Money-Growing: From Belorusskaya to the Outskirts

The area around the Belorussky train station square has always felt the influence of neighboring Tverskaya, the most expensive street in the capital in terms of class A and B office rentals, and its proximity to the city center.

Leningradsky Prospekt has long enjoyed the image of an upscale residential area inhabited for years by senior executives from major firms. Those managers used to open their offices in the vicinity. International corporations have always sought to rent space on Leningradsky because the road leads directly to Sheremetievo airport.

That is how the new commercial district was shaped, expanding far beyond the boundaries of the CBD, or Central Business District. Market analysts sometimes use the acronyms BEL and SOK (Belorussky and Sokol, respectively) when referring to those office zones. But in most cases the areas concerned are defined as the Belorussky Business District and Leningradsky Prospekt.

Those territories have turned into a rapidly growing office submarket, says Vladimir Pinayev, director at Jones Lang LaSalle. The further growth will most likely result in the emergence of two new zones, one of which will be formed around Tverskaya Zastava.

That area will, to all appearances, be included in the Tverskoi Business District, considering its proximity to Tverskaya in terms of property costs, as well as geography. The second zone will comprise Leningradsky Prospekt and a stretch of Leningradskoye Shosse, towards the Khimki reservoir.

No matter how many new office projects are launched in that area, there still aren’t enough, holds Ruben Alchudzhyan, managing director at the Praedium company. The submarket is still far from the point of saturation. A sufficient number of quality office centers is unlikely to emerge here before 2007-2008.

There are parts of the city suitable for office development just as, say, Ostozhenka is suitable for upscale housing construction. There will never be too many prime residential estates on Ostozhenka, he says. The stretch between Tverskaya Zastava and the Aeroport metro station on Leningradsky Prospekt has taken on the feel of a prestigious business zone.

Through the Eyes of a Realty Analyst

The entire zone of the Belorussky train station and Leningradsky Prospekt is very popular with office tenants, says Irina Gerasimova, head of office real estate at Noble Gibbons in association with CB Richard Ellis. That area has been in high demand since the mid-1990s. Even then many would-be tenants were calling real estate agents looking for an office, either in the city center or on Leningradsky.

Rental charges are high even on the outskirts. For example, offices at 39 Leningradsky Prospekt (class A) are rented at 650 euros per sqm, operating costs excluded, Gerasimova reports. What makes “Leningradka” – as Leningradsky Prospekt and Leningradskoye Shosse are commonly referred to – so popular is the proximity to the international airport and the abundance of Soviet-era research institutes and factory administration buildings, whose owners began to rent them out for office use in the early days of the market.

Later on, farsighted market operators ventured to redevelop such sites with a view to transforming them into modern business centers. All those factors played a role in the shaping of the new commercial district.

Regina Lochmele, head of office and industrial real estate market analysis at Colliers International, puts the total stock of class A and B office space in the area at 270,000sqm, where class A facilities account for 52,500sqm, or 3.7% of the total stock of class A offices in Moscow. By late 2008, that figure is set to grow notably – to 10%, after about 150,000 square meters of new prime office properties are commissioned.

The district in question is a vivid example of decentralization in the Moscow office market. The growing interest in the area on the part of developers and office tenants has resulted in the expansion of the CBD towards the Belorusskaya metro station while the borders of the commercial zone being shaped along Leningradsky Prospekt is gradually shifting beyond the Third Ring Road.

Low vacancy rates (3-4% on average), stable demand for offices and availability of building plots for new construction and redevelopment attract investors and developers to the Belorussky-Leningradsky area, says Lochmele.

Office projects in that zone are notable for their ‘multifunctionality’. Many properties here feature both offices and retail properties. Recent years have seen a tendency towards large-scale developments and business parks. Developers often raise two or three office buildings on one site, with construction being carried out in several stages.

Market analysts recall that the first quality offices in Moscow started emerging in the early 1990s not only in the city center – the main building site for class A developments – but on Leningradka as well. One of the landmark Chaika office projects – Chaika Plaza II – was built not far from the Belorussky train station, at 28/1 Sredny Tishinsky Lane by the Plaza Development company.

