Money-Growing: Never Say Never to Office Development

In the meantime office demand soars, rentals grow and with the commercial district expanding as far as Dubrovka and Volgogradsky Prospekt developers hope to secure new building plots on the sites of industrial estates.

The Taganskaya metro station has long become a Moscow landmark, in a way. Admittedly, for years in the eyes of the local public Taganka remained a working quarter with a romantic aura, extolled in city folklore songs. No one could ever imagine that one day the district would turn into a site of upscale office development.

One of the local landmarks is the building of Taganskaya Prison, now a home to Novospassky Monastery. That architectural monument was built on Krestianskaya Zastava Square in the 15th century; other attractions are Taganka Theater and Vladimir Vysotsky Museum.

But office market is governed by its own laws and in the early 1990s – the early days of the market economy – what mattered most for developers of top-class office space was Tagansky’s proximity to the city center, which meant that one day, downtown Moscow having run out of vacant plots, Taganka would become the city’s second most important site for upscale office construction. Those hopes proved true in the early 2000s. Class A and B office development began in the areas outside the Garden Ring.

Big Triangle Quarter

Tagansky Business District lies within a triangle between Taganskaya and Dubrovka metro station, and Volgogradsky Prospekt. There are at least 20 hectares of land suitable for office construction in the area, realty consultants report. For the time being, most class A and B properties available in TBD are concentrated on Marksistskaya, Taganskaya, Nikoloyamskaya, Zemlyanoi Val and Bolshiye Kamenshchiki streets, i.e. closer to the Central Business District.

That part of the district is quite densely built up with only a handful of vacant building plots left available, while more remote areas along Volgogradsky Prospekt, Dubrovskaya and Nizhegorodskaya streets have large plots of land where major urban development is still possible.

Moscow’s office submarkets are only being formed. So far, only the Central Business District and Zamoskvorechye have already taken on the shape of developed commercial zones, according realty analysts. But if the Moscow market continues to grow in line with the Western pattern, in less than several decades the capital will be divided into office zones just as it happened in New York or San Francisco, leading realty consultants agree.

For the time being, even consultants fail to define the borders of Moscow’s office submarkets more or less clearly. As regards Tagansky, most consultants polled by Vedomosti agree that it occupies the entire “big triangle” between Taganskaya and Dubrovskaya metro stations, the Third Ring Road and Shosse Entuziastov motorway, while others claim that so far Tagansky Business District is a smaller area between Taganskaya, Marksistskaya and Nikoloyamskaya streets. In their opinion, the areas along 1st and 2nd Dubrovskaya streets and Volgogradsky Prospekt are likely to become an independent commercial zone in the future.

Alexandra Krzhyzhanovskaya, head of office market research at Cushman & Wakefield / Stiles & Riabokobylko (CWSR), believes that while the concept of Tagansky Business District is only being formed the area has already seen the arrival of class A and B offices and construction of more properties is in the offing.

The first-ever business center rated as class A to appear in TBD was Mosenka Park Towers IV. Built by Mosenka in 1995, its first tenants were Pfizer, Procter & Gamble, Ipsen and TNK. The Turkish firm was one of the first office developers to arrive in Moscow in the early 1990s. Sources close to the company report that since the early days of the market Mosenka represented a successful partnership of Turkish construction executives and the Moscow city hall (hence, the name).

Having gained strength and changed its name to Enka the company built landmark office properties across the city that were to become the centers of future commercial zones. That is what happened, for example, in Zamoskvorechye, Oleg Myshkin, a partner at Colliers International told Vedomosti in a recent interview. Enka’s record includes Riverside Towers, Paveletskaya Plaza, Chaplygina House, and Sadovaya Plaza. Nowadays, the company is involved in construction of Bashnya Na Naberezhnoi, or Tower on the Embankment, as part of the Moscow International Business Center Moskva City.

“I think that Mosenka’s developments – Mosenka Park Towers at 17-23 Taganskaya Street, Mosenka Plaza V at 54 Nikoloyamskaya Street, Mosenka Plaza VI at 17 Vorontsovskaya and Mosalarco Plaza at 16 Marksistskaya – make up the heart of the district,” says Irina Gerasimova, head of commercial real estate at Noble Gibbons / CB Richard Ellis. “All those buildings were erected in 1995 to 1998 to become the city’s first-ever business centers matching European standards. Unfortunately, of late that part of the district has seen only a handful of large office properties being developed. Admittedly, there is Stanislavsky Business Center at 21 Stanislavsky Street under construction these days.”

