Money-Growing: Fashionable Southwest

Southwest is not rich in modern business centers for it has only recently caught attention of market operators who are beginning to consider it as a new commercial submarket – a commercial zone or an office cluster.

Property analysts used such terms in relation to southwestern Moscow at the annual conference held this spring by Cushman & Wakefield / Stiles & Riabokobylko (CWSR). Analysts augur a great future for the nascent submarket. Time will tell if their forecasts prove true or not. Some analysts tend to put the increase in commercial activity in the Southwest down to the fact that many executives and top managers of Russian and international firms have settled in the area and purchased apartments there.

“Communist Party bosses of the Soviet times preferred the Southwest. German nationals followed their example. The embassy of the Federal Republic of Germany is to be found there, as well as the compound of East Germany (GDR)’s former mission currently used as a business center by German firms; the German House residential estate is situated nearby,” says Sergei Kolegov, general director at Prime City Properties.

Offices on the Outskirts

Moscow falls into several business zones. Some of them -- with more or less clearly defined borders -- have been generally recognized by property analysts (CBD, or Central Business District, NOV or Novoslobodsky, etc.). Other parts of the city, beyond the borders of commercial zones already shaped, are usually described with an acronym OTA. OTA includes other districts where office complexes rated as class A or B are under development.

But CWSR analysts have studied the areas beyond the Third Ring Road and established that active construction is underway along Prospekt Mira, Ryazansky Prospekt and Profsoyuznaya Street. In other words, those are the future office clusters. According to the analysts, as many as 450,000sqm of prime office space have already been built along Profsoyuznaya Street and Leninsky Prospekt; 300,000sqm of space are on the drawing boards. In the course of 2005 rents in the area grew 30 percent – higher than in any other submarket outside the city center.

Back in the early 2000s far-sighted analysts said that new office clusters would emerge on the areas between Vernadsky and Leninsky avenues, and between Profsoyuznaya, Nakhimovsky and Sevastopolsky. Nowadays, some consultants define the location of the southwest commercial district as follows: the zone stretches from the Leninsky Prospekt and Sparrow Hills metro stations as far as towards the Moscow outer ring road, or MKAD.

The most remotely located, farthest from the city center and closest to MKAD is the Morbusinesscenter office complex, rated as class B, at 125 Profsoyuznaya Street (the Tyoply Stan metro station). Most office facilities are situated between the Third Ring Road and Obruchev Street, closer to the city center and farther from the vast green vistas of Bitsa, Troparyovo and Vorontsovo parks of the Southwest District, which also features a variety of smaller parks and public gardens.

Experts at CB Richard Ellis Noble Gibbons believe that the Southwest Business District is a site between Leninsky and Profsoyuznaya. DTZ’s analysts divide the district into two smaller zones -- Profsoyuzny and Shabolovsky business districts. “The borders of the southwestern commercial zone are not clearly-defined,” says Yelena Kolesnikova, head of office real estate at DTZ. “Profsoyuzny, in our opinion, includes part of the city south and southwest of Moscow. Shabolovsky is the area between Shabolovskaya, Dobryninskaya, Oktyabrskaya metro stations, between the Garden Ring and the Third Ring Road.” Southwest can hardly be described as a commercial district altogether, she says, as that part of the city has virtually no class A developments and suffers an acute shortage of office space.

At the same time, the road to the recently renovated Vnukovo Airport runs across the Southwest District. A large number of oil and gas production facilities and warehouses are situated in southwestern Moscow, both within and beyond the outer ring road. Construction of business class residential estates is underway. In early 2006, Gorky Park Tower and Vaviloff Tower projects were finalized in the area. Other compounds are to be finalized shortly. After market operators unveiled their plans to Vedomosti, it transpired that plenty of office projects are being planned in the Southwest. If those are to be finalized the capital’s office stock will grow considerably. CWSR has reported that at least 11 office projects are planned in southwestern Moscow. Therefore, there are prerequisites for development of a commercial district. But the process will take quite take a long time, Kolesnikova says.

Importance of Image

Office property consultants say that Moscow’s southwest, just as other remote districts, is widely used by major companies for their ‘back offices’ while their corporate headquarters, or ‘front offices’, are prestigiously located within the Garden Ring. But that is not always the case.

