Money Growing: A Hodgepodge for Investment Opportunities

“Commercial mixed-use properties are a norm for civilized real estate markets. It is hardly surprising that as the number of developers operating in St. Petersburg grows and the size of their projects increases the idea of mixed-use projects is becoming more popular. It is quite another matter that implementing such projects requires higher skills," says Boris Yushenkov, general director at Colliers International St. Petersburg.

“Creating multifunctional complexes makes it possible to break up the project into several zones and reduce the risk of illiquidity of each of uses. A successfully devised concept will bring about synergy meeting requirements both of the developer and the end-user. The demand for mixed-use complexes grows even as their clients are becoming more exacting as regards the range of amenities and services available on the site. For example, many office tenants attach importance to sports facilities, a certain range of shops, etc. An additional incentive is the shortage of building plots," says Irina Romanova, head of consulting at GVA Sawyer St. Petersburg.

“A decision on construction of a multifunctional complex is made depending on location of the plot, its size and configuration,” says Yuri Borisov, managing partner at IB Group. “But there may also be other reasons which are not always sensible. For example, such may be a condition set by a financial institution that provides financing for the development. One should bear in mind that mixed-use projects involve more complicated design solutions. Russian architects are not always ready to undertake those projects as they do not have sufficient experience even as regards to some of uses taken individually. The most common mistakes in the concept of such developments are flagrant incongruity between target audiences (for example, a prime office building featuring a grocery discounter store), failure to finalize various functional parts at the same time, intersection of customer flows (for example, where office guests mix with customers of leisure facilities), parking areas undivided between office visitors and shoppers, different opening hours for offices and shops, etc.”

Shopping at Work

The most common variant of a mixed-use is a complex providing shops and offices, with emphasis placed on either of those components. “This combination is neutral. They do not help each other but then they do not hinder either. Usually retail operators do not need separate offices that is why in most cases office tenants do not mix with retailers in any way. Prime business centers rated as class A and B+, given their location and status, are a successful place for boutiques, business souvenir shops, perfume shops and jewelries. A compulsory requirement for such respectable properties is separate entrances to offices and the shopping mall. For example, placing a reception area of a business center in a boutique zone is unacceptable,” holds Oleg Spivak, head of Becar Consulting. Namely this is how class A business centers at 25 Nevsky Prospekt (Atrium) and 38 Nevsky Prospekt are designed, with lower floors reserved for brand shops.

However until recently all those "motley” projects were rather an exception to the rule of general monotony. Today, practically all new commercial facilities located on bustling thoroughfares are mixed-use developments.

In early 2007 an office and retail center Regent Hall was launched at 21 Vladimirsky Prospekt. The 8-storied building measuring a total of 11,700sqm provides shops on the first three floors, restaurants on the fourth and class B+ offices on upper floors. “The decision on combining various uses was taken proceeding from economic effectiveness of the project. Admittedly, due to the growing competition in retail sector we reduced space initially allocated for shops. For the purposes of achieving synergy the mall was intentionally positioned as an office fashion center, attractive for tenants of expensive offices," says Andrei Shapovalov, general director at the property management company Regent Hall.

The former bookstore Dom Knigi at 28 Nevsky Prospekt has been converted into a mixed-use providing shops and offices. Stockmann plans a class A business center (measuring approx. 5,000sqm) on two upper floors of the mall and an underground car park at the corner of Nevsky Prospekt and Ulitsa Vosstaniya [street].

Ruric Management is set to raise a 40,000sqm office and shopping center at 57 Fontanka River Embankment, on the site formerly occupied by the printing plant Litera.

“The calculation here is quite simple. In case where the difference between office and shop rents decreases from lower to upper floors a business center is the better option. Besides, I believe that in view of the planned launch of new shopping malls in the Nevsky Prospekt area owners of some of operating projects will have to undertake redevelopment and redesign their upper floors for office use,” holds Alexei Shaskolsky, head of the real estate appraisal department at the Institute for Enterprise Issues.

The co-existence of shops and offices along busy motorways running close to the historic part of the city is not always successful. 2005 saw the launch of the River House complex on Prospekt Medikov, providing 11,200sqm of office space and 16,600sqm of shops. But given the specifics of location - with sparse residential build-up and no centers of attraction for city-dwellers, attendance rates are low despite the presence of popular anchors Ramstore, Sportmaster and M.Video. The owners are considering partial re-conception of the complex. The class B+ office center, on the contrary, has proved quite successful in this location.

Shops at Petrovsky Fort on Finlyandsky Prospekt have not been especially successful either, although the complex itself is rated as one of the city's leading office centers. "Various factors were at work here: those are the specifics of location and the fact that the property was originally seen as an office complex," says Konstantin Merkel, general director at Alliance Management. “As a result we were left with shops catering chiefly to our office tenants and their visitors. Services companies are also present, including a beauty parlor, railway ticket offices, etc. Last year the bowling alley closed down. Its owners had failed to achieve their revenue targets. We decided against looking for another leisure anchor, and redesigned those rooms as offices instead. On average, returns on office space at our complex are higher than the case is with shops.” Incidentally, offices at Petrovsky Fort are let at rates equaling the ceiling rate for class B+ offices and its occupancy stands at 100%, despite the large size of the property.

