Money-Growing: A Revised History of Offices

The decentralization and geographical expansion of office development are in full swing, according to leading market analysts. In some 10 or, perhaps, 20 years Moscow will see the development of more or less clearly defined commercial zones differing in their prices for office space.

Decentralization is felt, it is discussed, but for the time being it remains unclear what it will lead to in the long run. Analysts expect office development to expand to the east and southwestwards, and into the areas around the Third Ring Road.

But in the future both tenants and buyers looking around for an office will grow accustomed to the notion of a submarket, i.e. a commercial zone in a certain location, with plenty of office properties, governed by its own development trends and an integral part of the Moscow property market.

Moscow may soon see the emergence of more than a dozen such submarkets, as is the case in Los Angeles, San Francisco or New York.

The formation of new commercial zones with a high concentration of office space has already begun in the capital over the past years. Later, independent business districts are likely to emerge within those zones, says Sergei Riabokobylko, senior executive director at the Cushman & Wakefield/Stiles & Riabokobylko.

Geography of Business

In their analytical surveys property market consultants divide the Moscow office sector into a number of zones, which include CBD, or the Central Business District, ZAM (Zamoskvorechye District), TAG (Taganka), NOV (Novoslobodsky), FRU (Frunzensky), BEL (Belorussky), SCH (Shabolovsky), BAS (Basmanny), SOK (Sokol) and CTY, or City – a business zone currently under development.

Cushman & Wakefield’s reports already describe those zones as submarkets. Perhaps the theory here is somewhat ahead of the practice and zoning has been adopted for the convenience of foreign clients. However, Moscow office property experts also find the division into business districts helpful in their daily operations.

For its own convenience Paul’s Yard has conditionally divided the city into the following districts: Zamoskvorechye, Shabolovsky, Frunzensky, Kutuzovsky, Presnensky, Profsoyuzny, Belorussky, Novoslobodsky, Prospekt Mira, Basmanny, Tagansky, Paveletsky and Leningradsky, says Yulia Kucherenko, head of the consulting and valuation department at the company.

The ongoing development of commercial zones in southwestern Moscow is concentrating chiefly on Leninsky Prospekt, Prospekt Vernadskogo and Profsoyuznaya Street, as well as in the areas within Taganskaya/Dubrovka and the Third Ring Road, and Kievskaya/Kutuzovsky/Moscow-City. As for the business districts of Paveletsky, Tagansky and Novoslobodsky, their development began almost simultaneously with the city center and is considered to be almost complete.

For the time being, most of the mentioned zones can only be referred to as nascent submarkets, Maxim Zhulikov, a leading commercial property expert at Penny Lane Realty, says. It would be more precise to define them as business districts with a high concentration of office centers and office employees, or white collar workers.

“There are zones where the ongoing developments can already be described as urban-shaping. Some examples are the office developments by Capital Group and AIG Lincoln’s project near the Belorusskaya metro station,” holds Oleg Myshkin, partner with Colliers International. Myshkin has worked on the property market since its earliest days.

“Development of large office properties often radically alters the city landscape,” Myshkin continues. “When the Riverside Towers business center – developed by Enka in 1997 – was being rented out it was the only office property to match international standards in the eastern part of the Garden Ring.

“Several years later the entire embankment along with the adjacent territories was built up with Class A and B office centers. Here, Enka, as it were, has played an urban-shaping role by forming a business district. Today, it is one of the most highly developed commercial zones. Altogether, it is a rare and remarkable example of how the developer has changed a part of the city, on his own.”

Oleg Myshkin believes the expansion of the office property market beyond the Garden Ring is inevitable.

“Many companies – first and foremost, financial companies, consultants and law firms, head offices of energy and raw materials companies – need offices in central locations. At the same time, as businesses grow and take on more staff many firms feel the need for professional back offices to seat their software developers, engineers, phone operators, etc. To that end, elsewhere in the world offices are being developed on city outskirts where the land is cheaper and rental rates are lower. That leads to market decentralization and the development of out-of-town business parks,” holds Myshkin.

“In the early 1990s, tenants made very high demands of office location,” recalls Cameron Sawyer, head of GVA Sawyer, one of the first development companies in Moscow. "They preferred western and north-western locations within the Garden Ring. When we were building the Bernikovskaya Embankment House on Nikoloyamskaya Street its location – albeit within the Garden Ring – was not viewed as a very suitable a place for a top class development.

“Time went by and securing new plots of land for office development grew more and more difficult while the Central Business District was expanding, taking in new areas. Today, many quality office buildings are appearing further from the Kremlin. For example, there are new developments near the Third Ring Road. It is possible to say that in the future the commercial zone will expand towards the Third Ring Road, into the southwest, west, northwest, and even northwards.”

Nonetheless, for the time being, CBD remains the most developed commercial zone in Moscow. It saw the emergence of the office property market and leading Russian and international companies still seek tenancies here. It is possible to say that the development of the office market in Moscow began with the development of the CBD.

First Office Dispute

Today, few remember – although it has only been 15 years – who developed the first quality office in Moscow, and where. Most experts tend to agree that it emerged in the city center. These days, every company that was involved in the initial building of the Moscow office property market claims its developments were the earliest.