In the early 1990s, southwestern Moscow saw the emergence of prime office properties, raised by Russia’s rich and famous. To begin with, Gazprom built its impressive headquarters and a residential compound for its staff. Several years ago, RAO UES of Russia moved to southwestern Moscow where it had rented the entire Neftyanoi Dom complex. Sberbank had raised an office building for own use in the area.

The ever-increasing interest displayed by corporate tenants in prestigiously located class A and B office space boosts office development in the Southwest. The district is seen as one of the least polluted areas in the capital. Besides, the Southwest has the widest and least congested thoroughfares, which is of special importance for office development, says Konstantin Losyukov, head of office real estate at Knight Frank.

Besides, construction of new freeways is underway. The plan for development of the Southwest Administrative Okrug [district] envisages construction of at least one more route that would run between Leninsky Prospekt and Profsoyuznaya Street. The well developed road network, with the Third Ring Road (to be augmented with the Fourth Ring Road in the future), as well as Profsoyuznaya, Leninsky, Vernadsky, Nakhimovsky and Lomonosovsky avenues, ensure quick access to downtown Moscow, says Sergei Kolegov.

Regina Lochmele, head of office and industrial real estate market analysis at Colliers International, agrees. In her opinion, the transport situation in southwestern Moscow is quite favorable. The commercial zone rapidly taking shape along Leninsky Prospekt and Profsoyuznaya Street attracts developers who seek to secure plots suitable for office construction, Irina Gerasmova, head of commercial property at CB Richard Ellis Noble Gibbons, adds.

Southwest’s Landmarks

Moscow’s Southwest itself has long become a city landmark, with such remarkable sites as the Moscow State University compound on the Sparrow Hills or the Olympic Village raised to accommodate guests of the Moscow 1980 Olympics. As to the history of the local office market there are buildings in the district, which symbolize milestones in office development.

One of those is an office and residential compound Park Place measuring a total of 70,000sqm (12,000sqm of office space), developed by the Foreign Ministry’s Main Directorate for Services to the Diplomatic Corps (GlavUpDK) for its staff at 113/1 Leninsky Prospekt in 1992, DTZ reported. In those early days of the market few were familiar with international standards of office development. UpDK had hired Hines International to develop the project.

Maria Kotova, head of research at Knight Frank, believes that the first-ever class A business center to be raised in southwestern Moscow was Gold Tower at 16 Krzhizhanovsky Street. The first stage of the complex was finalized in 2002, the second was commissioned in 2004. The entire facility measuring 22,500sqm belongs to Sibur.

The legendary Neftyanoi Dom, or Oil House, was developed in the early 1990s by “oil barons”. The project was financed by oil & gas firms Mezhregionneftegaz, Sakhalinmorneftegaz, Nizhnevartovskneftegaz, Tomskneft and Sibneftegazpererabotka. At the moment the Oil House changed hands there were some 200 leases in place. Co-owners included units of oil companies Slavneft, Rosneft and TNK. The sale was ranked as one of the top three major deals in Moscow’s office history, according to Jones Lang LaSalle. RAO UES took the title to the debt-laden property for $35 million. The business center’s debts at the moment amounted to 20 to 25 percent of the sale price. The size of the property was impressive in those days. Measuring a total of 45,639sqm, 23-storied high, it featured lodging facilities and, as early as then, a fitness center World Class. Even nowadays the business center is considered to be quite large. RAO UES chief executives moved in the building upon acquisition.

The decision on acquisition of Neftyanoi Dom had not been easy. The issue was heatedly debated within the company and in the media. In 2004, minority shareholders in a UES unit that held the title ruled that the rent paid by the group was too small and sought to buy out their shares. Among those were individuals and companies Mospromstroi and Nizhnevartovskneftegaz. Minority holders filed a claim asking a court to annul the tenancy deal between Neftyanoi Dom and the electricity giant RAO UES and revise rental charges.

