Money Growing: Front Office Priorities


Living Apart

Andrei Bushin, head of commercial real estate and development at Miel Nedvizhimost, says that many prosperous companies operate both a head office in a prestigious central location and the so-called "back offices" where the majority of employees are seated. Back offices are often located beyond traditional commercial zones of the city where it is much easier to find a property meeting the company's requirements.

Valekh Rzayev, public relations director at Forum Properties, separate placement of company departments across the city is common in other countries, too. For example, companies in the U.S., especially media businesses, optimize office maintenance costs by organizing remote work desks. This has become a ubiquitous practice. “At such companies a head office is where only top executives, secretariat and financial services are seated, while all other employees work at home communicating with the office via the Internet and telephone," he says.

“Correlation between the size of headquarters and auxiliary offices is between 1 to 5 and 1 to 10, on average,” says Bushin. Andrei Zhamkin, senior commercial real estate analyst at Blackwood, says that quite often companies take up additional space as their head offices are no longer able to accommodate all their employees.

“Banks and insurance firms widely practice division of their offices into headquarters and auxiliary branches," says Irina Kirsanova, head of marketing and consulting at Astera Oncor. “Practically all of them run centrally located head offices and plenty of branch offices across Moscow. As regards banks, for example, the division into a network offices is considered the most efficient model.”

Andrei Petrov, head of office real estate at Knight Frank, points out that banks have a number of special compulsory requirements office space must meet irrespective of their status – a head office or a back office – and location. In particular, those are strict security requirements, which forces banks to acquire detached buildings for their head offices.

The best example is that of Raiffeisen Bank’s headquarters on Smolensky Boulevard. The building is located on the Garden Ring, facing the road which makes it perfectly visible from the street. A successful location enhances the image of the building owner. In addition to the head office, Raiffeisen runs many other offices throughout the city.

Citibank’s head office is on Ulitsa Gasheka (Gashek Street), whereas the company’s call center and credit card issue and customer services units occupy an office building near Kaluzhskaya metro station (Profsoyuznaya Street). Uralsib, VTB and Gazprombank also run their head offices in the center and a citywide network of branch offices.

The majority of companies who generate demand for office space outside the city center are those who seek to optimize rental costs by moving their back offices elsewhere. Those are, for the most part, medium-size and large domestic and international firms.

MTS has its headquarters in Izvestkovy Pereulok [side-street], Taganka District, and rents space at Semyonovsky business park (Bolshaya Semyonovskaya Street) for its auxiliary offices. The company IBM rents space in Bashnya Na Naberezhnoi, or Tower on the Embankment, at the Moscow International Business Center Moskva City and plans to launch an auxiliary office at Krugozor business center (Obruchev Street).

Marina Stupakova, head of marketing at United Realty Group, says that while major insurance firms Reso-Garantiya, Standart-Rezerv, Ingosstrakh, Alfa Strakhovaniye have chosen busy central locations for their head offices, their units in charge of payments and claims were moved to more remote parts of the city, for example, to the districts of Biberevo and Biryulyovo.

The consulting company BDO Unicon runs a front office at Paveletskaya Plaza business center and a back office on Kashirskoye Shosse.

Viktoria Manzyukova, head of corporate services at Cushman & Wakefield / Stiles & Riabokobylko, believes that when splitting up their offices companies proceed not only from considerations of cost saving. The tenant’s line of business also needs to be taken into account. IT firms, for example, have to bear in mind that once installed specialized hardware cannot be easily moved to a different location.

The expert believes that while far from all companies venture on spinning off a front office such an option is worthy of consideration by tenants seeking properties measuring 2,000sqm and over. Office properties raised in stages in remote locations offer tenants a possibility not only to cut down on property costs but also expand rentable space as their businesses grow. “Given the limited quantity of building plots in central locations new developments are designed to provide the maximum possible area, with no option for future expansion, in which case if the tenant takes on more workers the company will have to move,” she notes.

Yekaterina Kutumova, regional market and public relations director at Colliers International, says that while major Russian firms usually run head offices and rent auxiliary offices, major international companies, on the contrary, rent or even buy large properties in newly-built complexes or even in projects under construction, seeking to consolidate all their units. The examples are Deloitte, Henkel and Procter & Gamble.

The company Vimpelcom has recently made a revolutionary decision to move its HQ to Ermitazh Plaza, a prime 38,000sqm business center developed by Forum Properties on Krasnoproletarskaya Street, where all available spaces have been rented for the purpose, Valekh Rzayev has reported. “Having their units scattered across the city is not good for companies' operations, especially for major companies with strong bureaucratic traditions," he adds.

