Money-Growing: Commercial Commuter Area

The key thoroughfare of Krylatskoye is Rublyovskoye Shosse [motorway] – the federal route that later becomes Rublyovo-Uspenskoye Shosse – an upscale countryside locality where land prices soar as high as $100,000 per 0.01 of a ha (sotka).

Today, Krylatskoye is rather a prime residential suburb than a commercial zone. Commercial developments are rare. Even the urban development plan for the West Administrative District mentions Krylatskoye only once, in the chapter titled “Preservation and development of the nature complex”. According to a report by the Krylatskoye district administration, till the year 2020 the district will see construction mainly of residential estates, sports and leisure facilities.

Favorable Location

Krylatskoye has only two large business centers. Those are Krylatsky Hills (class A, 60,000sqm) and Krylatsky (class B, 18,500sqm). Those developments account for nearly 100 percent of prime (i.e. rated as class A and B) office space available in the district.

“Today, class A and B offices in Krylatskoye measure approximately 82,000sqm (which is below 2 percent of the entire stock of quality office space in Moscow),” says Regina Lochmele, head of office and industrial real estate at Colliers International. “Class A accounts for only 4.5% of the entire class A office stock in Moscow, and only 25% of class A office space outside the Central Business District. Class B offices measure a total of 22,000sqm, or 1% of Moscow’s entire stock of such offices, and of their volume outside CBD.” The limited supply of class A and B offices in Krylatskoye results in a vacancy rate of 0% at the moment, says Lochmele.

According to a report by Cushman & Wakefield / Stiles & Riabokobylko (C&W/S&R) approximately 10% of all would-be tenants who apply for office space at the company, show interest in Krylatskoye.

“From the very beginning Krylatskoye was viewed as a favorable location, in terms of housing construction,” says Olga Kisarina, head of research and analysis at Praedium. “Apartments in Krylatskoye are among the most expensive in Moscow, residential projects pay back much sooner than offices. As to office centers, their construction outside the city center began comparatively recently. Developers feared that projects in remote areas would fail. Today the situation is changing. Krylatskoye is a popular district.”

“We think that Krylatskoye has good prospects both in terms of housing construction and commercial development,” says Daromir Obukhanich, general director at First Mortgage Company (PIK). In Krylatskoye, PIK is building a residential estate Krylatskiye Ogni. “Krylatskoye has good ecology, a lot of greenery, parks, water features, historic buildings and a great scenery. All those factors attract buyers. As to the prospects of commercial property development, considering the increase in rents and lack of building sites in central Moscow commercial developers are moving beyond the Garden Ring. Western Moscow, and Krylatskoye in particular, is the most attractive location for the purpose. Given its natural characteristics, social makeup and proximity to Rublyovskoye Shosse, class A and B office projects developed there will succeed, regardless of the distance from the city center.”

Olga Kisarina, on her part, is not as optimistic about Krylatskoye’s prospects. “Rublyovskoye Shosse is a government route, which is already heavily congested while the development of large mixed-use facilities may result in further deterioration of the transport situation,” she says.

Nevertheless, Krylatskoye is growing increasingly popular, prompting real estate brokers and consultants to expand its territory artificially by including into it areas along the Moscow outer ring road and beyond, in the range of 58 to 64 kilometers. “Businesses view the borders of Krylatskoye not from the standpoint of geography, but in terms of prospects and opportunities. That is why they have moved beyond MKAD,” Kisarina explains. “For example, the Rezidentsiya project on Rublyovo-Uspenskoye Shosse is also considered as part of Krylatskoye, although technically it is situated beyond its borders.”

Viktoria Manzyukova, head of corporate services at C&W/S&R, notes that Kutuzovsky Prospekt and Krylatskoye have always been popular, as most senior managers and top executives have apartments in western Moscow and Moscow countryside. But hitherto office projects in that part of the city were rare. “C&W/S&R’s experts have not yet adopted a special acronym for Krylatskoye. We refer to that district simply as part of the commercial zone usually described as “business districts outside the Third Ring Road (TRR),” Manzyukova says.

Krylatskoye still falls short of becoming a developed commercial zone of Moscow, Knight Frank’s experts agree. The reason for that is, first and foremost, a large distance to the historic and commercial center of the city. “Today, commercial activity is concentrated chiefly in the city center,” Maria Kotova, head of research at Knight Frank, says. However, she adds: “Given the latest tendencies the district undoubtedly holds good growth prospects. The shortage of vacant sites and traffic congestion create precondition for decentralization of office development.”