Semi-industrial territories, which are undergoing drastic overhaul these days, are more suitable for moderately-priced offices combined with specialized stores or strong leisure anchors. For example, a mixed-use featuring a class C business center Ressours (“Resource”) and a DIY retail center Zhelty Ugol on Prospekt Zhukova (Kirovsky District) was launched by Best Group. Class B office center Akvatoriya on Vyborgskaya Naberezhnaya [Embankment] features a leisure center with bowling lanes, restaurants, etc.

In recent years office and shopping complexes have appeared in commuter areas and at city exits. “Office zones in all of those projects are multi-storied developments as developers seek to secure maximum returns," says Yulia Drovyannikova, chief executive at Praktis Consulting & Brokerage. But it would be unreasonable to ignore the shopping potential of such motorways as Leninsky Prospekt or Ulitsa Savushkina [Savushkin Street] and not to use lower floors as retail zones."

A vivid example is Atlantic City – a mixed-use under construction on a 4.6ha plot in Primorsky District, between Begovaya, Savushkin, Turistskaya streets and Primorsky Prospekt. The company Atlantik has secured the right to develop the plot at a tender held by the city government. The project is estimated at $80 million. The 108,000sqm complex will provide an office tower 95 meters high, with 25,000sqm of class B office space, a 3-storied shopping mall (74,000sqm) and an underground parking facility providing 700 to 800 spots. The project will also provide an outdoor parking for approximately just as many cars. The mall is slated to be commissioned in 4Q 2007. Colliers International St. Petersburg is the leasing agent for the project. Anchor tenancies have already been signed with the supermarket chain Azbuka Vkusa and fitness centers chain World Class.

Adamant Group plans to undertake several mixed-use projects across the city. Last year the group acquired a 12,300sqm grocery and clothing market Zvyozdny in Moskovsky District where it plans to raise a multifunctional facility measuring over 110,000sqm and providing shops, offices and 30,000sqm of parking spots.

Two shopping and leisure malls comprising high-rise office properties are planned above new metro stations in Frunze District (Mezhdunarodnaya and Bukharestskaya). Office towers featuring retail zones are to appear near Ladozhskaya metro station, at the intersection of Engels Prospekt and Zanevsky Prospekt.

Outside the city, in the village of Shushary Adamant plans a mixed-use, 2km long, comprised of office and retail centers.

Challenging Hospitality

Mixed-uses combining hotels with shops and offices are less attractive for St. Petersburg's developers. Only a handful of such projects have been finalized in the city. Sometimes investors abandon their plans to pursue certain uses after the building works begin or even after construction is complete.

The first mixed-use built from scratch in the city, comprising a hotel is Neptun, at 93a Obvodnoi Kanal Embankment. The 24,500sqm project by JSC Rubin features a 150-room hotel providing economy and first class (3- and 4-star) accommodation, water sports center, bowling alleys, tennis and squash courts, golf simulators, etc. The complex also comprises a restaurants and class B office center (6,000sqm).

The project, finalized and fully launched in 2000, can scarcely serve as a typical example of a proper mixed-use facility. The developer pursued the goal of creating a self-sufficient complex with a practically universal choice of amenities.

An 8-storied mixed-use was launched in 2003 at 19 Vladimirsky Prospket comprising the shopping center Vladimirsky Passazh (occupying the basement and the first four floors) and Dostoyevskaya Hotel on three upper floors, with approximately 200 rooms. The corporation Elis acted as investor for the project.

“Basically, retail and hospitality functions do not mix well and even interfere with one another. The one to suffer most is the hotel as guests are not happy with shoppers bustling around. Such combinations are often brought about by specifics of location and encumbrances imposed by the government. Vladimirsky Passazh is an indicative example. The developer was granted the property on condition that it would house a hotel although the location was ideal for retail. The high-rise would have become a multifunctional facility anyway but the investor most likely would have opted for offices as hotel projects are complicated and costly, both in terms of construction and operation. As a result, Vladimirsky Passazh’s developer has tried his best to isolate the flows of hotel guests and shoppers from each other. Two separate entrances allow hotel visitors enter the mall, but there is no access to the hotel from the mall. As part of Vladimirsky Passazh's marketing campaign hotels guests are offered discount cards for shopping at the mall. But “bottlenecks” still remain. For example, instead of visiting a hotel bar guests go to the supermarket operating at the shopping center, thus depriving the hotel of projected proceeds,” Oleg Spivak explains.

The company Petromobil-Stroi abandoned its earlier plan to build a hotel as part of the multifunctional complex Rumba, raised near the metro station Kirovsky Zavod. Instead of a 3-star hotel that was to provide 110 rooms the project will comprise a class B business center (6,500sqm), slated to be finalized in 2Q 2007.