Some even cite the Kremlin as the city’s first-ever top end business park. The Soviet-era World Trade Center on Krasnopresnenskaya Embankment is also mentioned by experts. Its first stage having been commissioned in 1979, the development was indeed a remarkable sight standing out against the backdrop of Soviet administrative buildings. These days, the World Trade Centre is still attractive, though it has been downgraded to class B.

Still, it would be more appropriate to speak of offices built in the first years of Russia’s transition to a market economy as being the city’s first quality office developments.

Most likely, the early growth of the office market began in the quiet lanes within the city center, such as Bolshoi Palashevsky, Volkov, Gazetny, etc. at the very beginning of the 1990s. Small clusters of offices also appeared on the premises of the Renaissance Hotel and the Park Place residential estate, on Olimpiisky and Leninsky avenues respectively.

In those days, developers willingly fitted out offices on the premises of expensive hotels, the Slavyanskaya being just one of them. Such offices were regarded as Class A properties. Gradually, office developers launched projects on Leningradsky Prospekt (Robin of Moscow at 53 Leningradsky Prospekt). Still, most office properties were raised in central locations. For the most part they occupied redeveloped mansions and old buildings. New building projects were rare.

In 1990, the Russian-American real estate development joint venture Perestroika opened a 1,145-square-meter class A office center at 19, Volkov Pereulok. Nowadays, the development is listed as class C, according to Jones Lang LaSalle.

Oleg Myshkin recalls the arrival of the first international companies in Moscow in the early 1990s. DHL, BASF, Dow Chemical, Credit Suisse, as well as foreign law firms Baker & McKenzie and White & Case were the first potential tenants seeking top class office space in this country.

All of them sought comfortable offices, but Moscow had nothing to offer at the time. The acute shortage prompted Perestroika to import small makeshift porter-cabins from Finland. The cabins – more commonly seen on construction sites – were set up on temporary sites and rented out at $750 per square meter per year.

Moscow city hall registered those properties as makeshift houses or barracks, although they were by far better than any Soviet-era administrative building.

The makeshift offices were situated on Samotyochnya Street and in the vicinity of the Baumanskaya metro station. They were rented fully fitted out with carpeting, painted walls and sometimes even partially furnished. Foreign tenants gladly moved in. A similar compound appeared on Leningradsky Prospekt, on the territory now occupied by the Western Bridge business park.

One of the first top class office properties was a development on Staraya Basmannaya Street reconstructed by Sawatsky in association with the state-owned Glavspetsstroi company in 1992. Coudert Brothers, Marathon Oil, Arthur Andersen and Norton Rose were the first tenants to move in.

At the dawn of the market era, any decent looking redeveloped property with parking facilities, security and cleaning services was viewed as class A, says Yevgenia Vlasova, managing director with Sawatsky Property Management.

Nobody took any notice of poor layout, lack of quality engineering systems and skilled property management, because in the early 1990s simply having an office was considered prestigious.

The Dawn of Greatness

Americans – leading commercial property experts – ventured into Moscow in the late 1980s and early 1990s.

“Working here in the early 1990s was extremely hard, especially, in terms of raising funds, securing building plots and at many other development stages,” says Cameron Sawyer. Sawyer was one of the pioneers who arrived in Russia from Atlanta, Georgia. In those days Moscow did not know the word ‘developer’.

Moscow market pioneers remember Andrei Stroyev who co-headed the Perestroika joint venture – the first development company in Russia that tried to build offices matching western standards.

Perestroika was set up by the famous Russian firm Mosinzhstroi and the U.S developer Earl Worsham. The Andrei Stoyev – Earl Worsham alliance produced quite a few quality office projects, says Oleg Myshkin.

Market veterans recall how Stroyev – a senior Mosinzhstroi official at the time – contacted foreign firms who sought quality office space in Moscow, clinched tenancy deals with them for several years in advance and secured payments upfront – a revolutionary method of financing in those days.

Perestroika’s first developments were effectively financed by future tenants. In those days, many developers worked on the receipts from rentals; some started their business without any start-up capital at their disposal. Rental rates were higher than today, as so was the payback.

In 1992-1994, base rental rates at Moscow office centers ran as high as $700-800 per square meter, operating and maintenance costs excluded, Sawatzky Group reports. Some properties were rented at even higher rates.

The figures named by Cameron Sawyer are approximately the same. Rentals remained at such a high level till 1998. In the wake of the crisis they plunged to $400-450 per square meter and then climbed slowly over the next few years, Sawyer says.

“Tenancies were snapped up in an instant,” says Oleg Myshkin. “Many offices were leased out long before they were built. To a certain extent, the current state of affairs on the market is reminiscent of those days. In 2005, the vacancy rate in class A dropped to 2% for the first time since 1996, while the supply in the first 6 months of 2005 exceeded the entire office space supply of 1996.”

Perestroika’s first properties were the redeveloped buildings at 11/1 and 2 and 2, 13/2 Bolshoi Palashevsky Lane and 17 Dolgorukovskaya Street, with a total space ranging from 1,000-2,000 square meters.

