Money-Growing: Class B Oasis

The district has its business streets and zones where every morning white collar employees hurry to their work desks in large and small office centers. Baumansky Business District lies between Krasnyye Vorota, Komsomolskaya, Krasnoselskaya, Sokolniki, Elektrozavodskaya, Chkalovskaya and Kurskaya metro stations, bordering on the Garden Ring closer to the city center and on Sakharov Prospekt, Krasnoprudnaya and Rusakovskaya streets in the north. Southern and southeastern borders of the zone run along the Yauza River embankments.

The submarket is referred to both as Baumansky and Basmanny. More often consultants use the name Basmanny. The submarket is somewhat larger that the Baumansky Administrative District [Okrug], holds Oleg Korzun, head of research at DTZ. Antonina Lairova, senior analyst at Prime City Properties, refers to the submarket as Baumansky, proceeding from the assumption that the metro station of the same name is closer to the geographical center of the district than Basmannaya Street. A map of Moscow office submarkets by Cushman & Wakefield / Stiles & Riabokobylko (CWSR) refers to the areas as BAS.

Large streets running through Basmanny District are Staraya Basmannaya, Novaya Basmannaya, Spartakovskaya, Bakuninskaya, 1st Baumanskaya and 2nd Baumanskaya, Malaya Pochtovaya and Bolshaya Pochtovaya, Dobroslobodskaya and Rusakovskaya, and embankments Akademik Tupolev, Syromyatnicheskaya, Lefortovo, Rubtsovskaya and Rusakovskaya. In the east Basmanny borders on Tagansky Business District. BAS comes under the jurisdiction of several district administrations – Basmannyoe, Sokolniki and Preobrazhenskoye.

The area is remarkable for landmark sites, dating back to various eras in Russian history. Basmanny market, the roof of which caved in unexpectedly earlier this year, is situated there. Less tragic events in BAS’ history are the development of a state-of-the-art residential estate on Rubtsovskaya Embankment in the early 2000s by DSK-1 construction company, that produced a sensation in the Moscow housing sector.

Another landmark site is the campus of the Bauman Moscow State Technical University. Not far off is the well-known Matrosskaya Tishina street that inspired generations of writers and artists to write books, stage plays and even launch a caf? of the same name. Moscow’s landmark train stations – Leningradsky, Yaroslavsky, Kazansky and Kursky – are also worth mentioning. As to architectural monuments, in Sokolniki alone there are 11 of them.

Although most sites suitable for office development in Baumansky have already been snapped up, developers and office tenants continue to show interest in the area and new projects being launched in the district prove that. Admittedly, market analysts believe that commercial and development activity in Basmanny is not as high as in Tagansky, Zamoskvorechye or Novoslobodsky.

Strengths and Weaknesses

Regina Lochmele, head of office and industrial real estate analysis at Colliers International, says that with low supply of prime office space and a high share of properties of poorer quality resigned for office use, Basmanny is not as appealing to tenants and developers as other office districts in the city. The vacancy rate in Basmanny stands at 7 to 9 percent.

Analysts at CB Richard Ellis Noble Gibbons (CB RENG) believe that the district offers good prospects for development namely of class B offices as BAS is not as prestigious as other commercial zones and nobody is willing to pay high rent there. Therefore, it makes no sense to build class A offices in Basmanny. Most likely, BAS will become a low-cost district targeting tenants who do not attach importance to prestigious locations.

But the potential of BAS is not exhausted yet. Ever since the early 1990s large building sites available within industrial territories and their proximity to the Garden Ring and downtown Moscow have appealed to operators. The same is true for Zamoskvorechye, Tagansky, Kutuzovsky and Novoslobodsky commercial zones.

“Factory administration buildings within industrial zones currently undergoing refurbishment or redevelopment are likely to make up the lion’s share of future office stock in the area,” says Konstantin Kovalyov, managing partner at Blackwood. “Those business centers are rated as class B or C. But there are also examples of properties of higher quality, rated as class B+, for example. Worthy of mentioning are Tupolev Plaza, Yauza Tower and Nemetskaya Sloboda.”

At the moment, BAS has at least 16 class B projects, either under construction or on the drawing boards, and five class A properties. Along with projects already in operation, there are approximately 50 office buildings measuring 5,000sqm and over. Taken together, they form BAS’ office stock. “A large number of industrial facilities in that area form a resource for further office development,” holds Oleg Korzun. “Class A properties are more likely to emerge where Basmanny District borders on the Garden Ring and the Third Ring Road. All other areas will be used for class B developments.”

