Money-Growing: Roadside Offices

“All over the globe there are commercial districts operating beyond the boundaries of big cities. The positive examples of London and Paris show that such projects are viable,” says Pavel Lebedev, chief executive at the RIGroup-Finans management company.

“Developers involved in large-scale office projects are still doubtful about the prospects of MKAD,” says Konstantin Losyukov, head of office real estate at Knight Frank realty. “Nowadays, in Moscow there are plots of land still available for new construction, located far more favorably in terms of transport accessibility and distance from the city center.”

Pioneers of MKAD

So far, the Moscow outer ring road has seen but a handful of completed office developments. The only office center fully in operation on the city outskirts is Country Park, finalized in early 2004 by CityPro and Race Communications at the junction of MKAD and Leningradskoye Shosse [motorway]. “Despite its address at 19 Panfilov Street in the town of Khimki the building is situated in fact on the outer side of the ring road, and it may as well be regarded as part of Moscow’s office property market,” says Sergei Kolegov, general director at Prime City Properties.

Nowadays, the occupancy rate at Country Park is nearing 100%. Irina Gerasimova, head of research at CB Richard Ellis Noble Gibbons, has reported that tenancies at the business park are held by BMW Russland Trading, Real Hypermarket, Metro Cash & Carry GmbH, Nokian Tyres, Volvo Trucks and other firms.

CityPro claims they had been confident in success from the start. “The MKAD location was not the only factor that predetermined Country Park’s success. MKAD is a road 110 kilometers long where there are plenty of other sites, better or worse. But Country Park is conveniently located at the intersection of MKAD and Russia’s key freeway linking Moscow to St. Petersburg, and is visible to a large flow of motorists and pedestrians,” says Leonid Lopatin, the company’s board chairman. The park’s proximity to the Butakovsky Bay and the metro station also contributed to the success of the project, he adds.

Other notable office projects developed on MKAD or in immediate proximity to the ring road are Vereiskaya Plaza, finalized in 2005, and Orbita technology park situated between Tallinskaya Street and Strogino Boulevard, says Regina Lochmele, head of office and industrial real estate market analysis at Colliers International. Lada Belaichuk, leading office property analyst at Cushman & Wakefield / Stiles & Riabokobylko, also mentions the celebrated business park Kryltaskiye Kholmy, by CMI Development. “That is the first example of a real business park in Moscow, one of the largest office projects in the city,” she says. But, despite their comparative proximity to MKAD those properties are situated at a certain distance from the ring road.

Projects of the Future

While some corporate tenants have already moved into offices on MKAD, the most ambitious projects in the area are still either on the drawing boards, or at the very early stages of construction where only a foundation pit has been dug. One of those, seen by property analysts as a landmark project, is the class A Greenwood business park launched at the 71st kilometer of the Moscow outer ring road, between Leningradskoye and Volokolamskoye motorways. “The complex will feature 16 buildings, including 13 office properties and an apartment hotel. Talks with would-be tenants are underway,” says Irina Gerasimova. Greenwood will provide a total of 90,000sqm of office space, she adds. “Greenwood will feature offices, a hotel, apartments, a fitness center and bank branches,” says Andrei Bushin, head of commercial real estate and development at Miel-Nedvizhimost realty. The park will be launched in 2007.

As part of its “city of millionaires” Rublyovo-Arkhangelskoe project, within only 3-kilometer distance from MKAD on Novorizhskoye Shosse, CMI Development is set to build 100,000sqm of office space, but so far those are still only plans. IKEA has announced plans to build six office towers across the street from its Mega Mall in Khimki; Plakon Estate is set to open 60,000sqm of offices at the 7th km of MKAD in 2007, as part of Kosinskaya Plaza retail and office project.

None of those developments, however, can be regarded as the largest projects on MKAD. The lead in that virtual competition of future properties belongs undoubtedly to Crocus International, which plans a commercial zone of 700,000sqm at the 66th km of MKAD, next to Crocus Expo. “The construction of the first office high-rise, 40 stories tall and measuring 100,000sqm, within Crocus City, will begin in late 2006, to be completed in 2008. At to what happens next time will tell. Our partners have long expressed keen interest in office space within Crocus City,” says Aras Agalarov, president of Crocus International.