Andrei Stroyev and Earl Worsham remain the most mysterious figures in the early history of the Moscow market.

After Perestroika split up – which happened fairly quickly – Worsham reportedly went back to Atlanta. Andrei Stroyev, too, left Moscow. Speculations abounded as to why Perestroika had broken up. Some alleged the city government was not happy with Stroyev, others surmised that he had fallen out with Mosinzhstroi, though nobody remembers what the reason was.

Stroyev’s name resurfaced in the early 2000s in media reports in Tver where he was pictured as chairman of the Tver chamber of commerce, or as board chairman with Tverstroikompleks, or as the first deputy to the Tver governor.

Reports about the legendary figure and Perestroika were published in the 1990s in Times magazine where he was described as Russia’s answer to Donald Trump. Like the real Donald Trump, who invented America’s skyscrapers, Stroyev sought to build a modern commercial property market for Moscow.

Pioneers of the Moscow Prairies

Perestroika was followed by Canadian developers who established the company Svatstroi. The Russian-German joint venture S+T also emerged where the Russian side was headed by Shalva Chigirinsky, today a well-known entrepreneur. Turkey’s Enka (Mosenka) came next, launching into busy development activity, Oleg Myshkin recalls.

The company F.W. Sawatzky, involved in construction and property management, arrived in Moscow in 1989 from Canada, says Yevgenia Vlasova. In 1991, the Soviet-Canadian joint venture Svatstroi was founded.

“The procedure of securing building plots in those days amounted to cooperation of commercial firms with government bodies who had plots of land at their disposal. Thus, all the sides benefited from the project,” Vlasova explains. In 1992-1995, Svatstroi and Glavspetsstroi developed offices at 14/2 Staraya Basmannaya, 10/2 Bolshaya Dmitrovka and 6, Brigadirsky Pereulok.

Turkish firm Enka, whose Russian branch Mosenka also worked in close partnership with the Moscow government bodies, developed its first project at 3, Third Samotyochny Lane (1,267 square meters of office space). Many market players criticized Enka’s early projects as primitive; however, the buildings developed by the company in recent years, such as Riverside Towers, for example, have proved quite successful.

ST Group developed the celebrated office building at 5 Nikitsky Pereulok (22,400 sq.m. of office space), half of which is currently occupied by the Moscow city town-planning authority while the other half is rented by private companies including Inteko, which belongs to the Moscow mayor’s wife, Yelena Baturina.

GVA Sawyer and Colliers appeared after Perestroika’s disintegration. “I came to Moscow in 1991 and worked together with Andrei Stroyev at JV Perestroika, as a deputy to the general director, until the end of 1992,” Cameron Sawyer recalls. “In those days, Perestroika’s projects were the best on the property market.

“We took pride in the fact that we were raising beautiful buildings in line with genuine western standards. We were sort of groundbreakers in Moscow. In late 1992 Perestroika was in dire straits, most of the top executives left, many of them started their own businesses. GVA Sawyer was established in 1993 by a group of my Perestroika colleagues and myself. Other colleagues started Stolny Grad, Noble Gibbons, Colliers.

“Can you imagine that in the beginning GVA Sawyer and Colliers even shared an office! We had a common reception area and secretary. The office occupied four rooms on Novinsky Boulevard,” Sawyer continues. His company’s first projects were the Bernikovskaya Embankment House on Nikoloyamskaya Street, and Alexeyevsky House on Ostozhenka.

Second Wave

Domestic developers entered the market in the mid-1990s. Next to Mosenka’s office projects on Sadovaya-Samotyochnaya and Nikoloyamskaya Streets, and Riverside Towers-1, the city saw the emergence of office centers by Forum Properties (Novo Building on Dolgorukovskaya, Sokol Place in Chapayevsky Lane), offices by Kolchuga Fund on Shchepkina Street and by Stolny Grad in Voznesensky Pereulok.

Also, new foreign operators, such as Bouygues and Millhouse Capital arrived in the city. Foreigners came who developed offices for their own use, such as McDonald’s and Samsung.

An office development of decent quality appeared at 22 Usachyova Street in 1995, built by the Israeli firm Rosegroup which later changed its name to MCD, says Ruben Alchudzhyan, commercial real estate specialist with 10 years of experience, who worked for Jones Lang LaSalle and Colliers International.

Alchudzhyan marks out the Sakhalin Energy office on Bolshaya Pirogovskaya and Toko Tower by Tokobank on Krasnopresnenskaya Embankment as the most remarkable developments of that time. The demand for Toko Tower offices was enormous. With the total office space exceeding 10,000 square meters the project was considered as grand as the Moscow City towers today. The building was resold twice.

As to the rental rates, in some cases they ran as high as $1,000 per square meter per year, all costs included. When Coca-Cola moved into an office at Galereya Aktyor at the rate of $600 per square meter the tenant was considered to have been very lucky to get such a good deal.

The late 1990s saw the arrival of JSC Tema, Capital Group, Mosalarko, and Raiffeisen who also sought building plots in central locations.