Alexandra Krzhyzhanovskaya, head of office market research at Cushman & Wakefield / Stiles & Riabokobylko (CWSR), says that Basmanny District falls into a number of office clusters – the area around the Krasnyye Vorota metro station, Baumanskaya Street, spots at the intersection of Spartakovskaya and Yelokhovskaya streets, Staraya Basmannaya and Krasnoselskaya, areas along the Third Ring Road and Akademik Tupolev Street.

Those areas are built up with class B offices measuring approximately 200,000sqm of quality space. As regards new developments, especially class A facilities, those are to be found mostly on the Garden Ring or in immediately proximity thereto. Prime offices available within the Basmanny submarket make up approximately 4.2 percent of the total stock of quality space in the city.

Industrial Territories

Baumansky District has long developed a reputation for being a class B office zone. Over the years, as Moscow’s real estate market grew most plots available for office development in Basmanny were former industrial estates. In the outlook, projects in Basmanny will provide offices predominantly rated as class B. Colliers International puts the total stock of class B office space in BAS at approx. 316,000sqm (or 10% of the entire class B office stock in the city), with class B2 (or B-) offices measuring 157,000sqm, or 50% of the total class B office stock in BAS. By late 2007 developers plan to launch approximately 100,000sqm of new class B offices in the area.

Irina Gerasimova, head of office real estate at CB RENG, believes that Basmanny may as well be described as a developed business district where class B offices dominate. Most projects currently underway are production facilities redeveloped for office use, as, for example, an office center at 4 Olkhovskaya Street on the site of Olkhovskaya furniture factory. One of the buildings on the site redesigned for office use in 2004 now provides 5,000sqm of space. In 2005, the second building, also measuring 5,000sqm, underwent redevelopment. The Yauza Tower business center at 24 Radio Street (30,000sqm, class B) constitutes a classic example of a completed redevelopment project.

Another example of a business center on the site of a production facility is Borodino at 13 Rusakovskaya Street (developed by Borodino Group, class B, 33,000sqm). Borodino specializes in production of soft drinks but the group also comprises several construction units, a company spokesperson reported. Borodino-Stroi is in charge of development of custom-built properties to serve various objectives. The company’s track record comprises a 17-storied business center at 13 Rusakovskaya Street, built on the site of a former soft drink and confectionery production facility. The project is estimated at $80 million.

The Unikor company and Rossiisky Kredit Bank have launched construction of a class B 35,000-square-meter office project at 14 Bakuninskaya Street, on the site of Fizpribor plant. Rossiisky Kredit finances development of several major residential and commercial projects in Moscow, including a 280,000-square-meter mixed-use complex on a 10.2-hectare site of the RTI Kauchuk production facility, which is subject to withdrawal from the city center.

On the other bank of the Yauza River, at 32 Bolshaya Semyonovskaya, the investment company Vizavi has launched a class B office park of the same name (Vizavi Office Park, 20,000sqm). ALM Development has built a business center at 9 (1-14) Malaya Semyonovskaya (class B, 33,930sqm). “ALM Development has launched three projects in that business district – at 4 Storozhevaya (6,000sqm, on the site of Eksperiment furniture factory), at 5 Poslannikov Side-street (7,700sqm, hosiery Baumanets) and at 9 Malaya Semyonovskaya (on the site of Osvobozhdyonny Trud factory),” Antonina Lairova has reported. “Those projects are vivid examples of redevelopment in the area. Offices in such a price range are appealing to small and medium-sized businesses and for ‘back-offices’ of large corporations.”

Established nearly seven years ago, ALM specializes in full-cycle class B office projects, with a track record of nearly 30 office properties raised across the city. There are several class A projects in BAS, developed within industrial territories. A large business center with a working title Olmineya is currently under construction on an industrial estate at 36-28 Novoryazanskaya Street and 29 Novaya Basmannaya, CB RENG has reported. The Moscow city hall’s order No. 2419-RP orders reorganization of the properties of JSC Olmineya. A plot of land measuring 0.95 ha has been allotted for development of a business center providing an underground car park for 244 spaces, and a total area of 33,970sqm, with underground facilities measuring 8,170sqm). Olmineya has invested its own and borrowed funds in the development. The city hall’s order contains a provision whereby the investor would secure a title to the entire project after the development is finalized and an amount of $7 million in ruble equivalent is transferred to the city budget, as a compensation for existing public amenities, engineering and transport infrastructure.