Center of Attraction

The square of the Belorussky train station can be viewed as a central point around which several areas of office development are concentrated. One of those stretches towards the Kremlin forms a prime commercial zone with such – near perfect – office complexes, as Romanov Dvor. Rental rates here exceed $1,000 per sqm, operating costs excluded. Another area is Butyrsky Val that links the city center to the Novoslobodsky commercial zone, or NOV. The third area is Leningadka proper.

Several years ago, Belorussky saw the first signs of the radical changes to come as a number of new office building sites emerged in the vicinity. Soon afterwards the market participants and the public learned of a variety of new office projects launched in the area.

One of those is the White Square complex on Lesnaya Street – a joint project by Coalco and AIG Lincoln. The other is Capital Plaza launched by Capital Group. Both business centers are rated as class A. In the near future, the district, so far largely unprepossessing, will abound in world-class office buildings.

Reconstruction Begins

The development of the district is to proceed largely in accordance with the town-planning program for northern Moscow (the North Administrative Okrug (District)) up to 2020, adopted by the municipal government. Emphasis will be placed on office, retail and mixed-use construction, especially on large squares and along main transport routes. Large-scale reconstruction of the district will begin on Tverskaya Zastava Square.

The project was presented at a recent session of the public town-planning council held on Feb. 10 by Moscow Mayor Yuril Luzhkov, Deputy Mayor Yuri Roslyak and Moscow’s chief architect Alexander Kuzmin.

The square next to the Belorussky train station has been chosen as a venue for a cluster of office and mixed-use facilities, in addition to projects already launched. Kuzmin has reported that all of the office and retail projects to be implemented there were a part of a project to build a new road junction next to the train station. As a result, there a large commercial district will radically change the existing landscape.

One of the main developers active in that area is the company Stroiinkom-K, controlled by the well-known entrepreneur Lev Levayev (the underground facilities alone will measure 112,000sqm). The company held a tender for the architectural design of the project among 10 design bureaus. The group of experts involved in the project includes representatives of the Moscow Heritage Committee, the Moscow Committee for Architecture and the Committee for the Preservation of Historic Estates. The general design solution for the entire area has been prepared by workshop No. 19 of the company Mosprojekt-2.

Special emphasis in that landmark project will be placed on streamlining the traffic in the area, Deputy Mayor Yuri Roslyak has reported. The idea to build a multifunctional underground facility in that part of the city was first proposed back in the years of perestroika by architects from the previous generation, he says. One of those projects proposed earlier even had the very striking name of ‘Gate to Nowhere’.

The authors of the Belorussky area redevelopment project have agreed to focus on high-rise construction. One of the first developments to be erected in line with that plan is a 48-meter tower by Stroiinkom-K featuring offices and a hotel, at 50/2 2nd Brestskaya Street, between 1st and 2nd Brestskaya Streets. It will be built on a site currently occupied by a casino and the Moskva-Berlin caf?, the favorite meeting place of creative intellectuals. Next to that site Stroiinkom-K will raise another office building, at 64-66 1st Brestskaya Street. Both buildings, measuring a total of 160,000sqm, will be linked with a passage forming an arch over 1st Brestskaya Street.

Another project, to be developed by Stroiinkom-K jointly with Shalva Chigirinsky’s ST Group is a 129-meter, 100,000sqm office high-rise at 31 Gruzinsky Val. Colliers International is a consultant for the project.

On the one hand, the area around Tverskaya Zastava square belongs to the conservation zone of the city. On the other, city hall believes it is the gateway to the historic part of the city en route from Sheremetievo and that it should not be resemble a chaotic marketplace.

Roads Failing to Tackle Congestion

Meanwhile, the transport situation is likely to deteriorate even further as office facilities and shopping malls open in the vicinity, attracting throngs of visitors, even more so as the roads around the Belorusskaya metro station and all along Leningradsky Prospekt have always been congested. The new road junctions that will appear on Tverskaya Zastava Square are unlikely to ease the traffic jams, believes Ruben Alchudzhyan.

Vladimir Pinayev of Jones Lang LaSalle agrees that the traffic will only get worse with time. A new junction at the Belorusskaya metro station will not help, he says, with reconstruction of Leningradsky Prospekt itself needed.

