Money-Growing: Office with a Downtown View

The formation of the zone began in the early 1990s, with the milestones in its history concurring with the key stages in the development of the office property market. The city center remains a giant building plot where new office centers are constantly being raised. And there are a number of reasons for that.

The first companies to develop and rent out Moscow’s first-ever modern offices arrived from the United States. Russian developers joined in at a later stage. By the early 2000s, dozens of property brokers, consultants and developers were active in the CBD. These days, central locations are still popular with major tenants. That is why developers are so eager to secure sites here.

All Roads Lead to the City Center

For the time being, Moscow’s best offices are to be found in the central business zone and the areas adjacent to it. The city center accounts for some 800 office buildings including 1.25 million square meters of class A properties and 0.75 million square meters of class B offices, Paul’s Yard reports. By comparison: the total volume of office space rented in class A and B centers stands at 3.9 million square meters (or 1 million square meters in class A, and some 2.9 1 million square meters in class B).

Disputes about the future of the CBD – on whether it will preserve its commercial functions or will be transformed into a tourist attraction and a historic site in accordance with city hall’s plans – have already begun.

But so far, Moscow’s largest office projects, with the exception of the Moscow City project, are being implemented within the Garden Ring. The history of world urban development shows that the most prestigious, expensive and bustling commercial districts are formed in the heart of large cities.

Nowadays some 50% of the demand for class A and B offices falls in the Central District, market analysts report. In 2005 and early 2006, new office centers are slated to be commissioned here. They include Dukat Place III at 6 Yaroslav Gashek Street (31,000sqm, Hines) and Aurora Business Park II-III at 82 Sadovnicheskaya Embankment (80,000sqm, Forum Properties).

Development of new business centers is to begin on the sites of former industrial estates; large-scale projects will be launched by Stroiinkom-K, Capital Group and Vedis.

Office rental rates for quality properties are the highest in central Moscow. In the areas around the Kremlin they run as high as $1,000 per square meter per year, VAT excl., while the average market rate stands at $650 (excl. VAT) for class A properties.

“Saying that the center has run out of office construction sites would not be fair,” holds Oleg Myshkin, a partner at Colliers International. “If you take a bird’s eye view of Moscow and its center – for example, on http://earth.google.com – you will see quite a lot of sites, many of them are unaccounted for or rundown, then, there are industrial zones. Sites for new office developments can be found even in the center of New York.”

“Ten years ago when the office market was just beginning to form it was concentrated mostly in Moscow’s historic center,” says Michael Lange, managing director at Jones Lang LaSalle. “Virtually all the projects where we were involved in the 1990s – Smolensky Passazh, Yakimanka office center, Toko Tower – are centrally located. Even Paveletskaya – one of the most highly developed business districts in the city – was initially seen as insufficiently central. The notion of a central location as such is gradually changing, these days prime office properties emerging far beyond the Garden Ring. Still, the overwhelming majority of the most interesting projects aspire to the central district.”

Third Wave

Following the advent of pioneering office developers in the city center – JV Perestroika, Sawatzky Group, ST Group, Enka, GVA Sawyer, and others in the late 1990s – the market saw the arrival of developers and consultants who were to set the office market standards for years to come.

The companies Jones Lang LaSalle, Noble Gibbons (Noble Gibbons in association with CB Richard Ellis) and Colliers International were established in 1994-1995. Since then they have grown and changed their status by forging alliances with major international corporations. Yet, most all of them began as small Moscow-based businesses set up by private individuals, mostly foreign nationals, recalls Ruben Alchudzhyan, commercial real estate specialist with 10 years of experience, who worked for Jones Lang LaSalle and Colliers International.

They are the companies who were nicknamed ‘the Big Four’ by the media. Noble Gibbons was set up in 1994 by Philip Bogdanov, Bill Lane and Jack Callagher. Darrell Stanaford, the company’s managing director of today, joined it later after leaving Western Group, an agency that had been active in Russia since 1993 and fell apart in the wake of the 1998 financial crisis.

The agency was co-founded by Parker Hudson, Page Aitkin, Oksana Tikhonovskaya and the others. Clients included Price Waterhouse, Coudert Brothers, Sumsung, Coca-Cola, Ford Foundation, and Procter & Gamble. Darrell Stanaford held the post of managing partner at Western Group. At Noble Gibbons /CB Richard Ellis he began as the head of the industrial real estate department.

Mark Stiles and Sergei Riabokobylko, too, began their careers at Western Group. Later they established the Stiles & Riabokobylko agency, afterwards reorganized as Cushman & Wakefield/Stiles & Riabokobylko. One of the co-founders of Jones Lang LaSalle is Michael Lange. In 1995, he established the company together with his partner Michel Paskalis. Colliers International’s owners are Preston Huskell and Oleg Myshkin

Those four companies have developed a uniform classification of office space adapted to the Moscow market and agreed to adhere to it. Perhaps, that was when they were nicknamed the Big Four. The name was coined by the media, while in their daily operations those companies do not cooperate as closely with one another as it may seem, says Ruben Alchudzhyan. In the beginning, the companies were involved mostly in brokerage and consulting.