Office for a President

As the market grows the supply is becoming increasingly more structured. Developers undertaking new office projects determine, as early as during the concept stages, the type of offices their project will provide. That helps avoid unwanted spending during building works and use the potential of the plot to the maximum. “Later on, when promoting the project on the market the developer offers a sort of a clue to the tenant as regards the designated use of the business center," says Alexander Novikov, head of office real estate at Prime City Properties.

“The main requirement head offices are to meet is that of presentabilty,” says Sergei Lobkaryov, head of commercial real estate at MIAN Realty. Companies launching their HQ do so seeking to enhance their image in the eyes of their partners. An HQ building is “the signature of the company” that shapes their clients’ opinion about the company's reliability and strength, Irina Kirsanova says. Companies seeking to maintain their image are more likely to rent space in centrally located prime business centers.

“For the most part, corporate HQ are detached buildings rented by a single tenant," Andrei Zhamkin says. Andrei Bushin notes that a head office may also rent space at class A business center, occupying upper floors, if possible. Preference is given to central locations within Garden Ring, with special emphasis placed on the areas along Tverskaya Street. Of equal value are the spots near the Kremlin and in Zamoskvorechye District.

No HQ building would do without high-end engineering and communication systems in place, top quality finish, developed amenities and a multi-tier security system, Andrei Petrov says. Other requirements include a professional international property manager running the building, as well as guarded open-air and underground parking facilities.

“A business center should provide a spacious stylish foyer, high-speed elevators, wide corridors and large windows and be fitted with top quality and expensive materials,” says Alexander Novikov. “All those factors produce due impression on visitors and underscore the high standing of the company.”

The majority of prime business centers rated class A and A+ meet these requirements. Baltschug Plaza (on Baltschug Street) has won special acclaim among property consultants. Originally custom-built for Sibneft HQ, the project became available on the open market after the property had changed hands. The complex comprises four buildings including three refurbished historic properties and a new construction, and measures a total of 30,000sqm. Two smaller developments measuring 1,500 and 400sqm house a posh restaurant, an upmarket florist’s and a jeweler’s store.

Baltschug Plaza provides 17,000sqm of office space. The complex features an impressive foyer and an atrium. Interior space is fitted with marble, granite, Venetian stucco and valuable timber. The general access area accounts for some 15% of the entire complex, which is quite a lot for a class A property. For the purposes of providing uninterrupted power supply the complex operates two diesel-powered generating units.

Among top quality business centers used as corporate HQ are the 24,300sqm Central City Tower on Ovchinnikovskaya Naberezhnaya [embankment], Romanov Dvor II (26,000sqm) in Romanov Pereulok [side-street], Berliner Haus (8,000sqm) on Petrovka, Evropa Khaus (Europa Haus) in Kolokolnikov Pereulok and several others, Praedium’s analysts report. .

Companies looking for offices for their HQ could take interest in the class A business center Savinski, currently under construction near Savvinskaya Naberezhnaya. The project, slated to be launched in late 2007, comprises two developments measuring a total of 28,320sqm – a 9-storied office building providing a two-level underground parking area for 300 spaces and a detached block designed to house leisure facilities and a restaurant. Both buildings form a closed internal courtyard. Upper floors have a panoramic view of the Moscow River.

The office complex Four Winds Plaza (31,000sqm), prestigiously located on Tverskaya Yamskaya Street near the hotel Sheraton Palace, is positioned as a class A+ business center. Built with the use of top end know how, engineering and security systems, the building provides a three-tier car park, a restaurant, sports facilities and shops.

Alexandra Kadchenko, deputy head of research and analysis at Praedium, says that as the demand for top quality office space continues to grow stably and exceeds the existing supply it is quite difficult to find a property for corporate HQ. Many properties available on the market now are to be finalized shell&core no sooner than later this year. For example, Citydel II is slated to be commissioned in 2Q 2007; the first stage of Severnaya Bashnya is to be launched in 1Q 2007, while White Square Office Center will be launched in 4Q 2007.

“At the moment there is but a handful of office properties that near completion that is why today we witness many preliminary tenancy deals,” Yekaterina Kutumova agrees. “Up to 12 months and over, depending on the size of the project, may elapse before the tenant is able to move in.” Given the shortage of building plots in the capital and scarcity of new offers, finding a top quality office space is becoming increasingly difficult, Andrei Zhamkin agrees.

Irina Kirsanova says that prime offices in Central Administrative Okrug [district] remain the most sought-after properties. Applications for such properties received by Astera in the first half of 2006 accounted for 31.4% of all requests; requests for properties in northern and northwestern parts of Moscow made up 7.3%, while 7% of applicants sought space in the south and eastern districts. “Those figures have not changed as compared to 2005. Finding a suitable property for a head office is far more complicated than renting an office in a remote location," she notes.