The 47,000-square-meter Stanislavsky – developed by Chorus Capital – is rated as class B. Rental rates are $500 to $520 per 1sqm per year, operating costs (approx. $75 per month) and VAT excl., Irina Gerasimova reports.

Tagansky Business District is notable for predominance of class B offices over upscale facilities rated as class A and suffers an acute shortage of the latter. Redevelopment of small mansions is widespread in the areas adjacent to the Garden Ring. Companies ordering such projects prefer buying those properties instead of renting them. As a rule, such mansions have one or two owners. Developers also take interest in industrial estates available in the district.

Favorable Neighborhood

Proximity to the city center has considerable impact on Tagansky District. Class A offices situated near the Garden Ring are rented at the rates of up to $650 per 1sqm, which is nearly as high as charged in the popular Zamoskvorechye district or on Tverskaya Zastava Square in Belorussky commercial zone. Rentals charged in Central Business District are the highest, exceeding the market average by 14 percent. Centrally located class A offices are rented at $700 per square meter and higher.

Zamoskvorechye lies southwards from Tagansky. In 2005, the average weighted rental rate for class A in Zamoskvorechnye stood at $737 per square meter, operating costs excluded, Knight Frank reported. Alexandra Krzhyzhanovskaya says that nowadays office rents in Zamoskvorechye exceed average rates across the city. That is especially typical of class B offices as Zamoskvorechye, indeed, has top quality mansions, that enjoy demand. That explains a trifling difference between rates charged for class A and B offices, which stood at only $80 in 2005, while across the city that figure stands at $170.

In the north, Tagansky borders on Basmanny Business District where the average rental rate stood at $685 last year. Still, Tagansky can hardly vie with the city center or Zamoskvorechye. The difference in rentals charged in Tagansky and the Central District stands at $50 to $150 per 1sqm, holds Antonina Lairova.

Hopes Pinned on Industrial Estates

Taganka suffers an acute shortage of top quality office space available for rent or sale and has practically no vacant building plots, market operators complain. That is the key reason why redevelopment projects are so common in the area. Offices rated as class A in the 1990s were built long ago in line with the standards adopted on the market in those days. In near future they are likely to be downgraded to a lower class. Consultants say that the above mentioned developments by Mosenka will still be rated as class A as long as possible but even now they can no longer compare to most class A properties of the new generation, being raised across the city since the 2000s.

The demand for office facilities in Taganka exceeds the supply and that situation is not likely to change in the future, says Alexandra Krzhyzhanovskaya. Still, by late 2006 the district’s office stock will increase by 50,000sqm, she says. What is peculiar about the projects under construction in that zone is that almost none of the property brokers have exclusive deals with owners of class A and B buildings here. The history of projects and deals Taganka has seen over the past years shows that most landlords prefer open listing and invite various realty agencies to broker tenancies or sale of their properties.

Consultants are optimistic about Taganka’s future. Maria Kotova, head of research at Knight Frank believes, that the district has goods prospects, given good infrastructure and proximity to major transport routes – the Garden Ring and the Third Ring Road. With the demand for upscale class A and B offices soaring, developers are constantly looking for new opportunities in the area.

A look at the map of Moscow shows Tagansky District has at least two vast industrial zones. One of those lies between 1st Dubrovskaya Street, Melnikov Street, Third Ring Road and Kalitnikovskoye Cemetery and is divided into two parts by Volgogradsky Prospekt. Another industrial territory is situated between the Moscow Circular Railway, Volochayevskaya Street and Serp I Molot production facility, with Shosse Entuziastov running across the site.

The fate of those estates has been decided in numerous decrees of the city hall and the urban development plan for the Southeast Administrative Okrug [District] of the city. The city government believes that part of production facilities need to be relocated to vacate territories for office, retail and housing construction. Some of the industrial facilities will be preserved but are to undergo redevelopment. Industrial territories in the district measure a total of 2,217 hectares. 316 hectares of local land are to be vacated for construction of multifunctional centers before 2020, according to the city hall.

Not much is known of the projects to launched in that part of the city. But developers do express interest in the area. For example, CMI Development is planning to build Dubrovka Plaza near Sharikopodshipnikovskaya Street, in the vicinity of the Dubrovka metro station. CMI Development is set to redevelop part of the industrial zone into a business park that will feature 150,000sqm of class A and B office space. The company’s track record includes Krylatskiye Kholmy business park and Baltschug Plaza, developed for Sibneft.