In 1993, Penny Lane Realty was founded. The multitude of branches and the variety of sectors the company was involved in was striking, says Ruben Alchudzhyan. Penny Lane worked with commercial and residential real estate, afterwards also in industrial and out-of-town property sectors. The company fostered professionals who later established Paul’s Yard (2004) and Leeds Property Group (2004). On the whole, the year 2004 marked a turning-point in the real estate consulting sector, some analysts believe.

In those days the battle between realtors for a place on the market intensified as a variety of new firms were established, says Andrei Petrov, a partner with Knight Frank. “Leading real estate agencies were transformed into consulting firms,” he said. “Moreover, the year 2004 can be seen as the final stage of the formation of elite of professional consultants which - as would be expected - included only the companies able to use Western expertise and know-how in their work.”

The Market Knows

The 1990s is an era marked by the arrival of major developers. Capital Group entered the property market in 1993. The company’s track record includes 50 commercial and residential properties, either completed or under construction. The group became famous on the office market owing to the projects it launched in 2004 and 2005, such as the 49,414-square-meter Capital Plaza on 4th Lesnoi Lane, and the 18,500-square-meter Pushkin House at 9 Strastnoi Boulevard.

In 1994, another major developer, KRT Group, or the Corporation for Development of Territories, carried out an inventory-taking of territories in the Yakimanka and Zamoskvorechye districts, with the total space of plots in the area amounting to 960 hectares. KRT, together with city hall, arranged for the withdrawal of industrial facilities from the area; some of the enterprises underwent re-profiling.

In the late 1990s, KRT developed the House of German Economy, a building for the Bank of Austria, Polyanka Business Park, as well as office buildings at 50-52 Bolshaya Ordynka. Golden Island is likely to become KRT’s most impressive project, envisaging the development of over 1 million square meters of office, retail, hotel and residential properties along the Bersenevskaya, Sofiiskaya and Bolotnaya embankments.

Admittedly, not long ago the Moskapstroi company took over the coordination of the project, but, according to KRT’s chief spokesman, Valekh Rzayev, the group retains the titles to nearly two-thirds of the plots on the island and the results of geological surveys and other work carried out in the area by KRT at their own expense are unavailable even to the Moscow government.

Over the past decade, more developers have arrived in the CBD, including JSC Tema, Sistema Gals, Mirax Group (formerly Stroimontazh), Forum Properties and Vneshinvestprom Group.

Investment Failures of the Past Decade

At approximately the same time when the Big Four consultancies were set up, the Kolb Levins agency was active in Moscow. The company specialized in office rentals. Somehow the entity ceased to exist and was forgotten. In their time, however, it was Kolb Levins who rose to notoriety for their failure to find a tenant for a 10,000-square-meter property.

In those days, a property of such a size seemed enormous and few would venture to try and lease it out in bulk, even more so as the construction work was not yet completed. But Hugh Levins, the head of the agency, secured an exclusive right to broker the deal, according to reports of the real estate websites of the time. Nowadays, the building, situated near the Moscow Palace of Youth, is occupied by UralSib.

The office – jokingly referred to as the Kolb Levins Building in real estate circles – took several years to be completed, Ruben Alchudzhyan recalls. Situated outside the city center it became one of the first most striking examples of “dolgostroi” – a construction project that is, literally, “long in the building” – on the local office market.

Oleg Myshkin puts the developers’ failures to produce quality properties fast in those days down to their inexperience, difficulties in securing building plots and the lack of project financing. Undoubtedly, market players have gained in experience since then; however, Moscow still retains the traits of an immature market. Problems with securing project financing and expensive loans are the most serious hindrances. Many projects are still being financed through equity capital.

One of the major ‘dolgostroi’ projects launched in the early 2000s is Tsaryov Sad, near the Kremlin. Construction began by the Keystone company in the late 1990s was never completed. Sberbank had earmarked $90 million for the development of the 83,000-square-meter facility. All the work on the site was suspended almost immediately after Gennady Shulman, the founder of Keystone, died.

Another project the government had planned to implement near the Kremlin envisaged the development of the Kremlyovsky multifunctional complex, but all attempts by the federal government to attract investment have failed. The concept was revised several times to include office, retail and hotel facilities. While still on the drawing board the projected size of the building grew to 90,000 square meters, requiring some $200 million to be built. The government-owned company Kremlyovsky was set up to oversee the project, but construction has never been launched.