The project has already caught attention both of the future tenants and rival developers. RIGroup, for example, is planning an office center next to Crocus City, to be finalized by 2008. “The total built-up area will measure 2.4 hectares, the projected total size of the complex providing guest parking facilities for 1,200 car-spaces, is 105,000sqm. The class A facility, approximately 20 to 22 stories high, will be designed by Kurortproyekt,” Pavel Lebedev has reported. Both projects will be developed on the Myakinino floodplains of the Moscow River outside the capital. “That will be a unique property, a commercial and community project,” he adds.

Target Audience

Most analysts agree that as early as now it is possible to say who will choose MKAD as an office location. First and foremost, those are companies that do not fear moving away from the city center. “In the West, major companies have made it a rule to move their headquarters into the suburbs of big cities, ever since the 1950s to 1960s. That is why, such projects are understandable and enjoy demand worldwide,” Leonid Lopatin says. “As long as MKAD projects meets class A standards, Western firms see no problem in their non-central location,” agrees Sergei Kolegov. “Russian tenants more often believe that their offices must be if not centrally located then at least within the Third Ring Road.” Respectable tenants take keen interest in class A properties on MKAD, Leonid Lopatin says.

“There are several concepts of business centers available on MKAD. Some offer the same quality of office space [as elsewhere across the capital] at lower rents, others provide a wider range of services at the same rates. Country Park, for example, does not differ much from Moscow business centers in terms of rental charges, it is no low-cost or economy office property, but its tenants are offered a wider choice of amenities, larger parking areas, better environment, more spacious offices and greenery. That is what has made it a premium class business center,” the expert says.

Irina Gerasimova believes that offices on MKAD could appeal to IT companies, call centers and back offices of large companies. “Potential tenants at those business centers may be Russian and foreign companies whose customers do not need to visit their head offices before making a purchase – car dealers, pharmaceutical concerns, logistics operators whose warehouses are outside MKAD, transportation and shipping agencies,” adds Sergei Lobkaryov, head of commercial real estate at MIAN. Konstantin Kovalyov, managing partner at Blackwood realty, also mentions Russian distribution operators and retailers (Starik Khottabych, Pyaterochka) who operate storage facilities on MKAD and in the Moscow countryside among companies likely to take interest in offices along the outer ring road.

Office centers on the city outskirts appeal to any company willing to cut costs. Those are major and medium-size firms who move their back offices to the outskirts seeking to optimize costs, Regina Lochmele says. “Office tenancies on MKAD are sought chiefly by large companies, seeking to optimize cost of maintaining their technical and support staff,” Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global, agrees. Developers involved in office construction in the area believe that tenants attach importance to geography, as well. “Companies operating in the Central Federal Region (central Russia) will open their offices on MKAD, and in the Moscow Region,” Pavel Lebedev says.

“When RIGroup set about working on the Myakinino floodplains project it took into account proximity to Crocus Expo and companies specializing in exhibition business active in the area,” he adds. Aras Agalarov says: “All our partners need offices at Crocus City, in fact, we are building for the companies we work with. The city will gradually lose appeal for businessmen who live outside downtown Moscow.”

Knock-down Prices

Office rents are lower on MKAD than elsewhere in the city, market operators agree. “Rental rates in remote districts of Moscow and around MKAD are on average 30 to 40 percent below rents within the Third Ring Road,” says Konstantin Kovalyov. “Rental charges at prime office centers on MKAD are comparable to the average rent at class B offices across Moscow,” says Olga Kisarina, head of research and analysis at Praedium. “Top class offices are available on MKAD at somewhat lower rates than charged for analogous properties situated closer to the city center.”

“Rental rates, including operating costs but excluding VAT, at office projects that match international standards and are being developed currently in immediate proximity to MKAD stand at $500 to $550 per 1sqm per year, for deals signed at early stages of construction, to $630 - $680 per 1sqm at final stages,” Regina Lochmele notes. Offices in redeveloped buildings and new developments on the sites of former industrial estates are let at $350 to $500 per 1sqm, she says. Lada Belaichuk recalls that “rents at class A offices within the Moskva City business center now stand at $700 to $800 per 1sqm per year; in the Central District they have already exceeded $800; there are office properties where rental rates are above $1,000 per 1sqm.” Offices near MKAD are let at only $500 per 1sqm, she reports.