Blank Spots and Black Holes

In addition to the legendary, scandal-ridden Oil House, other remarkable office projects of the Southwest are the frozen Zenit development and the long-suffering Cherry Tower. Cherry Tower, located at the intersection of Profsoyuznaya and Garibaldi streets, is an office and retail center measuring a total of 100,000sqm. Offices rated as class B account for 40,000 sqm, shops make up 45,000sqm.

Building works on the site began as early as 1975. The plan was to build the Dom Knigi bookstore. Protracted construction was suspended in 1991 to be resumed only in 2002, by the company OptimaTekhnoStimul. It was not until 2004 that the 16-storied development welcomed its first tenants. In the course of construction the concept of the building had been changed and the project was redesigned as a shopping and office center.

The development of Zenit at 82 Vernadsky Prospekt, launched in the 1990s, was put on hold due to lack of financing. The 22-storied property with a projected size of 100,000sqm was to provide 52,000sqm of offices, 20,000sqm of retail space and 18,000sqm of apartments. The unfinished building is situated on the territory of the Russian Academy of National Economy. Italian investors had poured over $150 million into the project but construction was suspended after nearly 70 percent of works had been completed. Finalizing the project would require at least $50 million, according to developers’ estimates. Meanwhile, the gigantic blue-glazed development is falling into decay.

Construction of an office compound of the Institute of Electronic Management Systems at 24 Vavilov Street was launched back in 1977 but only the first building was raised before the building works were suspended. A well-known development firm LVN Development took over the site and finalized all of the three buildings. In early 2006 the second and the third developments were commissioned and welcomed first tenants – BGS, Solvay Pharma and Transneft, Colliers International reported.

Cash for Business Class

In 2006, the total supply of class A and B office space in southwestern Moscow stood at 630,000sqm (with class A accounting for 10,000sqm), Regina Lochmele has reported. That makes up approx. 14 percent of the total class A and B office supply across the city. Offices being scarce and demand soaring there are no vacant prime facilities left, while vacancy rate for class B properties is below 2%. DTZ puts the total size of class A and B offices in southwestern Moscow at 640,000sqm, or 13.5 percent of Moscow’s entire market of prime office space. In 2006, analysts expect base rent to continue growing, by 6-12% for class A and 5-7% for class B.

Nowadays, class A offices in the area are let at $600 per 1sqm, excl. VAT, class B - $450 per 1sqm, excl. VAT, Antonina Lairova, senior analyst at Prime City Properties, reports. Rates range from $450 (Park Place) to $700 (Gorky Park Tower). Class B offices are rented at $380 (46/1 Bolshaya Tulskaya) to $520 (8/1 Nauchny Proyezd). Tenants at the recently built Gorky Park Tower (32,800sqm, 13-15 Leninsky Prospekt, class A) are charged $550 per 1sqm, Maria Kotova says. Rent at Vaviloff Tower (7,600sqm , 24 Vavilov Street, class A) stands at $635 per 1sqm.

Offices at 6-8 Vernadsky (11,713sqm, class B) cost $600 per 1sqm per year. A business center at 8 Nauchny Proyezd (16,500sqm, class B) offers space at the rate of $695. The Akademichesky business center (9/2 60-Letia Oktyabrya Street, class B, 12,000sqm) - $650. Cherry Tower (56 Profsoyuznaya, class B, 45,000sqm of office space) - $620. At the class A Konkord complex, currently under construction at 10 Shabolovka (20,300sqm), offices are rented out under preliminary tenancy deals at $600 to $650 per 1sqm. An office building at 27 Obruchev Street (the second stage of the Gas Field business center currently under construction, 15,000sqm, class B) the rent is set at $700 to $750 per 1sqm.

The size of rent at a class B building under construction by the development firm Khorus Capital at 30 Obruchev Street is set at $425 per 1sqm. The first stage of the complex is slated to be commissioned in 3Q of 2006, Yelena Kolesnikova has reported. Rental rates at Donskaya Hall, class B business center developed on Malaya Kaluzhskaya Street (to be finalized in 1Q of 2007), run as high as $485.

Office properties at 11 Ordzhonikidze are rented at $420 to $600 per 1sqm per year. Class B offices at 13/17 Bolshaya Cheryomushkinskaya Street, to be finalized in near future, with $650 are nearly as high as the cost of class A offices in the area. “Rents in Southwest District are still considerably lower than those charged within the Garden Ring. At the same time they are comparable to rates in Northwest and Northeast districts and higher than in southeastern Moscow,” Kolesnikova says.

