specific and limited by the market structure, but at the same time landlords make handsome profits leasing and selling properties. If a building is in a tolerable state, not requiring emergency repairs, it can be sold or leased out without any preliminary renovation. This is what helps many local landlords stay afloat.

By Contrast

Stary Arbat is not only one of Moscow’s most expensive retail areas but also one of its oldest compared to the streets built in the 20th century. Tverskaya, Novy Arbat, and Kutuzovsky Prospekt are considered to be “young” retail corridors. Stary Arbat, on the contrary, obtained the first features of a shopping zone in the late Middle Ages.

Retail outlets and restaurants began to mushroom here in the 19th century. These days Arbat has a total of approximately 20,000 square meters of leased retail space, according to Cushman & Wakefield/Stiles & Riabokobylko. No exact figures are available as regards the total volume of all the commercial properties on Stary Arbat. The vacancy rate stood at 0.7% as of January 2005.

Sale prices in January ran up to $10,000 per square meter while annual rental rates ranged from $1,000 to $2,000 per square meter, VAT excluded, according to ABN Realty. But for a Stary Arbat boutique of 50,000sqm rates can be even higher. By way of comparison the average rental rate for top class premises on Tverskaya Street is $3,800 per square meter, at Kuznetsky Most it is $2,000, and on Novy Arbat $1,500.

Stary Arbat is a tourist and pedestrian zone, a place for relaxing. Some of its sites are traditional street show venues. In summer break dancers and yoga masters perform their miracles here, local poets recite their verses near the Vakhtangov Theater, and a professional jazz band plays near McDonald’s. Since cafes and restaurants started filling the street in the early 2000s a European appearance has emerged on Stary Arbat.

Arbat “is reminiscent of Europe’s and America’s famous retail and entertainment streets established quite a long time ago; at any rate I saw a similar street in Copenhagen over 20 years ago,” Moscow arts critic Lev Kolodny wrote in his research work “Wandering Around Moscow”.

Cafes, fast food joints, restaurants and snack bars do well in Stary Arbat. Their abundance is striking as the street itself is not very long. A variety of catering outlets is one of Arbat’s characteristic features. At the entrance to the street from the Arbatskaya metro station there is the famous Praga Restaurant; at the other end of the series of cafes and restaurants there is a McDonald’s outlet near the Smolenskaya metro station.

Down the street, not far from the Arbatskaya metro station and Praga, there is a fashionable youth caf? called Prime (there is another outlet of the same name in Kamergersky Pereulok [lane]). It is also popular with foreign nationals. This is not the only chain outlet on Arbat, with other famous city public catering brands having found a niche here. They are Mu-Mu, Shokoladnitsa, Baskin Robbins, and Italian Sbarro.

All the establishments are situated on the first floors of Arbat’s maisonnettes, or town houses, while the upper – second and third – floors are traditionally occupied by residential apartments or offices. Development of large modern shopping malls in Arbat is virtually impossible, as most mansions are placed under government protection, with the exception of buildings that fall into ruin and are subject to demolition.

Renovating historic building is not easy, either. Lev Kolodny writes that originally Arbat houses were built of wooden plates, with facades of wooden walls covered with sophisticated architectural details such as modeling, pseudo-columns and bas-reliefs so that passersby would never guess at the true nature of the construction materials used to build the mansions. That is why investors are often faced with dilapidated constructions.

On the other hand, Stary Arbat is hardly a place to house a variety of new retail formats. Retail realty experts believe that Arbat has a specific and limited clientele that influences its development as a place where some retail formats take root while others do not.

Much is conditioned on the fact that Arbat is a pedestrian street, says Yulia Drovyannikova. Russian and foreign tourists make up the majority of customers here. Muscovites never go to Arbat just to shop because there are no convenient access roads. Most customers travel there by metro. That is why the most popular outlets are gift shops and youth-oriented clothing stores.

The majority of the specific consumer groups at Arbat’s stores are people from non-conventional strata. There are representatives of unofficial youth movements wearing torn jeans, though you are just as likely to see debonair businessmen. Crowds of foreigners wearing Russian rabbit-fur ushanka hats are also a common sight on Stary Arbat.