A look on the map of the district shows that BAS comprises several industrial territories. One of those is situated not far from Komsomolskaya Square, in Krasnoprudny Side-street. Large industrial estates stretch between Baumanskaya and Nizhnyya Krasnoselskaya streets, between the Rusakovskaya overpass, Novaya Perevedenovskaya Street and railway yards, and between Balakirevsky and Perevedenovsky side-streets.

More industrial territories are situated within a quadrangle formed by Boyevskaya and 2nd Boyevskaya, Matrosskaya Tishina and Babayevskaya streets. A large industrial zone stretches along Rubtsovsko-Dvortsovaya Street. Another estate lies between Bolshaya Pochtovaya and Rubtsovskaya Embankment. In the southern part of the district industrial territories are to be found near Kursky train station and Chkalovskaya metro, and near Syromyatnichesky Side-street.

Class B offices in Basmanny are let at average annual rate of $500 per 1sqm, VAT excluded; class A facilities are rented at $670 to $720 (at Citydel), Irina Gerasimova has reported. But class A rents are that high only in the areas close to the Garden Ring. Office rents in Basmanny differ greatly from rates charged in other, more prestigious parts of the city, she adds. For example, class B offices in the Central District are rented at rates as high as $700, in southwestern Moscow rents run up to $650 per 1sqm.

Regina Lochmele puts the average rate charged for class B1 under construction or undergoing redevelopment in BAS at $500 to $620 (operating costs incl., VAT excl.), for B2 at $380 to $420 (operating costs incl., VAT excl.). Offices at class B business center Borodino are let at $550 per 1sqm per year, VAT excl. (some analysts rate Borodino as class A), Antonina Lairova reports. Class B office complex Lefort offers space at $370 to $400 per 1sqm, VAT excl. The difference between rates in the city center and Basmanny stands at $100 to $200 per 1sqm per year. Offices in BAS are cheaper than in Tagansky by $50 to $70. Over the past two or three years rents in BAS have increased as everywhere across the city. In 2005, rents grew by 8.5 - 9 percent.

Alexandra Krzhyzhanovskaya believes that rental rates in BAS are comparable to those charged in Novoslobodsky and Shabolovsky submarkets. In her opinion, most office properties in BAS fail to meet modern requirements, therefore, they are rarely available on the open market and most projects are built to order.

Conditions for class B office development in Baumansky are favorable enough, holds Konstantin Kovalyov. The district has vast industrial territories, vacated gradually, as production facilities move beyond the city limits; the transport situation is also favorable given BAS’ proximity to the Garden Ring and with the Kremlin only 10 minutes’ drive away, along the Yauza River embankments; the area has a developed engineering infrastructure and is densely built-up with residential estates.

Analysts are not unanimous in their estimates of BAS’ potential. Maria Kotova, head of research at Knight Frank, believes that Basmanny is a district where construction activity remains low. But if its industrial facilities undergo redevelopment in the future developers will be able to pursue large-scale office and mixed-use projects of high quality there.

First Developments

First modern offices were built in Basmanny as early as the mid-1990s. In those days first prime office facilities appeared in downtown Moscow and Zamoskvorechye. Analysts at the Praedium real estate company believe that BAS’ oldest office buildings are Zenit Inter I and II, both are relatively small compared to more recent developments. Zenit Inter I, rated as class B and measuring 1,600sqm, was built in 1996 at 3 Alexander Lukyanov Street by the Zenit Inter company. The second complex, the 2,000-square-meter Zenit Inter II, was raised at 38/2 Staraya Basmannaya in 1997 by PSF Nord.

A property at 45 Bolshaya Semyonovskaya, built in 1926, was redeveloped for office use in 2003. Today it is rated as class B and measures 1,720sqm. A 1950-built house at 9 (1-14) Malaya Semyonovskaya has been recently refurbished by ALM Development (34,000sqm). Another office building worthy of mentioning is a business center at 26-28 Denisovsky, by Asata Construction, where tenancies are held by Carl Zeiss, Hitachi Construction Machinery, Zurich Insurance Company and others.

One of the first buildings of class B in BAS to enter the market was an office center at 3/2 Bolshoi Pleteshkovsky Side-street (1993, 1,300sqm), owned by Mosvodokanal, Alexandra Krzhyzhanovskaya has reported. In 1994, a building at 21/44 Staraya Basmannaya was redesigned for office use, measuring a total of 6,500sqm.