The largest deal registered within the period of 2005 to early 2006 was the tenancy agreement signed by Citibank that rented the 5,200-square-meter Kaluzhsky II office building in 1Q of 2005, Prime City Properties reported. According to DTZ analysts, the largest deal reported in 2005-2006 in the Southwest was a lease of a 12,550-square-meter office secured by Raiffeisen Bank at Gorky Park Tower at 13-15 Leninsky Prospekt. Alcatel rented 7,799sqm and Eurasia Company took up 2,710sqm at the same address. A 2,200-square-meter office property at Konkord at 10 Shabolovka has been rented by Beiersdorf. Astra Zeneca has rented 3,020sqm, Sogaz – 1,7800sqm at Vaviloff Tower.

Among the properties currently available for sale in the area Kolesnikova mentions the business center at 6 Nauchny Proyezd, where offices are sold at $2,400 per 1sqm. Maria Kotova quotes the following sale prices: an office facility at 27 Lobachevsky Steet (class B, 4,311sqm) is offered at $13 million. A building at 12 Bolshoi Savvinsky Side-street (A, 4,800sqm) - $22 million. A complex at 6 Nauchny Proyezd (B+,43,500sqm) - $2,200 per 1sqm.

Development on the Rise

Gorky Park Tower is recognized the tallest office building operating on Leninsky Prospekt. The 22-storied high-rise was finalized in early 2006. The building measuring a total of 38,000qm provides 26,000sqm of offices. Rated as class A, it features a 4-level parking facility providing 200 car-spaces. The complex was raised from scratch by the development company Stimul Group, says Regina Lochmele. All offices have been rented out. Vaviloff Tower has no vacant offices left, either. The tower is a 14-storied business center, with floors measuring 550sqm ca. The launch of those two centers in early 2006 was seen as a key and long-awaited event on the market. Originally, both developments had been expected to enter the market as early as 4Q of 2005.

Most offices at Konkord, the development by Capital Group on Shabolovka street, have already been distributed among future tenants. MIAN and Russky Dom Nedvizhimosti (Russian Realty House) are currently letting space at a 50,000sqm class A business center at 41 Vernadsky Prospekt, one of the largest projects on their track record. Another major project is a mixed-use complex on the site of the Sport Hotel, pulled down recently. The project carried out by Sistema Hals and Amiral B.V. companies is seen as the costliest development in the vicinity. The developers plan to build over 400,000sqm of office, lodging and retail facilities on the site measuring 3.65 hectares.

Gazprom’s office complex on Namyotkin Street has become a center of a rapidly growing commercial zone. The Solnechny Gorod company is developing a 43,000sqm office complex at 6 Nauchny Proyezd, not far from Gazprom’s offices. Office developers active in the Southwewst include Stimul Group, Khorus Capital, LVN Development, Vlakra, and others. Earlier this year, retail company Perekryostok in cooperation with the owners of a popular vodka brand Putinka announced their plans to build a business center on the site of the Cheryomushki open air market (64/1 Vavilov Street). The mixed-use facility will measure 97,500sqm. Kvartal, known rather as a housing developer, is involved in office construction in southwestern Moscow (1 Udaltsov Street).

KV Engineering has launched a project to redevelop the area of Avtokombinat No. 12 (a municipally-owned car fleet company), within the Vorontsovo industrial estate in the Southwest Administrative District. The estate is situated in Obryuchev District, where residential blocs make up only 36 percent of the entire area of 604.6 hectares, while the rest is occupied with production facilities and two large forest parks. The future quarter will measure a total of 250,000sqm, providing 70,000sqm of class A offices. The project is estimated to worth $400 million. The development will be phased in gradually and is expected to be finalized only in 2010.

In southwestern Moscow, Moscow city hall sets priority on the development of mixed-use community centers, offices and shopping facilities, to be raised, first and foremost, along key thoroughfares and in the areas of “high urban development activity”, as stated in the city’s urban planning program till 2020.