Guiding Lines: Skeptics and Optimists

Sale prices and rental rates will plunge, tenants will be hard to find and some of the previously built office centers will stand vacant while survivors will be drawn into a long and nerve-racking fight for the client. In short, soaring returns of today will become a distant memory. Time has now come to tap into other segments of the market, for example, shops or warehouses.

Considering those misgivings the perseverance of developers who continue to build new prime offices – seen as largely superfluous given their expensiveness – seems quite strange. The question is: what those romantics hope for?

Skeptics

By early 2006 Novosibirsk had 1.3 million square meters of office space, DSO Consulting reports. Built-to-suit office space measured 60,000 to 65,000sqm offices; newly built offices rated as class B and A measured up to 90,000sqm, while the stock of class C offices, including former production facilities redesigned for office use, stood at 850,000 to 900,000sqm. Other properties including first-floor properties in residential buildings accounted for a total of approximately 300,000sqm.

In years 2002 to 2004 about 20,000 to 30,000sqm of office space were launched; in 2005 that figure stood at 50,000sqm; nowadays, approximately 300,000sqm of offices are under construction in the city. Market operators registered a drop in returns as early as last year after the number of properties launched had increased only to 50,000sqm. Rates grew slower and payback periods increased. Making quick money became possible only at the expense of growing office prices.

Today it is obvious that once all the announced projects are finalized the market demand will be satisfied for years ahead. The most deplorable fate is in store for class A offices. They are too expensive for Novosibirsk to afford. Monthly rents are set at 1,500 rubles per 1sqm. Hitherto, none of class A business centers already built or under construction in the city has succeeded in letting space at such rates.

Even the Novograd business center, despite its prime location on the city’s main thoroughfare, was forced to lower the rent from 1,400-1,450 rubles to a more realistic level of 1,100-1,200 rubles per 1sqm per month.

Today, the total supply of planned class A office space has already reached 150,000sqm, which is thrice as high as the total volume of space commissioned last year. Developers pin hopes on major companies who generate demand for top class buildings in the city but most of them – Novosibirskenergo, MTS, Lanta Bank, Belon and Vneshtorgbank – have already raised offices for own use.

Class B offices are the most sought-after in Novosibirsk but their owners must brace for tough competition. Tenants, faced with a wide choice of properties, will grow fastidious, demand lower rents and extra benefits.

Optimists

Against that background, the projects by developers who continue to put up cash for new business centers look strange. In addition to RosEuroPlaza (27,000sqm, to be launched by RosEuroDevelopment in December 2006), the city’s class A office stock is expected to increase in the near future after the projects Greenwich (34,000sqm, Transservis, late 2007), Cobra (22,000sqm, Trud, 2007), a business center on Shevchenko Street (30,000sqm, late 2007, by Novosibirskmontazh) and ST Plaza by Moscow-based ST Group Region (45,000sqm, 2007) are finalized.

Novosibirskenergo’s construction arm Stroitel, currently raising a 55,000-square-meter class B office center, also plans a building measuring 20,000 to 40,000sqm. Class B offices are under construction by companies Sail (6,000sqm on Shamshins Street), Strug (14,000sqm on Kalinin Square), ISK Zayeltslovskaya and others. Authors of those projects are convinced that the demand for office space will grow each year, as businesses expand. The demand for offices is comparable to foreign-made car sales, which have exceeded the most optimistic forecasts.

Who Is Right?

Statistical reports by the Russian Statistics Committee prove that Novosibirsk’s economy is booming. By many criteria the region is far ahead of other Russian provinces. In the years 1999 through 2005 Novosibirsk’s gross regional product grew 75%, while the average growth across the country was only 45%.

A major role in regional economy belongs to industrial production, which accounts for 19%, followed by commerce (17%), transport (12%), while agriculture accounts for only 9%. During the same period the industrial growth amounted to 62%, whereas across Russia industry grew 44%. Capital investments grew 2.5-fold (80% across Russia). Retail trade increased 2.3-fold. Over the past five years economically active population grew from 1.13 to 1.217 million.

Incidentally, according to realtors’ reports, office spaces offered for rent on the market are taken up in two weeks on average and that period is not likely to increase. Most properties in business centers under construction are snapped up before the projects are completed. For example, RosEuroPlaza signed first tenancy deals in late 2005.

Almost half of properties at the former factory workshop redeveloped into a business center on Kalinin Square have been leased out. Ironically, back in the early 2000s when construction of business centers was only being launched in the city, some wondered: “Who needs those, everyone feels so comfortable in their apartments (redesigned for office use)!”