Tenants at Country Park are charged $500 to $600 per 1sqm, excluding VAT and property management costs. In other words, the size of rent is comparable to those charged across the city. But developers planning projects on MKAD do not intend to set such high charges for their offices. “In the long run, we plan to charge $400 gross, on average,” says Aras Agalarov. Andrei Bubshin believes that offices let at such comparatively low rates are most appealing to tenants. “The highest demand is for quality inexpensive properties, measuring 1,000 to 1,500sqm, at the rate of $350 to $400 per 1sqm per year,” he says.

Experts do not expect any sharp increase in office rental rates on MKAD in the near future. “Prices grow at the same rate as elsewhere in Moscow,” says Konstantin Kovalyov. “The commercial real estate market is conservative, we expect no sharp price fluctuations. Only the most successful projects may count on higher rates,” Andrei Bushin agrees. “In 1Q of 2006, the average cost of office rent on MKAD grew 4.5%, which is comparable to the cost of leasing offices along the Third Ring Road,” Vladimir Zhuravlyov has reported. “It is hard to talk of any rent dynamics at the moment as the market is still young and there are only a few examples,” Irina Gerasimova notes with caution.

Skeptics and Supporters

With the office real estate market on MKAD only being formed and despite Country Park’s success many analysts are skeptical about the prospects of office development along the ring road. One of the reasons for such a cautious attitude is the availability of building plots in locations closer to the city center. “Moscow developers are active on the sites situated between the Garden Ring and the Third Ring Road where quite a few interesting projects are underway, including Moscow International Business Center Moskva City,” says Konstantin Losyukov. “Another significant project is the Nagatino i-Land technology park developed by the Moskovsky Business Incubator company in the western part of the Nagatino Island area.”

“As long as those resources remain unexhausted offices on MKAD are not likely to attract many tenants. Besides, considering how many industrial territories and vacant plots are still available within the Third Ring Road one can rest assured that developers will have their hands full for another eight to ten years at least,” Sergei Kolegov says. Another disadvantage of MKAD offices is their remote location and transportation problems arising for employees as a result. “Employees who drive their own cars will find it difficult to get to their office. For those who use public transportation that would be twice as difficult,” holds Irina Gerasimova.

But there are those who back the idea. What we see here is decentralization of the office market, says Regina Lochmele. That tendency is brought about by scarcity of vacant building plots in downtown Moscow, lack of parking spaces, and a noticeable increase in developers’ activity in the class A segment in conditions where rents have reached the seven-year high. “Thus, one of the key factors predetermining the growing demand for offices outside the TRR is the availability of office space meeting international standards, at rates lower than those charged in the Central Business District,” she explains.

Office centers on MKAD have good prospects, says Olga Kisarina. “Attractive formats are office and warehouse complexes and business parks,” she says. Office properties on MKAD are, for the most part, low-rise buildings on larger sites, with developed public amenities and convenient entry driveways, at lower rental rates,” Andrei Bushin adds.

But both the opponents and proponents of offices on MKAD agree that the ring road is multifarious. “As a location, MKAD is no guarantee of success. We have opted not for the road but a specific location with serious prospects for development,” Pavel Lebedev says. “The area around MKAD is multifarious. The Western stretch has good development prospects, and top quality office buildings will be rented at high rates despite their remoteness from the city center,” says Lada Belaichuk.

Vladimir Zhuravlyov believes that MKAD is likely to transform into a full-fledged commercial zone within the next few years. Office development on MKAD makes sense in rapidly growing districts, one of those being a stretch between Leningradskoye and Novorizhskoye motorways, Myakinino, in particular. Once the Crocus City exhibition center is linked to the new office high-rises developed by Aras Agalarov, the area will be given a new impulse for growth. “We expect the formation of the new district that will include the commercial enclave at the intersection of MKAD and Volokolamskoye Shosse, residential areas of Strogino, Mitino, Myakinino floodplains and some of the countryside compounds on Novorizhskoye Shosse, to be finalized by 2010 – 2012,” Zhuravlyov says.