The souvenir and gift stores along Arbat are represented by Russky Promysel, Podarki, Arbatskaya Kollektsia, Russkiye Suveniry, Russkaya Troika, Matryona, and Starinnyye Ikony. Arbat’s clothes and shoes stores include Miss Sixty, Obuv XXI Veka (21st Century Shoes), and Parad. Luxury goods, antiques, and jewelry stores, too, fit in nicely, as well as bookstores, drugstores, audio and video shops, beauty parlors and travel agencies.

The surge in the gaming industry that has hit Moscow over the past few years has reached Stary Arbat as well. To all appearances, the neighboring Novy Arbat retail corridor, where several famous casinos and gaming establishments are situated, has contributed to that development. For example, the major gaming operator Jackpot has arcades on Stary Arbat.

Arbat is a street where you can feel the presence of the criminal underworld, believes Aleksandr Tishkov, development director at the real estate consulting company Magazin Magazinov. First of all, this is because of the proximity to a variety of casinos and gaming clubs. Secondly, Arbat is a street where many commercial businesses lack transparency.

Many small vendors, including the owners of open-air souvenir stalls, are unwilling to end their shady business practices. “That is a different level of business,” Tishkov says. “Rental rates remain high with owners earning incomes they are happy with, so they are quite satisfied with what they have.” For example, a boutique shop renting a property of 50sqm pays $2,000 to $3,000 per square meter annually. In the neighboring street of Novy Arbat the situation is somewhat different because properties there are, for the most part, large, making it is easier to legalize rental agreements and to control cash flows. Hence, Stary Arbat is, in certain respects, inferior to the other major retail corridors of Moscow, holds Tishkov.

Large Format Narrowed Down

With major developers and commercial realty consultants preferring areas where large properties are available, Stary Arbat draws the attention of just a handful of professional market players. The largest shops in Stary Arbat house such brands as Mexx running an outlet of some 500sqm, E-life (200sqm) and Silver Row (800sqm), according to Cushman & Wakefield/Stiles & Riabokobylko.

Early 2004 saw the opening the new 14,000-sqm retail and office center Dvoryansky Dom at 10, Stary Arbat, its retail and office properties available for lease occupying nearly 5,000sqm, Cushman & Wakefield/Stiles & Riabokobylko said. Judging by the consultants’ reports, they doubt the viability of Dvoryansky Dom. For the time being it is the only large multilevel shopping mall in the vicinity although it occupies a renovated building, not a newly built one. But professional consultants disapprove of its concept.

“Whoever it was that designed the concept of that property, it certainly wasn’t us, nor JLL,” Magazin Magazinov experts say. Some of them commented on Dvoryansky Dom asking for their names to be withheld.

Some said that the bulk of customers attracted by the Esprit clothes store situated on the first floor right next to the entrance to the mall never reach the upper floors. Others said that the famous BHS (British Home Stores), although it occupies the entire second floor, is positioned in such a way that customers stroll by without ever visiting it. Dvoryansky Dom’s movie theater and bingo club are lost somewhere upstairs beyond most customers. The food-court on the third floor is mostly empty, the escalators are inconvenient, and the front doors are cumbersome.

“Initially the Dvoryansky Dom complex did not even have a marketing concept,” says Olga Zabara, advertising and marketing director at Arbat-Management, the company that runs the mall. “It was assumed that the marketing strategy would be developed jointly with the tenants and in part those plans were implemented through their advertising campaigns and measures taken by the complex. The property was presented to the tenants by the agent Cushman & Wakefield/Stiles & Riabokobylko.”

Development of the mall was overseen by the company Finsnab-M, while Midland Resources Limited acted as investor. From the start, the fate of the property was never going to be straightforward if the decrees issued throughout the period of construction by Moscow City Hall were anything to go by. According to resolution No. 690-PP of July 31, 2001 financing was suspended by Sberbank of Russia – the initial investor – “due to ZAO Rosinterstroi’s failure to honor its obligations and undertake the duties of a project supervisor.” Finsnab-M subsequently took over that role.

According to Cushman & Wakefield, initially the authors of Dvoryansky Dom allocated insufficient space for shops, planning to place several tenants on the first and second floors of the mall. But at that time major firms such as BHS were demanding large properties. That is why it was decided to occupy the first two floors with two large stores. The mall also lacks professional marketing and an experienced operator to manage its movie theater.

