Guiding Lines: Disputable Exclusivity

That simple truth, reiterated constantly by real estate market analysts, brings about a situation where a new large class A office center, even if it has certain flaws, is seen as “an exclusive property” waiting for arrival of its tenants undeterred even by soaring rents.

Strictly speaking, so far Moscow has but a handful of finalized class A office projects and most of those are, indeed, worth being recognized as “exclusive”. For example, in the spring of 2006 offices at Baltschug Plaza entered the market again.

From the very start property analysts rated that complex as unique, and, on the whole, they were right. Practically every floor has a view of the Kremlin and would-be tenants are offered an opportunity to rent an entire floor measuring 1,500sqm. The total office space available for rent measured 17,000sqm.

The development has a complicated history. Jones Lang LaSalle, an exclusive leasing agent for the project financed by Shalva Chigirinsky’s ST Group and Millhouse Capital, proved quite successful. Market operators report that Deutsche Bank, Severstal and VimpelCom sought tenancies at Baltschug.

However, in the summer of 2004 Millhouse Capital bought its partner’s share in the project, withdrew it from the market and the entire property went to Sibneft. The fate of the complex remained undecided ever since the oil firm was acquired by Gazprom as the gas monopoly did not take over the Baltschug offices and, perhaps, will not need them at all, for, as has been reported recently, Sibneft is set move its headquarters to St. Petersburg.

As a result, Millhouse Capital retained the title to the building and put it up for rent anew. The company hired a new leasing agent -- Cushman & Wakefield / Stiles & Riabokobylko, also acting under an exclusive agreement with the landlord.

Regardless of all amenities in place it would not be true to say that Baltschug has no flaws. Market analysts believe there are only two shortcomings – poor transport accessibility and soaring rents. The only way to get to the office center is along Sadovnicheskaya Embankment. But while traffic congestion is a problem all centrally located office centers have to put up with, rental rates charged at Baltschug cannot be described as average even for the class A office sector.

The landlord has set the annual rent at $900 to $1,000 per 1sqm, VAT and operating costs excluded. Analysts are convinced that in the near future the complex will attract tenants, even despite its complicated history.

While only recently top class offices in Moscow were rented at around $700 per 1sqm on average, nowadays rentals at most class A office centers have increased. For example, the Blackwood real estate company – an exclusive agent for the Turgenevskaya Ploshchad (Turgenev Square) office complex, is leasing space there at $950 per 1sqm, VAT excl.

Curiously, quite often space is offered for rent at office centers with a somewhat tarnished reputation. For example, Volna business center on Sakharov Prospekt, albeit notable for convenient transportation access and sophisticated engineering facilities, has already been hit by two fires – on the 3rd and 4th floors; VimpelCom that had tentatively accepted a tenancy at Volna pulled out of the deal after the developer failed to finalize the project on time.

Besides, it has been rumored lately that the co-owners of the building have fallen out with one another. Be it as it may, the completion of the complex is likely to be delayed for at least another six months. All those factors aside, market operators report that the owners have been quite successful in negotiating the sale of the property to Alfa Group, and it is quite possible that the complex will not stay long on the market.

Not all tenants are ready to accept exclusive offers by property brokers and rent new offices at such rates. For example, representatives of a certain consulting firm have reported that the company pays $650 per 1sqm a year, which makes up 6 percent of corporate budget. In principle, the company would agree to pay twice as much but it is not satisfied with the quality of office space.

Each major class A complex has its flaws, such as poor layouts, poor transport accessibility or inconvenient location. Even the most exclusive properties, such as, for example, Baltschug Plaza, have one flaw in common, namely soaring rents.

In terms of rental costs Moscow has already caught up with the world’s leading commercial centers, including London and New York, but quality of office space in the Russian capital still fails to meet international standards.

According to analysts’ calculations, such a state of affairs is unlikely to stay unchanged for a long time and in some two or three years top class office centers may fail to attract tenants. Each year, vacancy rate at class A office centers grows. In 2005 it reached 4%, as compared to 3% in 2004.

Such changes may seem insignificant but then the number of tenants willing to rent an entire floor in an office center at over $1,000 per 1sqm is not high, either, even in the capital. In the near future several new projects are expected to enter the market, for example, business centers Legion II, Severnaya Bashnya at Moskva City and Novosushchevsky, as well as the second stage of Baltschug Plaza.

Strictly speaking, as early as today Baltschug Plaza -- that unique business center -- may have to face competition from Central City Tower on Ovchinnikovskaya Embankment where top floor offices also offer a view of the Kremlin, even if that complex is a bit farther off.

Analysts describe the current situation in the prime office sector as “dizziness from exclusivity”. Arrival of each new major project on the market is seen as a landmark event, and properties are leased out by brokers under exclusive agency agreements. But the question as to how long that will last remains open.