In-depth: Developer’s Dream – Shopping After Work

It should be noted that in the majority of cases it is necessary to distinguish between mixed-use projects, which became such because their developers sought to squeeze the maximum out of a relatively small but favorably located plot, and projects raised on larger sites, where developers are free to probe various uses within one and the same project. While a smaller site implies vertical division of a property into units for various uses within one building, a larger area allows horizontal placement, with the complex divided into several buildings. This latter scheme is considerably more effective.

Historically however, the former option was predominant in Moscow. The examples are Smolensky Passazh with 18,500sqm of offices and 22,400sqm of retail space on Smolenskaya Square, Berliner Haus (5,800 and 7,800sqm of offices and shops respectively) on Petrovka Street, Novinsky Passazh (36,700 and 10,500) on Novinsky Boulevard, etc. Among the recently launched major mixed-use projects there are Yerevan Plaza (10,300sqm of offices and 20,000sqm of shops) on Bolshaya Tulskaya and Sheremetievskoye Podvorye (13,200 and 9,500) on Nikolskaya Street.

Such projects are raised mostly in central locations where the shortage both of retail and office properties is especially acute. It is no coincidence that mixed-use facilities were among the first projects built in the city for the purpose of letting. Among those are the World Trade Center on Krasnopresnenskaya Embankment, built as far back as 1979 and Galereya Aktyor launched in 1996 on Tverskaya Street, with 8,900sqm of offices and 2,900sqm of shopping space. It is also worth mentioning hotels run by international hospitality operators, launched in the early 1990s. Take for example Radisson Slavyanskaya, providing – in addition to hotel rooms – spacious office and retail facilities.

Against the backdrop of the underdeveloped office property market of the 1990s such projects were destined to succeed practically irrespective of their quality, concept and location. Today, as both the supply of office space and tenants' expectations grow the situation is changing. On the one hand, even more ambitious mixed-use projects are being launched in the city; on the other, more and more attention is being attached to the concept, so as to achieve an optimal combination of various uses, their synergy and as a result to enhance the market value of the entire property.

One of key reasons why developers decide in favor of multifunctional construction is the desire to distribute risks between various uses – offices, shops, hotels and homes. For example, apartments pay back sooner than commercial properties, but on the other hand commercial properties are believed to be more substantial… But a poorly thought-out combination of different uses may create additional risks as various users quite often set conflicting requirements as to location, layout, transport and pedestrian accessibility.

For example, the key requirement for a shopping mall is a busy location with large car flows. For homes such a location is rather a disadvantage, while for offices it may be either positive or negative depending on the concrete address. Offices built at the center of commercial activity, in proximity to offices of their tenants’ clients and partners enjoy an advantage, while for shopping centers a proximity to other retail projects spells tougher competition. As a rule, office tenants set stricter requirements as to reputation and prestige of the area, while retail operators are more flexible proceeding chiefly from the size of coverage area and population density, which is the key to future attendance, and adjusting the concept of their shops to those factors. International brand hotel operators are also rather exacting. In most cases, a central location is their key requirement.

Proximity to class A office buildings may enhance the status of the mall, patronized by high-income earners. At the same time, few office tenants will be happy to share the building with retailers if, for example, the office zone does not have a separate entrance. This is the reason why mixed-use projects require a thorough elaboration of concept, implying division of customer flows.

In addition to a variety of requirements as to the plot, it should be noted that the type of use has an impact of the structural characteristics of the building proper - ranging from ceiling height to bay spacing and placement and quantity of lifting pipes. Another challenge is the issue of parking spaces. Ideally, parking facilities reserved for office tenants, mall customers and/or residents should be separated from each other, which is not always possible, for example in central locations with a relative small floor area.

How could a single project meet all those requirements? Most importantly, one should examine the potential of the available plot realistically. Construction of a mixed-use may serve as an instrument of risk diversification but its performance will depend strongly both on the demand/supply dynamics and size of rents. For example, given the 30% loss factor in retail where the percentage of space “lost” to common use areas is larger than in offices (10-20%), emphasis on the former should be made only as long as the developer is certain that even in 5 or 10 years the site will preserve the status of a prime shopping location and redesigning it for a different use adjusting the project to changes in the market situation will not be necessary. On the other hand, the prospects of high rental proceeds from retail space stimulate inclusion of shops in the project, which in different market condition would provide only office space.

Such a choice between various components in a mixed-use is relevant only in case of relatively small plots in central locations. If the project is to be implemented on a larger territory, being a mixed-use it may pay back sooner. After all, when putting a large property providing only offices or only shops on the market, the developer faces additional risks. A good example of a mixed-use is the Metropolis office and retail project by Capital Partners, under construction near the Voikovskaya metro station on Leningradskoye Shosse, not far from the spot where the motorway will intersect with the future Fourth Ring Road.

The 14-ha territory is allotted for construction of three class A properties measuring a total of 112,000sqm (incl. 80,000sqm of rentable space) and a high-grade shopping and leisure mall (80,000sqm). The total area of the project is 325,000sqm. What makes Metropolis unique rather than its size (as some of the mixed-use skyscrapers under construction in Moskva City are scarcely smaller in size) is that office and retail zones are isolated from each other, which became possible because of the large size of the plot. No less importantly, the entire project is perceived as a single property which makes it more attractive for investors.

Offices and shops function independently from each other, but their proximity results in synergy. Offices at Metropolis will employ some 8,000 people, who of course will patronize the mall. In fact, here we witness a combination of two independent projects, which considerably improves its chances to attract investors. The proof of that is the recent acquisition of the 50% stake in the Metropolis mall by Rodamco Europe N.V., the largest mall investor in Europe. It would have been much harder to arouse the investor’s interest in the project if shops and offices had been operating there under the same roof. With no clear-cut distinction between various uses within a building the project loses its liquidity. The number of would-be investors shrinks, as well as the developer’s chances for further refinancing.

As Moscow market grows new ambitious mixed-uses will appear in the city. Construction of commercial properties on vacated plots may reduce developers' risks, especially against the backdrop of rising land prices. For a mixed-use developer, if his project is to succeed in long-term, it is highly important to be able to visualize his end-product, who its consumers will be, and to what extent it will meet expectations of prospective investors.