Analysts cite Novinsky Passazh on Novinsky Boulevard as an example of another ‘dolgostroi’ of our times. The development launched by the Turkish firm Entes was afterwards bought out and completed by Globex Bank. All in all, the mall took four years to be completed. “The capital opts for Turkish builders as they offer the best price/quality ratio,” holds Ruben Alchudzhyan. “But not all companies are like Enka.”

At times, even successful developers suffer failures. Fore example, the Kolchuga fund was forced to suspend the development of the Europe House business center at 11 Kolokolnikov Lane, Penny Lane Realty reported. Earlier, Kolchuga had commissioned two successful properties, a building at 4 Shchepkina Street, and the Millennium House business center at 12 Trubnaya Street.

The developer had to suspend construction after three stories had been raised. This reportedly happened after some high-ranking official residing nearby complained about the construction work in his neighborhood. Official reports cited by Prime City Properties say that the work was suspended over a dispute with the authorities on the projected size of the property. Eventually, the 8,000-square-meter development was completed but about 12-18 months later than had been initially planned.

Internal Zones

The Central Business District is being formed unevenly. Plots built up with office properties alternate with residential estates and industrial facilities. Curiously, market analysts have made an interesting observation: within the Garden Ring there are a number of independent islets of commercial activity.

Such small business zones are being formed in areas where several large office centers accumulate. The streets in those parts of the city are filled with people in suits and ties hurrying to important meetings, expensive cars, and cafes where businesspeople hold informal meetings.

One such quarter is to be found at Paveletskaya Square where the towers of the Enka-built Paveletskaya Plaza rise into the sky.

“The zone around Paveletskaya Square had objective prerequisites for growth,” says Maxim Zhulikov, senior consultant at Penny Lane Realty. “The area abounds with industrial facilities that city hall is set to have withdrawn [from the city center], hence at the time when Paveletskaya Plaza was being developed it was not very difficult to secure building plots there.”

Antonina Lairova, senior analyst at Prime City Properties, believes that the largest accumulation of office properties can be found in the streets and lanes around the Kremlin.

To begin with, there are Nikitsky and Romanov Lanes with the Romanov Dvor business center. The development of the third and final stage of Romanov Dvor – 12,000 square meters – is to be completed next year. The total size of the property will then reach 58,000sqm.

Secondly, there is Vozdvizhenka Street and Voznesensky Lane where the 37,500-square-meter Usadba office center is located (22 Voznesensky). Then, there is Gazetny Lane, Tverskaya Street, Bolshaya Dmitrovka, Petrovka, Stoleshnikov Lane and Nikolskaya Street.

“Another well pronounced commercial zone within the city center is the area between the metro stations Pushkinskaya and Tverskaya where the famous business center Galereya Aktyor (16 Tverskaya Street, 11,000sqm) built in the mid-1990s is situated,” Lairova continues. “Then, there is also the multifunctional center at 8-10 Strastnoi Boulevard, an office center at 22b Tverskaya, and many others.”

Given the high demand for office space in that district many apartments are being reclassified as non-residential properties for office use. By virtue of their prestigious location alone those offices are being snapped up by tenants forthwith. The building at 4/3 Strastnoi Boulevard is an example, she says.

One more established commercial quarter is the area around Tsvetnoi Boulevard. The Turkish developer Enka has raised several office centers here, at 17, 19-23 and 21-23 Posledny Lane, 25/3 Tsvetnoi Boulevard (4,413sqm) and 24/27 Sadovaya Samotyochnaya Street (5,219sqm).

Trubnaya Street is where the properties developed by the firm Inzhener (No.21, 3,700sqm; No.23/1, 1,1500sqm; 23/2, 2,300sqm, No.25, 1,175sqm) are situated. Millennium House (8,036sqm) is also to be found on Trubnaya. Top.Ri.Invest is building a 5,100-square-meter business center at 28 Posledny Pereulok.

A number of modern class A business centers have sprung up lately near the metro stations Turgenevskaya and Krasniye Vorota. They are Myasnitskaya Plaza at 48 Myasnitskaya Street (6,530sqm), Georg Plaza at 5a Ogorodnaya Sloboda Lane (5,747sqm) and a 9,000-square-meter development at 17/1 Chistoprudny Boulevard.

A cluster of commercial activity is being formed near the Kurskaya metro station where the office buildings at 19-21 Lyalin Lane and 20-12/1-1a Podsosensky Lane have already been commissioned. A large property under construction is the 63,500-square-meter Citydel at 11-19 Zemlyanoi Val, developed by JSC Tema.

All those small commercial zones, however, differ greatly from one another in terms of prestige and rental rates, as well as their appearance and rhythm of life.

Maxim Zhulikov believes that office properties in the Taganka district and other areas east of the city center are not of prime quality, while the more prestigious commercial areas are Sretenka, Tverskaya, Patriarshiye Ponds, Novy Arbat and the southwestern part of the city center. New business zones are being formed near Tverskaya Zastava Square at Belorusskaya.