“Commuter areas are likely to witness prime office development as commercial real estate geography expands,” says Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global. “However, we register no activity of office developers in other commuter areas of Moscow. Krylatskoye’s taking on the shape of a commercial zone cannot be examined separately from Rublyovskoye Shosse. Such projects as Krylatsky Hills, Krylatsky business center or Profico, currently under construction, would hardly be possible in eastern or southern parts of Moscow. Their location in proximity to Rublyovskoye Shosse has played a key role. In our opinion, the city experiences an imbalance in office supply in favor of western Moscow.”

“Moscow’s business elite, indeed, lives mostly in the areas along Rublyovo-Uspenskoye or Novorizhskoye motorways,” Oksana Basova, spokesperson for S-Kholding corporation agrees. “I have heard many people complain about how tiresome it is for them to spend three hours a day getting to their office and back and they would like to work somewhere closer to their homes. At the same time, they do not forget about their employees who take metro to get to their offices. So Krylatskoye would suit everyone.”

Property analysts note that more development companies show interest in business parks and technology parks nowadays. Those properties, typically located on the city outskirts, provide class A and B quality office space. According to the IPD (Investment Property Databank), a business park is a campus style group of freestanding offices. The complex, situated outside the busy commercial areas of the city center, features a large parking area with convenient entry driveways. The project provides high-quality office facilities at rates lower than charged in central areas and targets companies who seek to minimize costs by moving their support staff to “back-offices” (in contrast to their HQ in the city center).

Manzyukova says that tenants attach importance to quality characteristics of the property, such as simple and convenient floor layout plan, high-end engineering, extra services (catering, bank offices, dry cleaner’s, etc.), seen as a compensation for a large distance from the city center.

Roman Sokov, head of consulting department at Becar. Commercial Property, adds that given the existing undersupply of high-quality office space the market will welcome a business center of any format, be it a high-rise within a centrally located commercial zone or a business park on the outskirts. “Both types of commercial complexes have their advantages and disadvantages, and for the time being office tenants are forced to put up with inconveniences,” Sokov says. “It is quite another matter what happens to those properties in some 5 or 7 years, after [the Moscow International Business Center] Moskva City and other major projects are finalized. Today, the situation is different. It is rather the investor who chooses, than the tenant.”

Krylatsky Hills Business Park

The first-ever class A business park in the area – Krylatsky Hills, which was to become Krylatskoye’s landmark office development – was finalized in 2005. Before it was commissioned property experts had been quite skeptical about its prospects, Manzyukova recalls. Nevertheless, their forecasts proved wrong and as soon as offices at Krylatsky Hills were available for rent tenants jumped at the offer. As a result, each of the four buildings was let out long before the building works on the site were finished.

Tom Wiseman-Clark, head of consulting at C&W/S&R, the company that provided consulting services and acted as an exclusive agent for Krylatsky Hills, recalls: “When the business park was still on the drawing board there was a certain prejudice against the project on the market. Some alleged the idea was unclear, for Moscow had never seen any business parks before. Kryltatsky Hills became the first such project in the capital. We had to deal with the common opinion that class A offices outside the center of Moscow had no right to exist. We had to prove that such an office project could be possible even if situated at quite a distance from the Garden Ring. The first to realize that were the Western firms, such as Microsoft, Intel, Cisco, Huawei, British American Tobacco and others. There was no need to persuade them that central location was not the key. In other countries where they have operations they have long got used to locations outside the city center where large space is available at reasonable rates. Krylatsky Hills has only one Russian tenant so far, renting an office that measures only 600sqm or 1% of the entire area of the complex.”

Krylatsky Hills comprises four office buildings of approximately the same size, each representing one of the four elements – earth, water, fire and air. The complex measures a total of 58,226sqm. The minimum block of offices leased is 600sqm. “Since the launch of the marketing campaign,” says Tom Wiseman-Clark, “space was offered at the rate of $400 per 1sqm (VAT and operating costs excl). By the end the rate grew to $550. This is hardly surprising as once major tenants stepped in, the interest in the project grew considerably.” The complex was developed by Stroimarketinvest (CMI Development). The business park has a large parking area providing 1,400 car-spaces.

Offices Amid Greenery

Another prime office development – Profico business center – is to be finalized in Krylatskoye by late 2007. The property is owned and run by the Industrial Finance Company (Profico), while RSI (Rybstroiinvest Company) oversees the development.