City hall has included a special provision in the General Plan of Moscow up to 2020 envisaging reconstruction of highways in that zone, including Leningradsky Prospekt and Leningradskoye Shosse. The road reconstruction project was presented to the public in January of this year.

By the year 2008, the authorities plan to have Leningradsky Prospekt widened to eight lanes both ways. Tverskaya Street will be redesigned for transport to move without traffic lights, all of which will be dismantled; the traffic flowing over the bridge at the Khimki reservoir will move in a single direction, while an extra bridge to be built next to it will carry traffic in the opposite direction.

Landmark Projects

Each business district has its own landmark sights. The Belorussky-Leningradsky area, too, has seen the emergence of complexes, which are likely to become the symbols of that district in the future. They are the sites most often mentioned by property consultants and brokers.

The 49,414sqm Capital Plaza, at 14 4th Lesnoi Lane was one of the first office centers to be developed near Tverskaya Zastava Square. Tenancies were brokered by Colliers International. The first tenants moved into the building in 2005.

The facility is remarkable for its successful layout: the atrium at the center of the building fills the offices with natural daylight, Maxim Zhulikov, leading consultant at Penny Lane Realty, says. At the moment, offices are available for rent on the 7th, 8th and 9th floors of the building, at $680 per sqm, VAT excl., Irina Gerasimova of NG/CBRE has reported. Operating costs stand at $100.

White Square, an office compound of three buildings with a convenient layout, is currently under construction by foreign developers at 15 Lesnaya Street, measuring a total of 66,550sqm and rated as a class A development, says Irina Gerasimova. The new offices will be visible from Tverskaya Zastava Square to pedestrians and motorists alike, as all of them will have direct access from the street.

Capital Plaza, on the contrary, will be hidden from sight behind new developments. If the first building of White Square entered the market today, the offices there would be available for rent at no less than $700 per sqm, Gerasimova believes. AIG Lincoln and Coalco – the companies developing the site – plan to complete construction of the first building in 2007; the 2nd and the 3rd buildings are due to be commissioned in 2008. The rental rates will remain the same as they are now as long as the economic situation does not change and is not hit by a new crisis, Gerasimova says.

Tenancies at White Square are brokered by almost all of the leading realty agencies because the landlord has arranged for open listing. Market analysts report that offices in the 1st building are being rented out under preliminary agreements at $550 to $660 per sqm, depending on the size of the office and the tenant’s status (operating costs excluded). In the future, analysts expect rental rates at White Square to grow to $650-700 per sqm. As regards White Square I, the landlords intend to rent it out entirely to a single tenant though the deal has not been signed yet. Rental rates tend to grow as a development nears completion and a completed facility is always more expensive, Ruben Alchudzhyan explains.

Another landmark development is to be found at 3 Lesnaya – a retail and office center rated as class A (5,700sqm of offices), purchased by Fleming Family & Partners (FF&P) from Coalco, the company that developed the property, under an investment deal at a price of approx. $22 million. Considering that Moscow’s real estate market has seen just a handful of investment deals, that deal was particularly sensational. Colliers International acted as a consultant for the leaseback deal (Coalco retained the tenancy).

Siemens AG’s Moscow headquarters (50,000sqm), at 41 Leningradsky Prospekt, was developed by Russian developer Sistema Hals. Construction of what was to become the largest representative office of a foreign firm ever built in the Russian capital was launched in 2003. The German concern poured 100 million euros into the project.

Offices Instead of Plants

Leningradka historically abounds with Soviet-era factory administration offices and research institutes. Those properties were the first to catch the attention of office developers back in the 1990s.

Forum Properties was one of the first companies to launch redevelopment of industrial estates along Leningradsky Prospekt and Leningradskoye Shosse. The firm rose to prominence as a developer of prime office facilities (class A and B) on such sites. Its track record includes Aurora Business Park in Zamoskvorechye and a project on the plot earlier used by the Institute for Allround Automation, in the Kievsky Business District.