Renting an office in the new business centers on Ordynka Street, which are especially popular with tenants, may run up to 635 euros per square meter per month, excluding VAT and operational costs.

Rents on Ovchinnikovskaya Embankment – where offices are also in high demand as well as on the many other embankments in the Zamoskvorechye district – stand at between $670 and $850 per square meter. Conditions for the emergence of new business zones exist in the areas between Presnensky Val and Gruzinsky Val Streets, around the Tatarskaya Street area, and at the beginning of Kutuzovsky Prospekt, Zhulikov says.

21st Century Projects

In the course of the first six months of this year, around 10 large business centers were commissioned in the city, eight of them having been developed in the city center, according to realty consultants. They include Pollars built by Mirax Group, Central City Tower I by PFPG and Aquamarine by Stroiinkom-K. Central City Tower I is remarkable, realty experts say. Maxim Zhulikov, for one, believes it to be the best class A property among all the office centers of the same size.

New large-scale developments currently on the drawing boards are due to emerge in 2006-2008. A project by the Nerl investment company is likely to become the largest development in the area, on the territory of a former industrial estate that was evacuated from the city center.

Nerl is set to raise a prime office center named Krasnaya Roza (“Red Rose” in Russian) of 70,000sqm, on the place of a factory of the same name, Knight Frank realty reports. The projected investment exceeds $200 million.

Vedis Group plans to build a large business center and a hotel, estimated to be worth $100 million, on the site of another industrial estate that moved out of the city. The development will include four office buildings, 15,000sqm each, on the site of the Moscow furnishings plant.

The DON-Stroi company is set to make commercial property development one of its priority fields of operation, the company’s press-service reports. The company is currently working on a 100,000-square-meter office center in Oruzheiny Lane.

Banks, too, continue their active participation in development projects. For example, the Bank of Moscow has come up with a plan to build a 17,400-square-meter center near the Krasniye Vorota metro station. The mayor of Moscow has postponed discussion of the pre-project proposal till the next session of the town-planning council.

Noble Gibbons / CB Richard Ellis realty has been hired to broker tenancies at the 60,000-square-meter Serebryany Gorod business center, currently under construction on Serebryanicheskaya Embankment. The building will have 40,700sqm of office space. The project is being developed by the firm Mosinzhstroi Development, which is part of the Neftyanoi concern, Noble Gibbons reports.

The Vizavi investment firm plans to build the 50,000-square-meter Kursky office park, near the Kursky train station on the territory of the former reinforcement metal plant Arma

The modern office and hotel complex Pokrovskiye Vorota is currently under construction on Pokrovka, which holds a leading position among Moscow’s streets in terms of the speed at which new shops, coffee houses, restaurants and bank branches are springing up there. The complex will be leased out through the Dominique Renard real estate consulting firm.

Dominique Renard has signed an accord with Sistema Gals who is developing the property. The complex featuring 14,772sqm of office space is to be completed in the second quarter of 2006, Dominique Renard has reported.

Trends in Time

Observers note several clear-cut trends governing the office market in Moscow as a whole, and the city center in particular. To begin with, there is the ever-increasing supply of multifunctional properties, especially office-retail centers. Practice shows that projects combining retail and office properties bring higher profits. Development of multifunctional properties is definitely a fashionable trend, experts at Capital Group agree.

The other trend is the arrival of developers previously involved in other property sectors and companies operating on other markets. There are examples of residential developers switching to commercial projects or banks who assume the role of developers in the projects they finance.

“Elsewhere around the globe investing in real estate is one of the most popular and reliable financial instruments,” says Vladimir Yegorov, head of investment at Globex Bank.

“Today, we are witnessing a shortage, and, subsequently, an increase in demand for commercial properties of European quality, which speaks for the growing commercial activity in Russia. Moscow, being one of the world’s leading financial and business centers, is one of the most attractive venues for real estate investment, and not only for Russian nationals.

“Also, I would like to note that Russia remains largely a raw material producing country; with world oil prices soaring, the inflow of petrodollars is particularly felt here. Many opt for investing their spare cash in real estate. Real estate investments bring higher returns; they are safer and more reliable.”

Industrial estates are becoming the main source of building plots for the development of large multifunctional properties, Vesco Consulting reports. In the first six months of this year alone, as many as 12 projects for the development of office centers on the former territory of enterprises subject to withdrawal from the city center have been announced. Many such complexes are now under construction in the CBD. Areas around the Third ring road are another source of such plots.

Some of the districts which were earlier said to be only potentially appealing in terms of real estate investment, are acquiring the traits of established commercial zones, believes Andrei Petrov. In the city center, the districts of Zamoskvorechye and Paveletskaya can already be rated as class A commercial zones. Some experts believe that the time when business zones, too, will be subject to classification is not far off.