The future of the Moscow metallurgical plant Serp I Molot remains undecided since the early 2000s. In 2000, Moscow’s property department secured a 5.27% stake in the plant, at the nominal value of 1,000 rubles per share for the total amount of 54,360 rubles, paid from the municipal budget. In 2004, the Bank of Moscow and Meta-Invest acquired controlling stakes in the plant, 37.01 and 33.34 percent of shares respectively.

It was in those days that Mechel Invest, established by Mechel Steel Group, took over the management of the plant. Mechel and the plant’s executives agreed that both sides would benefit from cooperation as the enterprise would be able to avoid unnecessary competition while the group would widen the range of goods and markets by using Serp I Molot’s production facilities. Today, stakes in the plant are held by the Russian Federal Property Fund, Meta Invest, the Bank of Moscow and the state-owned Promsyryoimport company, according to SPARK-Interfax. Serp I Molot is one of the oldest metals works in central Russia, founded in 1883. Market consultants say there are plans to have the plant moved beyond the Moscow outer ring road (MKAD). But if the plant is to be relocated it needs to be moved in its entirety to a new site. However, as there is more than one title-holder, consent to withdrawal has to be received from each owner, which is not always easy to achieve.

Authorities have adopted a plan for reorganization of the production zone No. 23 “Serp I Molot”, measuring 550 hectares. While most effective production units will be preserved, public utilities and warehouses will be moved to a new location. Thus, nearly 90 hectares of land will be vacated. Rostek development company has already launched construction of an office facility measuring a total of 21,300sqm at 6 Proyezd Zavoda Serp I Molot. The property is slated to be commissioned in the 3rd quarter of 2006, Antonina Lairova has reported.

A waste ground of 0.74 ha, located at 45 Volgogradsky Prospekt has been chosen by the European Real Estate Company for construction of Avilon Plaza, the company’s first office and shopping complex (36,907sqm). The 21-storied plaza will provide underground parking facilities, class B+ offices (23,100sqm), shops on the first two floors (525sqm), a bank branch office, cafes, bars and a conference hall, DTZ, an exclusive broker for the project, has confirmed. The European Real Estate Company has reported that the building is designed so as to meet class A standards to the maximum.

In Search of an Office

Tagansky District accounts for some 20 percent of modern offices available in Moscow. Class A properties are rented at $600 per 1sqm per year, Antonina Lairova reports. The size of rent depends on the type of the building. For example, offices at Mosalarco Plaza and Mosenka Park Towers are rented out at up to $700 per 1sqm. Class B offices are let at $350 per 1sqm (e.g. 38 Rabochaya Street). Offices at Stanislavsky are rented at $580 per 1sqm.

Olga Kisarina, head of research and analysis at Praedium, says that sale prices in the area stand at $3,000 to $6,000 per 1sqm for class A facilities and $2,000 to $3,000 for class B buildings. Knight Frank reports that rentals and sale prices in Taganka have risen by 15-25% over the past 2-3 years. As an example analysts cite Mosenka Park Towers where offices let at $475 to $550 several years ago have been put up for rent again recently at $725 per 1sqm, VAT excl., operating costs included.

A bank office on Marksistskaya Street, for example, may be offered for sale at $5,000 per 1sqm, Knight Frank’s analysts report. A small mansion measuring 650sqm – for a total of $3.5 million. Sale price of properties in need of reconstruction rarely exceed $3,300 per 1sqm.

Good Pennyworth

The Stanislavsky business center was the venue of the largest tenancy deals the district saw in 2005. In total, 1,060 square meters of office space were leased out at Stanislavsky, Colliers International reports. Approximately 1,000sqm of space was rented by the energy drink producer Red Bull in a mansion at 5/2 Bolshaya Kommunisticheskaya Street, according to a JLL report.

A mansion at 14 Nikoloyamskaya (600sqm) was sold in August 2005, at $3,250 per 1sqm, according to property brokers who withheld their names in the interests of their client. Other major deals of the year included the sale of a building at 8 Bolshoi Poluyaroslavsky Side-street where 3,000sqm of space were sold at $3,500 per 1sqm. A 1,713-square-meter building at 20 Bolshoi Drovyanoi Side-street was put up for sale at $2,919 per 1sqm, with Russky Dom Nedvizhimosti (Russian Realty House) acting as landlord’s representative.

Tektronix Company rented a 119-square-meter office at $590 and $650 per 1sqm, in a building measuring 4,600sqm at 6 Bolshoi Drovyanoi, developed by NatsStroiInvest. InvestKinoProyekt Company that runs a chain of multi-screen theaters in Moscow and other regions rented a space of 354sqm at the same address. NRC LLC signed a tenancy deal for a 1,080-square-meter office at 5 (2) Bolshaya Kommunisticheskaya – i.e. the entire mansion, at $600 per 1sqm. The landlord is Kubita (Class B).