In an interview for Vedomosti, RSI’s chief Gennady Zhigaryov said that the plot where the development of Profico is currently under way is a slope, previously occupied by garages, barns and the like. “What is difficult about developing a slope is that we will have to build a breast wall 26 meters deep, fortified by over 500 anchors”. Currently, 7 stories of the business centers have already been built. After the development is finalized the business center will have 26 stories measuring a total of 50,000sqm, including 25,000sqm of office space, with a helipad on the roof and a 5-level underground parking providing 400 car-spaces. The ground floor will contain a bank office, a shop and a unit of a caf? chain. The basement floor will house a dining area for employees of office tenants.

Profico’s parking facilities will provide more car-spaces than elsewhere in the city. Nonetheless, Nikolai Rasskazov, general director of the future business center, admits that for some time after the project is finalized Krylatskiye Kholmy Street, where the property is situated, will be filled with parked cars of employees and visitors. According to preliminary calculations, at least 1,000 people will work in Profico offices. The developer sees the solution to the problem in comprehensive development of the territory around the business center. The complex is being built in immediate proximity to Moskvoretsky Park.

RSI has already received a go-ahead from the Moscow city hall for construction of a sports and recreation zone, with a multilevel parking lot of 500 car-spaces (the city hall’s decree PPM No.157, of March 16, 2004). Rasskazov says the project is currently in its design stages. He notes that building works will be carried out on the site currently occupied with storage facilities and car garages. “If local residents agree, we will be able to build new garages,” Rasskazov said.

One of the advantages of the new complex, according to Rasskazov, is its favorable location and transport accessibility, for after the construction of Krasnopresnensky Prospekt is finalized a drive from the city center to Profico will take only 20 minutes. As to the possible impact of the new project on the already heavily congested Rublyovskoye Shosse and Nizhniye Mnevniki street the developer abstains from comment on the issue.

Profico was rated as a class A project as early as during the stage of construction. Consultants believe its has good prospects. Nikolai Rasskazov says the building will be rented out by floors as smaller tenants are not wanted there.

Rasskazov also said that the company was currently in talks with a major international company that seeks a lease of nearly 13,000sqm. Rates will most likely be denominated in rubles but are yet to be set, he said. Property consultants believe that rents at Profico will stand at $600 per 1sqm or over (VAT and operating costs excluded).

Profico is not the first office project by RSI in Krylatskoye. Not long ago the company finalized a class B business center Krylatsky on Osseny Boulevard. Incidentally, that building houses RSI’s own office. The complex measures 18,500sqm, including 12,000sqm of rentable space and provides a 250-space open-air parking area and an underground parking area for 26 cars. Offices are let at $600 to $900 per 1sqm (incl. VAT and operating costs).

Small But Numerous

Reasonable rents charged in Krylatskoye appeal to tenants. High-quality class A and B office buildings currently under construction in the area are rented out under preliminary tenancy deals at the average base rate of $500 to $600 (class A) and $450 to $500 (class B), VAT and operating costs excluded, Lochmele has reported. The average base rent for class B offices grew approximately by 20% over the past 2 to 3 years.

“The size of rent for top quality offices in Krylatskoye is the same as in the neighboring Northwest District and some 20 to 30% lower than in southwestern Moscow,” says Alexandra Kryzhanovskaya, office real estate analyst at C&W/S&R. “Compared to Central District, office rents for class A in Krylatskoye are 30 to 40% lower, on average. In certain, unique cases the difference is even larger. Such a difference is typical also of class B offices. Over the past two to three years class A office rents have remained practically unchanged, but most likely they will increase by the time Profico business center is finalized.”

“Tenants at major business centers are anchors who are able to attract a large number of smaller firms to the area, such as lawyers, for example, who are already providing services to those giants or those who hope for cooperation,” Kisarina agrees. “But for the time being Krylatskoye is not able to provide them all with office space. Most offers available are first-floor properties within residential buildings. There are many of such proposals but they are snapped up fairly quickly.”

“Rental rates at former residential properties redesigned for office use stand at $260 to $400 or 450 per 1sqm per year,” Kisarina says. “They vary depending on the class of the building, quality of fine finish and repairs. Offices at administrative buildings are let at $200 to $600 per 1sqm. A freestanding office building may cost up to $700 per 1sqm. The cheapest are the properties in basements and semi-basements, they are let at $200 per 1sqm. Offers are numerous but all properties are taken up quickly. As to sale deals they are rare. Depending on the building a square meter would cost $3,000 to $5,600. For example, offices in residential buildings on Osseny Boulevard are available for sale at $4,500 to $4,700 per 1sqm.”