BHS is losing customers by being situated in Dvoryansky Dom, experts say. And it is not a fact that Esprit will remain in the building if a better property becomes available nearby. Andrei Timofeyev, vice-president of the Avtolain group that runs three BHS outlets in Moscow under a franchise agreement, confirmed that in February 2005 the company closed its outlet in Dvoryansky Dom.

There are at least two reasons why the store is leaving Stary Arbat. Firstly, BHS will shortly open a new outlet in the city center, not far from Stary Arbat. Two outlets situated that close to one another would not be effective. Secondly, Dvoryansky Dom has failed to live up to BHS’ expectations in terms of profitability. “Stary Arbat’s customer flow is insufficient and its structure is different from what is needed for the brand to sell, not counting our constant patrons,” says Timofeyev.

The managers and owners of Dvoryansky Dom are set to change the concept of the mall, Olga Zabara said. The average rental rate for retail and entertainment properties is $1,000 to $1,500 per square meter; offices are leased out at $550 to $650 per square meter per year, according to the management company.

The anchor tenants, in addition to the 4-screen movie theater and catering outlets within the food-court, include the 1,100-sqm bingo gaming facility Loto Club. Office properties occupy the fourth to the seventh floors of Dvoryansky Dom, with a total of some 8,500sqm of leased space. Dvoryansky Dom also has a multi-level underground parking lot with 156 spaces, and a 12-space outdoor parking area.

Considering that the shopping mall and its entertainment areas require more publicity, Dvoryansky Dom is being positioned as a shopping and entertainment complex in current and upcoming advertising campaigns, Olga Zabara said.

The only major project to be commissioned in the Stary Arbat retail corridor shortly is the multifunctional Alfa-Arbat Tsentr (Center) at 1, Arbat, research analyst at ABN Realty Antonina Lairova reports. Alfa-Arbat is a new multistoried building of 50,000sqm, with 2,000 to 3,000sqm allocated for retail outlets. Initially, the project was financed by Alfa Group; its fully-owned subsidiary Sirakuzy acted as a developer. Today, the building belongs to TNK-BP. Construction has already been completed and the mall is awaiting first tenants.

Spice of Life

Every shop in Arbat – whether old or new – is unique. Some offer goods for members of youth movements such as rock and heavy metal music fans. A second-hand bookshop has existed here for years.

Especially noteworthy is the audio and video shop at 6, Stary Arbat – an outlet of the major retail chain Soyuz. The shop is one of the chain’s most successful. Soyuz’s outlets compete with each other, and in terms of sales the Stary Arbat shop ranks 2nd in the city center, while the shop in TsUM leads the way.

30, Stary Arbat houses the city’s oldest pet-shop built in Soviet times. Near the building there are rows of illegal street vendors offering kittens, dogs and hamsters to passersby.

Further along there is a shop named Mir Novykh Russkikh, or the World of New Russians (36, Stary Arbat). Pedestrians often stop near its windows to gaze at the Palekh lacquered boxes featuring individual miniature paintings of cars, a figurine of a traffic police inspector offered for $47 or “New Russians playing cards” for $10.

Some sites on Stary Arbat are especially popular with Muscovites. An example is Monya – a catering outlet specializing in traditional Russian pelmeni, or dumplings. Nowadays such restaurants are rare in Moscow. Another favorite among Muscovites is the caf?-club Gogol, at 36/2, Stary Arbat, opened by a co-founder of Proekt O.G.I, frequented by creative intellectuals and students.

Then there is Hard Rock Caf? – a name that speaks for itself – at 44, Stary Arbat. The club exhibits a jacket worn by George Harrison, Jimmy Hendrix’s fur-coat, Madonna’s hat, Michael Jackson’s boots and numerous other personal items belonging to celebrities. Hard Rock Caf? is a world chain running 116 outlets across the globe, including a caf? in Shanghai.

In the past Arbat was filled with rows of stalls, kiosks and booths and was not exactly a pleasant place to stroll. In the early 2000s the city authorities brought some order to the street. City Hall is set to redevelop Stary Arbat, the prefecture of the city’s Central Administrative District [okrug] reported. The reconstruction plan is being revised by Mosproekt-2, whereupon it will be published.

Reconstruction is set to begin in the second half of this year. The new Stary Arbat will have trees, special areas for street performers and statues, while the open-air souvenir stalls that hinder pedestrians today will be removed. Reconstruction of some of the existing sites and the creation of small retail properties would be the best variant for Stary Arbat, ABN Realty experts say.