Several tenants have moved in Mosalarco Plaza where they rented space at the rate of $650 per 1sqm. Those are Vitra (150sqm), Ingosstrakh (330sqm) and USB (220sqm). The TMK company rented a 1,985sqm office at a 26,000-square-meter class B business center by Mosinzhstroi, at 50a (2,3) Zemlyanoi Val, at the rate of $500 and $650 per 1sqm.

Beginning 2006, the following rental rates have been set for offices in the area: the class A Citydel facility currently under construction offers offices at $640 to $700 per 1sqm, to be commissioned in 2007; class A Serebryany Gorod (Silver City), to be commissioned in late 2006 - $625 to $700. Sale prices on Zemlyanoi Val for class A offices stand at $6,075 per 1sqm. In the areas closer to Derbenevskaya Embankment, class B buildings - $2,000 to $2,500 per 1sqm, Praedium reported.

Class B Takes the Lead

In 2007, Tagansky will have as many as 90,000sqm of newly built class B offices, according to forecasts by brokers and developers. If all the plans materialize by 2008 the district will account for 7 percent of all class B office stock across the capital. But Taganka suffers an acute shortage of premium class A properties. Regina Lochmele, head of market analysis at Colliers International, puts the vacancy rate in class B sector at 5 percent.

“Class A and B offices taken together measure 225,000sqm, or 5.2% of Moscow’s entire stock,” she says. “Class A properties measure only 25,000sqm, or 2% of the total stock in Moscow. It should be noted that class A office buildings raised in 1995 to 1999 no longer fully match modern requirements. The Moscow Research Forum plans to renew the office classification (taking part in the forum are Colliers Int., CWSR, JLL, NG/CBRE – Vedomosti). It is highly likely that business centers built in the mid-1990s will be downgraded.”

Irina Gerasimova expects the main inflow of class B offices to be registered on the sites of industrial estates currently undergoing development between Dubrovka and Shosse Entuziastov. In those parts, there are plots suitable for mixed-use developments – offices and warehouse facilities. The neighboring Kursky Business District is another venue where many such developments will appear.

Stanislavsky, apparently, is one of the largest complexes under construction in that part of the district, close to the Garden Ring. The future facility will provide a 2-level 92-space underground parking, with a number of stories ranging from 2 to 10, with apartments on five upper floors.

Future for Premium Class

The Citydel business center is, perhaps, one of the two largest prime business facilities currently under construction in Tagansky. Citydel, measuring a total of 63,500sqm, is being developed by JSC Tema at 11/19 Zemlyanoi Val, Knight Frank – the exclusive broker for the project – reported. Another project of an equally grand scale (60,000sqm) is under construction at 27 Serebryanicheskaya Embankment, by Mosinzhstroi.

Taking part in the project are international companies, including Bouygues B?timent International as a general contractor; the project is financed by Vneshtorgbank and a syndicate of French banks. Once the complex opens maintenance services will be provided by M+W Zander Facility Management CIS. Citydel is to b commissioned in the 2nd quarter of 2007.

The Serebryany Gorod, or Silver City, is under construction at the intersection of the Garden Ring (Zemlyanoi Val) and Serebryanicheskaya Embankment, on a small industrial estate formerly occupied by the State Institute for Nitrogen Industry (GIAP). The site is developed by Mosinzhstroi, a development company that is part of the Neftyanoi concern. Consultants for the project are Colliers International and NG/CBRE. Regina Lochmele says the development is to be completed in the 1st quarter of 2007 and will provide 42,400sqm of space for rent.

The third largest class A development in the area is a mixed-use facility at 11 Nikoloyamskaya Street, measuring a total of 15,000sqm, which Dial Stroi Invest undertook under an investment construction project in 2005. After that, the property was sold to development companies who were to complete construction. And finally, the fourth largest office building under construction here is located at 21 Goncharnaya Street (13,672sqm) by ATNK Invest; Paul’s Yard acts as an exclusive consultant.

Market consultants report that by 2007 Tagansky will have 450,000sqm of prime office space. Rental rates will grow, albeit slowly, judging by the general situation on the market. NG/CBRE forecasts growth of 2% to 4%. Last year Moscow ranked sixth in CB Richard Ellis’ survey of world’s most expensive cities in terms of rental costs.