Another property, at 14 Staraya Basmannaya, was refurbished by Svatstroi in 1995 (2,300sqm). The first tenants to take up offices there were Coudert Brothers, Marathon Oil, Arthur Andersen and Norton Rose. Those foreign companies had already launched operations in the capital by that time but were unsatisfied with the quality of office space the market had to offer. A 14,000-square-meter property was built at 17A Novaya Basmannaya. Initially, it belonged to the National Reserve Bank; later Sberbank took over the building.

Developers of the 2000s

Regardless of consultants’ skepticism as to BAS’ prospects well-known property developers actively pursue their projects in the area. Capital Group plans to finalize a 65,615-square-meter complex at 27 Mirnovskaya Street in late 2007 – early 2008. Sistema Hals is developing Preobrazhensky business park at 12 1st Bukhvostov Street, on “a site of an industrial estate, situated in the East Administrative Okrug outside the Garden Ring where large-scale prime housing, office and retail development is currently underway,” according to a description of the project provided by the company.

The mixed-use complex to be raised within six years not far from the Preobrazhenskaya metro station will provide office and retail space, apartments and leisure facilities. Khorus Capital has launched the Lefort office project at 27 Elektrozavodskaya Street. The Otkrytyye Investitsii (Open Investments) company is developing a new office property at 30 Sakharov Prospekt (132,000sqm). The complex, rated as class A, will comprise two office buildings, 50,000sqm each, and a high-rise of 33,000sqm, as well as an underground parking facility providing 1,100 car-spaces. Rosbank is the co-investor in the project. The complex will be operated by Sakharov Business Plaza, a company set up especially for the purpose, according to a report provided by Otkrytyye Investitsii. Other participants of the project are Vorontsov Architectural Design Studio, MMA + Fitzroy Robinson and Waterman International from Great Britain.

Major international companies are involved in the development of Citydel, another class A project launched in BAS, Maria Kotova reports. 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, measuring a total of 63,500sqm, is being developed by JSC Tema at 11/19 Zemlyanoi Val, and is slated to be commissioned in 2Q 2007. The mixed-use will provide offices (80%), shops, restaurants, cafes, a fitness center and a swimming pool. Some consultants say Citydel belongs rather to the Tagansky Business District.

Deals of the Year

The acquisition of a 12,300-square-meter office building at 37 Novaya Basmannaya by Transkreditbank from NRB Bank is seen by property brokers as one of the biggest deals of the year, says Irina Gerasimova. The building was put up for sale at $3,880 per 1sqm, or the total of $48 million. Video International has recently rented a 960-square-meter office at Tupolev Blaza, at the rate of $480 per 1sqm per year, CWSR reports. The Engineering Building Company rented 1,932 sqm of office space at the same office center, at $550 per 1sqm. Reebok Fitness secured a lease at Citydel, at $630 per 1sqm.

The average rental rate at class B and C offices in BAS stands at $350 (5 Poslannikov) to $470 per 1sqm (22 Olkhovskaya). Sale prices stand at $2,500 per 1sqm, on average. Class A offices are sold at $5,000 per 1sqm (12-14 Spartakovskaya). Prices are higher in the areas closer to the city center and the Garden Ring. One of the biggest deals registered in early 2006 is the long-term lease signed by MTS and Vizavi. The telecom company rented the first three floors (15,000sqm) at the Semyonovsky office complex at 32 Bolshaya Semyonovskaya, Blackwood reports.

Class A offices were available for sale in May 2006 at $5,000 to $6,000 per 1sqm, on average, Moscow property brokers report. Class B offices were sold at $2,000 to $4,700. In 2004, prices stood at $2,000 to $3,000 for class A and $1,700 for class B. The price of 1sqm of office space at class A complex under construction at 20-26 Spartakovskaya Street is estimated at $430 to $480, VAT excl. Offices at the Yelokhovsky business center (class B), to be commissioned soon, are available for sale at $5,000 to $5,500 per 1sqm. Tupolev Plaza II (class B) lets offices at $420 to $500. Office rates at Yauza Tower stand at $525 to $600.

Yauza Tower was one of the few buildings in the city where space was put for sale in 2005, not for rent, Antonina Lairova reports. Colliers International reports that space at Yelokhovsky, too, was put up for sale. Other major projects where properties were offered for sale last year are several offices at the Moscow International Business Center Moskva City and Pollars Business Center on Derbenevskaya Embankment.