Guiding Lines: Shell & Core Property

Office tenants still feel the shortage of top quality buildings, whereas developers, landlords and investors have the advantage as they can afford to save, say, on interior design.

Interior design is the key to a top quality office property. Many Class A and B office tenants complain about the poor quality of fittings and decoration in modern developments available on the open market.

Many office buildings presented on the market as Class A developments fall short of international standards in terms of the quality of the interior design. Many of them are not even equipped with false floors let alone entrance facilities for the disabled.

The office space classification widely used in Moscow these days and largely adjusted to the state of affairs on the local property market doesn’t always take into consideration the level of interior design. For the most part, tenants finish the office design themselves. Sometimes, they split the costs with the developers 50/50. Base rental rates rarely include the cost of interior design.

Moscow developers rent out most of their office projects as shell and core developments, that is, what the tenants get is, in fact, a bare shell with fittings provided only in common areas.

Developers claim that ‘shell and core’ is a convenient option because it enables tenants to choose the office design themselves. Perhaps that shouldn’t be taken for granted, as every developer interprets the term ‘shell and core’ the way they see fit.

Of course, landlords may offer tenants a ‘holiday’ of about 90 days without rental payments provided the property is leased out as shell and core, or the fit-out cost is not included in the base rate.

Another option is for a tenant to be offered a discount of $100-200 per square meter throughout the term of the lease. Offering a discount may turn out to be more convenient for the landlord than wasting time and money on decorating. The average cost of fitting out a Class A office amounts to $500 per square meter.

The situation is different on the developed European markets where the fit-out package is usually included in the base rental rate while the shell and core option is not popular. Vast open-space offices are rented out ready-to-use for the tenants so they can move in, arrange their furniture and start work.

The standard fit-out package includes wall and floor coverings, suspended ceilings, air conditioning systems, electric wiring, and radiators. Office developers in Great Britain often use natural materials for decoration and the buildings are often equipped with smart office solutions.

Speaking of high quality office space in Moscow will only become possible after the vacancy rate reaches the point of 10-12%; in early 2005 it stood at 3-5%. For the time being, Russian tenants have to put up with being served raw meat instead of a fried steak.