In-Depth: Offices Aim High and Wide


While the former trend will result in rapid growth business parks, the latter will bring about construction of high-rise buildings, first and foremost, on the territory of [Moscow International Business Center] Moskva City.

But is there any real need for those new formats or as far as business parks are concerned we are dealing with skillful marketing while high-rise development is, in truth, a result of concerted efforts on the part of the city officials driven mainly by considerations of prestige?

In order to answer those questions we will have to make a short assessment of the current situation on the Moscow office property market and look into key advantages and disadvantages of business parks and office skyscrapers, from the standpoint both of developers and tenants.

Today the Moscow office real estate is one of the most rapidly developing markets in the world. In terms of volume of rented or acquired space (which stood at nearly 1 million square meters in 2005 and is expected to reach 1.2 million square meters by the end of 2006) Moscow ranks 2nd in Europe after Paris and is ahead of London, although the total volume of the London market exceeds that of Moscow nearly 6-fold.

The growing demand, pushed up by favorable economic situation and permanent shortage of properties (for example, in the terms of office space per head Moscow falls far behind any large Western European city) result in increasing rents and extremely low vacancy rates (of less than 3%).

Out of 5.3 million square meters of prime office space available in Moscow today, only one-fifth, or 1 million square meters, fully meet the class A standards, which pushes the demand even higher as Russian and international companies expand their operations and seek larger offices for longer terms.

The situation is not likely to change next year; and while the correlation between demand and supply will be more balanced rental rates will not stabilize before 2008 – 2009 when the market expects arrival of large-scale projects of the new generation. The office market growth proceeds along with its segmentation and increasing decentralization: over the past years the share of class A and B offices outside Central Business District grew from 50 to 60%.

Business park projects planned on the outskirts of Moscow and even outside the Moscow outer ring road (MKAD) will only further strengthen that tendency. It is expected that in 2009 office buildings beyond the city center will account for 70% of the entire office stock. According to our estimates, within the next three years the share of business parks in the total volume of quality office space available in Moscow will increase from the current 2 to 6%.

In addition to the highly successful project Krylatskiye Kholmy – the only classic business center (situated outside the historic center and constituting a campus of low-rise buildings with convenient open-air parking areas, surrounded with greenery) in Moscow, in the course of the next 1.5 to 2 years the market expects arrival of Khimki business park (120,000sqm), developed by IKEA next to Mega Khimki, business park Greenwood (130,000sqm), on the outer side of MKAD between Volokolamskoye and Leningradskoye motorways, the first stage of which is to be launched in spring 2007.

September saw the beginning of construction of an ambitious project Zapadnyye Vorota (Western Gate) on Belovezhskaya Street in western Moscow. The project, slated to be completed in two stages before the end of 2008, will measure a total of 170,000sqm, according to the plan of the developer – the company Tsenturion.

It is worth noting that Moscow, albeit with a delay of many years, follows the world tendencies of development of business parks. The reasons for emergence of that office format are the same as in the U.S. and Western Europe. Various group of tenants for whom central location is not of utmost value seek to escape from the sultry atmosphere of the big city and at the same time save considerably on rent.

Tenancies at business parks are held chiefly by IT firms, telecom operators and pharmaceutical companies, i.e. those for whom an opportunity to rent a large office meeting world class standards (or an entire building) at reasonable rates outweighs a prestigious location.

Another advantage for the tenants, which may play quite an important role in the choice of an office, is availability of spacious parking areas. For example, the afore-mentioned Krylatskiye Kholmy provides 1 car-space per 40sqm of office space, the figure that is downright fantastic in terms of the center of Moscow.

Advantages for developers are obvious. Plots of land on the outskirts are cheaper and the overall cost of construction is relatively low. And with major Western hi-tech companies showing keen interest in large properties within business parks, developer can let them quickly and effectively to reliable tenants.

It should be noted that rental rates in business parks are usually 20 to 25% lower than in centrally located projects of the same grade, whereas large companies seek considerable discounts given large volume of space they plan to rent.

For comparison: in Western Europe and the U.S. the rent gap between centrally located office centers and business parks may be even larger, which is a result of a considerably higher supply. As Moscow’s market grows that tendency is likely to be spread in this country, too.

While the emergence of the business park format in the city is a natural consequence of the market evolution, high-rise development is an initiative of the city authorities who already in the early 1990s moved to create what was to become “the Moscow Manhattan”, despite the lack of experience, know-how, legislation and financing. Besides, there was no special need for such buildings in those days.

Today, the project Moskva City, which seemed unrealizable nearly a decade ago, gradually comes into being. The company Enka has completed the first two phases of the Bashnya Na Naberezhnoi (Tower on the Embankment); the construction of the third phase, measuring 100,000sqm is underway; development of Severnaya Bashnya (Northern Tower) is nearly completed by Severstaltrans company; Mirax is raising the tower Federatsiya (Federation).

Before 2012 Moskva City will see the launch of over 1.5 million square meters of class A office space, comprising such ambitious projects as Rossiya Tower, which is to become the new seat of the Moscow mayor’s office, the Transport Terminal, the Gorod Stolits project, etc. While in late 2005 Moskva City accounted for only 2.5% of the total volume of class A office stock in the city, as soon as in 3 or 4 years its share may rise to nearly one-third.

Unlike business park development, which is not difficult technologically, high-rise construction is fraught with certain difficulties, challenging even for highly experienced developers. To begin with those are problems arising during construction and operation, including installation of fire-safety systems, ventilation, heating, power supply, air conditioning and water supply, which cannot be solved simply by extrapolating analogous systems in buildings with fewer stories.

The problems of vertical transportation also play an important role. Managing such a high-end building is not an easy task; it requires assistance of international experts, as their Russian colleagues still have not gained necessary experience. Along with the need for ultrastrong materials, all that pushes up the cost of the project significantly. As building a skyscraper in phases is technically impossible, its construction requires consolidation of considerable funds, which may run into hundreds of millions of dollars.

Given the impossibility of gradual realization of the project raising cash on favorable terms may prove to be a difficult task. As a result, skyscrapers are notable for lower rate of return per 1 sqm as compared to usual buildings, although they do benefit from considerably larger volumes.

So what makes high-rise development so appealing to developers? One should not ignore the traditional reason for high-rise construction, which lies in the shortage and expensiveness of building plots, but in Moscow the considerations of image and prestige, too, have played their role. A skyscraper is a landmark project, which serves not only as to boost the image of the company who has built it, but of the entire city, embodying economic upturn and political stability. That is the reason why owners of office skyscrapers often charge rates, which are considerably above the market average, for appearance and prestige.

But there are evident disadvantages: longer construction periods, during which the market situation may change, costly maintenance requiring among other things competent coordination of human flows inside the building. A larger share of space should be allocated for technical facilities, which renders the layout plan less effective, along with smaller floor space.

Tenants seek space in high-rises, attracted by location in the center of commercial activity in a landmark project and a large number of offices. Negative sides are high rents, problems with parking and transport accessibility and safety concerns.

On the whole, Moscow tenants do show interest in high-rise complexes although not without caution, as Russian developers still have no experience in commissioning and operating skyscrapers. This experience will not be gained until the next year when the third building of the Bashnya Na Naberezhnoi project and the first tower of Federatsiya – the first true high-rises in Moskva City – will enter the market.

This piece was contributed to Vedomosti by Vladimir Pinayev, managing director of the company Jones Lang LaSalle Russia and CIS. The point of view of the author does not necessarily reflect the position of the editors.