In late 2005 shopping and leisure complex Rumba, 4 to 5 stories high, was launched at the intersection of Vasya Alexeyev and Marshal Govorov streets, becoming the largest in the area. Two floors at Rumba are occupied by outlets of famous brands Intersport, Mexx, Naf Naf, Levi’s, Guess and others. The third floor houses a multiplex Kinomax and a food court. Sport Life fitness center is operating on the fourth floor. The complex provides a 130-sport parking area. Initially the developer had planned to launch a hotel on three upper floors of the complex. “However, the owner examined the risk of launching a middle-class hotel in a semi-industrial area and decided in favor of a business center. The location is favorable for an office property, given its proximity to the port,” explains Yuri Borisov of IB Group, the company that runs Rumba.

A 3-star hotel providing 85 rooms is planned as part of the mixed-use facility Lider (“Leader”) under construction on Ploshchad Konstitutsii [square] in Moskovsky District. The complex will feature a spacious 7-storied business center with shops on lower floors and a 11-storied hotel building, much smaller in size. The projected area of the property is over 30,000sqm with offices (class B and B+) measuring 14,000sqm and shops 8,500sqm.

The first stage of the project – the business center – is to be commissioned in late 2007. Shops are let to retailers while offices have been put on sale at 2,300 c.c.u. per 1sqm and over.

Praktis Consulting & Brokerage, which brokers tenancies and sale of units at Lider, reports that the developer StroiIndustriya M plans to give up the hotel project and build an additional office building instead.

But in larger projects combination of various uses is justified. For example, the company Adamant is planning a first class hotel providing 500 rooms (23,000sqm) as part of its mixed-use project Pulkovsky (a total of 150,000sqm). The complex will also provide 21,000sqm of office space, a 60,000sqm exhibition center, shops and leisure facilities. A hotel and office center will occupy two buildings 20 to 25 stories high, connected with passages on each floor.

The most interesting mixed-use comprising a hotel is under construction on Nevsky Prospekt. The plan envisages expansion of the operating luxury hotel Corinthia Nevsky Palace through redevelopment of neighboring houses into hotel facilities and a congress center. Two 8-storied buildings measuring a total of 25,280sqm will be raised on the site of dilapidated properties, which are to be pulled down.

One of those new buildings will provide 105 executive rooms and a conference facility with seats for up to 1,000 guests, and a boutique zone. The other building will feature a shopping arcade for 20 premium-class boutiques on the first two floors and a 7,730sqm office center on the upper six floors. The complex will be linked to a multi-level parking lot with 250 car spaces. The project estimated to by a Maltese group of companies Corinthia is to be launched in 2008.

Complex Structures

"A striking tendency of late is the launch of mixed-use projects focusing predominantly on cultural properties, such as New Holland with Palace of Festivals or Naberezhnaya Evropy (Europe’s Embankment) with Eifman Theater. They cannot survive on their own but play the role of anchors and community centers," Yulia Drovyannikova explains.

Those ambitious developments are in the early stages; meanwhile, as soon as by the end of this year St. Petersburg will see the launch of the first-ever commercial complex featuring a theater. The project, under construction in Petrogradskaya Storona district, is developed by a popular theater company Litsedeyi. Investors are a group of individuals.

The 23,400sqm complex, 9 to 13 stories high, will also house a class A business center (9,800sqm), a small shopping center (3,200sqm), Chaplin Club, several restaurants, an audio recording studio and an art gallery, according to IB Group, which acts as a consultant, broker and operator of the project. The seventh floor will feature a winter garden. The complex will have an underground parking area. The theater proper will measure 2,000sqm – on 4th and 5th floors of the complex and will have two stages with 400 and 190 seats respectively. The project is estimated at $30 million.

Last year several shopping malls with truly unique leisure facilities were launched in the city. The 28,000sqm mall Planeta Neptun (Planet Neptune) on Marat Street houses a 5,000-sqm oceanarium, comprising 32 aquariums. The mall also features a Perekryostok supermarket, an amusement park Dino Park and a shopping gallery. Visitors queue up to the shopping and leisure center Rodeo Drive, launched in December in the northern suburb of the city (Prospekt Kultury). Property experts believe it is too early to say whether such projects will prove successful and if city-dwellers who come to have a look at fantastic fish will offer financial support to local shops.

Projects combining offices and homes are gradually taking root in the city, too. For example, the 10-storied residential project Chkalovsky at 8 B.Zelenin Street, by Garant Stroi Servis, features a business center, shops and fitness facilities. Offices have been put up for sale. The residential estate Grand Capital also provides office space available for sale on the market.

Several office mansions are planned as part of Paradny Kvartal raised by the corporation Vozrozhdeniye Sankt-Peterburga (Revival of St. Petersburg).

Homes are planned at the mixed-use planned by Elis on Poklonnaya Gora. The 4.8-ha plot has been allotted for construction of housing, shops, restaurants, offices and parking areas.

“Universal mixed-use complexes combining commercial and residential functions are a tendency that has already become apparent in the West. Construction of properties where people live, work and shop is justified in view of economy of resources (land, energy, etc) and in terms of security, too," Oleg Spivak assumes.