Forum Properties developed the business centers Sokol Plaza I, II and III at 20/1 and 12 Usiyevich Street (3,500sqm each), near the Sokol metro station, the Sokol and Sokol II office centers at 12 Vrubel Street (3,100sqm and 4,500sqm respectively), as well as the 5,500sqm Sokol Place at 14 Chapayevsky Lane.

West Bridge Ltd. has launched the development of the Western Bridge business park at 37 Leningradsky Prospekt, at the Dinamo metro station. The first building has already been completed. Tenancies were brokered by Knight Frank.

It is enough to take a close look at a detailed map of Moscow to see that there are still plenty of industrial estates along Leningradsky Prospekt. Today those sites are also attracting young ambitious developers. The largest business park under development in the area is located not far from Tverskaya Zastava. The project launched on the site of the Soviet-era watch plant Slava at 8 Leningradsky Prospekt (200,000sqm) by Stolny Grad and Globex Bank will feature offices as well as retail properties.

Sources close to the project have reported that the owners have acquired nearly 100% of the shares in the Slava plant, promising to have the production facilities withdrawn from the site to southwestern Moscow. Analysts put the prime cost of one square meter of office space in most of Moscow’s commercial districts at approximately $1,200, but by calculating the cost of office developments on the sites of former industrial estates one should also take into consideration the cost of relocating production facilities, as well as the demolition of old facilities.

Another grandiose project – Metropolis – is under construction by Capital Partners, the developer of Ritz Carlton Hotel on the site of the Soviet-era Intourist hotel and the Pushkino warehouse complex outside Moscow. The site selected by Capital Partners on Leningradka is that of the Radikon plant at the Voikovskaya metro station. The building currently houses the large Snezhnaya Koroleva winter clothing store and the Champion entertainment center.

The plot acquired by Capital Partners measures at least 11 hectares, Erkan Erkek, chief managing director of the company, has reported. The developer plans to raise a mixed-use complex of 330,000sqm, featuring offices, shops and a 4,000-space parking area. The project – estimated to be worth at least $300 million, according to market analysts – will include 3 buildings, 9, 9 and 13 stories high respectively, and an 80,000-square-meter shopping mall. Jones Lang LaSalle is a marketing partner for the project.

Mega Complexes: Pros & Cons

As regards the project on the site of Slava, it is quite controversial, says Ruben Alchudzhyan. Considering that the future complex – rated as class B – will be surrounded by prime class A office facilities, the developer ought to make sure it will attract tenants, that it pays back and does not require unreasonably huge investment. Irina Gerasimova of NG/CBRE believes the choice of that site is successful and, so far, there are no obvious obstacles to the development of a quality business park there.

As for Metropolis, real estate consultants are cautious in their forecasts. Construction work on the site, initially slated to be launched in April 2006, is unlikely to begin on time. Recently, some of the tenants at Radikon who had long-term lease deals, refused to leave the building. They include the Pancho Pizza and Don Peri restaurants who are not happy with the new properties offered as an alternative.

The Champion club, which holds a lease at Radikon till 2010, is wary of the offer of a tenancy at the future Metropolis, because it will have to wait for several years before the building is completed and suffer losses in the meantime. “As long as the lease is in force the tenant has every right to stay on the premises,” says Ruben Alchudzhyan. “The new landlord’s task is to come to terms with each of the tenants.”

When designing retail properties the developer has to take into account the target audience of the future mall. For example, if customers are expected to arrive from other, remote districts of the city, Alchudzhyan recommends developing convenient approach roads for motorists. Offices should be separated from the shopping areas and equipped with separate entrances. Metropolis is the first multifunctional facility where large properties are allocated for offices and shops. The complex will also feature a hotel, as suggested by Jones Lang LaSalle. “But won’t those components impede one another,” wonders Gerasimova.

The Aviapark project (500,000sqm of shops, offices and hotel rooms), estimated to be worth $1 billion, is to be developed by TVK Aviapark company near Khodynskoye Field. The investors are Mosfundamentstroi-6, Inteko and Lev Khasis, co-owner of the Perekryostok retail chain. The 26.8-hectare park will include 120,000sqm offices. However, by the end of 2005 the name of the investors for the office and hotel developments was still unknown.