White Collar Migration

The key objective of setting up a back office is to optimize property rental costs. That is why, Alexander Novikov notes, units that do not function as HQ and receive no visitors, are housed in business centers operating outside the Third Ring Road where rent per 1sqm is $200 to $400 lower than in the city center. As a rule, back offices are far more spacious than HQ, and may measure up to several thousands of square meters for larger companies. “The most convenient locations for back offices are business parks, industrial estates redeveloped into office properties or large class B business centers,” he says.

Convenient transport access or possibility of organizing a shuttle service to and from the nearest metro station are the criteria that play an important role in choice of location for a back office, Andrei Petrov says. Availability of parking facilities is no less important but while head offices require underground car-spaces ensuring safety of top executives' luxury cars, back offices could as well make do with open-air car parks with marked spaces; availability of a guarded car park is welcome. .

Other requirements include open plan, enabling the tenant to change the layout and create the required number of work spaces, says Yekaterina Kutumova.

However economical, a back office must be comfortable and effecient, holds Alexander Novikov. Importance is attached to top quality engineering although expensive high-end systems are not absolutely necessary. Economy is achieved through a more efficient use of office spaces. In competently designed buildings usable space loss factor does not exceed 7 to 9%.

“Considering that back offices are responsible for considerable data flow high-speed uninterrupted communication is essential,” Andrei Zhamkin adds.

Analysts believe that the most suitable properties for working units of companies are class B business centers. Praedium's consultants cite Dmitrovsky business center on the highway of the same name (Dmitrovskoye Shosse) as an example. The building measuring a total of 14,000sqm provides an open-air parking area for 300 car spaces. Semynovsky business park (19,000sqm) features a 200-space car park. The technology park Orbita on Kulakov Street, measuring a total of 6,000sqm, offers 50 car spaces.

A number of business parks built along and beyond MKAD(Moscow outer ring road) have entered the market recently. The first stage of Greenwood is to be launched in 2Q 2007; IKEA business park is to be finalized this year. Greenwood offers a choice of buildings with open plan layouts for large firms. The complex features a developed network of public amenities, including hotel rooms. Remarkably, Greenwood’s tenants are entitled to 1 car spot per 40sqm of rented space.

Viktoria Manzyukova believes that finding a property for auxiliary offices is relatively easy, with projects designed to meet their requirements being built far more rapidly on the outskirts where the supply of building plots is higher. But even there the demand exceeds the existing supply, Sergei Lobkaryov notes.

Rewarding Equilibrium

The difference between office rents in centrally located class A office projects and class B offices in the suburbs is what makes the idea of a back office effective, Andrei Petrov explains. “While the cost of a head office may run into $800 to 1,000 per 1sqm per year, operating costs and VAT excluded, in more remote districts properties are available at$400 to $500 per 1sqm per year," he notes. On rental costs alone the tenant may save 30 to 50%, Andrei Bushin says.

Offices at Baltschug Plaza are let at $1,000 to $1,400, Central City Tower’s rates are $800 to $1,000, Romanov Dvor II lets space at $1,500 per 1sqm per year; rental charges in class B office centers are considerably lower, for example, Krugozor lets space at $525 to 600, LeFort at $450, IKEA business park $400 to 450, and Greenwood’s offices are offered at $320 to 50 per 1sqm per year, Knight Frank has reported.

One of the banks in Moscow, with HQ near the Kremlin, is currently looking for a 10,000sqm property for an auxiliary office, says Andrei Zhamkin. “It is easy to calculate the effectiveness here: offices near the Kremlin are let at $1,200 to $1,500 per 1sqm per year; the rate for a standard class A office is $800 to $900. Thus, the tenant may reduce his office maintenance costs nearly by half," he concludes.

“Today we are processing a number of requests from tenants seeking space for their back offices outside the Third Ring Road and even beyond MKAD," Marina Stupakova reports. “Two of those applicants are IT companies, who seek properties that may be reequipped as high-tech buildings. Both companies plan to keep their centrally located head offices measuring between 300 and 500 square meters, housing customer services, sales and marketing departments. According to their estimates, those tenants may reduce their rental costs nearly by 50%.”

Banks tend to buy buildings used as company HQ instead of renting them, as such properties are usually selected painstakingly and with an intention to stay there for years to come; very rarely, their owners undertake relocation. “It is worth noting that acquisition of a building to be used as a company head office is connected with the permanently growing market value of such properties, provided they are located in a prestigious commercial district of the city,” Andrei Petrov explains. For example, Raiffeisen Bank acquired the Smolensky Boulevard mansion at $3,000 to 3,500 per 1sqm. Two years later its price stood at $8,000 to $9,000 per 1sqm.