Money Growing: Looking for a Place to Work

The size of St. Petersburg's office market is still incomparable with that of Moscow. Specialists at Colliers International St. Petersburg put the total stock of quality offices (rated as class A and B) in the city at 420,000sqm. Analysts do not have precise data on the volume and structure of office take-up and build their conclusions on the basis of applications submitted by prospective office tenants.

Percentage wise, the share of tenants seeking truly spacious units is still relatively small in the city. Becar Realty Group reports that only 15% of prospective class B office tenants seek units measuring 500sqm and over. The share of such applications in class A sector is higher, with nearly 20%. The most sought-after properties are units measuring 100 to 300sqm (40% of applications for class A and 27% for class B space).

However, as a rule operating office centers where occupancy rates near 100% have nothing to offer to major companies. That is why that sector is clearly suffering an acute shortage of space. A vacant property, even if measuring only 500sqm, is hard to find. But as to companies that require offices measuring 1,000sqm and over (and the number of such applicants is growing in the city), most of them are forced to give the idea of moving into a new home in the near future. Well-off applicants pin hopes on prime business centers under construction where units are usually rented out to anchor tenants before construction is completed. Developers are ready to offer their clients open-plan offices and do not restrict them in their requirements. As a result, practically all major office tenancy deals are made by the owners of new developments.

The city has already seen first examples of single-tenant office buildings. The symptoms of megalomania are especially noticeable in the sector of expensive class A and B+ offices. Affluent clients are ready to splash out on presentable offices. Quite often they calmly refute one of the main laws of sale – the larger the quantity the larger is the discount. This is not the case. On the contrary larger units are rented at higher rates.

Such a state of affairs is reminiscent of the early 1990s when inexperienced Russian businessmen tried to export cheap meat from the U.S. and Argentina, buying batches of 2 million tons in hope of large discounts and resell it at home. But those plans failed. Such enormous bids were sending prices on local markets up.

On the other hand, many landlords admit that working with anchor tenants is convenient and more profitable. Although, specific risks also exist.

Who Is Next?

The first prime office complex catering to major tenants was class B+ River House, launched in the spring of 2005. The project was financed by Moscow-based company Promsvyaznedvizhimost. The 12,000sqm business center at the intersection of Aptekarskaya Naberezhnaya [Embankment] and Akademika Pavlova Street was divided between eight tenants in the course of several months. Each tenant rented a unit measuring over 1,000sqm.

In 2005, properties at the new class A business center 38 Nevsky (6,700sqm of rentable space) were rented by Vebinvest Bank (2,500sqm) and KIT Finance, an investment bank (3,200sqm).

In 2006 tenants seeking large offices have finally been offered favored treatment by developers. Here are but a few examples of recent deals.

Last year’s record was set by Sun Microsystems St. Petersburg, a subsidiary of Sun Corporation. The company rented a 6,000sqm unit at Kellerman Center on 10th Krasnoarmeiskaya Street. The business center positioned as class B+ property is a refurbished building of the clothes factory Pervomaiskaya Zarya. The owners of the enterprise had decided to move the manufacturing facility to a new location and vacate the 1.6- ha site it occupied in the historic part of the city. The last workshops were withdrawn last summer. The project was initiated by David Kellerman, the company’s board member. The complex bears his name. The redevelopment was launched in 2004. Offices already put into operation measure a total of 15,000sqm. The developer plans to raise an office cluster providing 48,000sqm of space including a multi-level car park. The total cost of the project is estimated at $15 to 20 million.

The deal with Sun Microsystems St Petersburg was brokered by Maris Properties, a company affiliated with and a sole representative of CB Richard Ellis / Noble Gibbons in northwestern Russia. Sun Microsystems is one of CB Richard Ellis’ corporate clients.

The anchor tenancy deal has been signed for a term of five years. The tenant also acted as a co-investor, having spent a significant amount of cash on equipment and decoration of its offices. The size of rent is kept secret. At the time the deal was signed similar offices were let at $300 per 1sqm per year. Today, offices at Kellerman Centers are let at 480 c.c.u. (or “conventional currency units”) per 1sqm. “When we signed the deal the rates were not significantly below the market price,” says Boris Moshensky, Maris Properties’ general director.

“We needed such a large unit as our company is a research development center of the corporation, focusing on software development,” says Grigory Labzovsky, general director at Sun Microsystems St. Petersburg. “From the very start we hired a workforce of some 300 specialists and made provision for further growth. As a result, we ran out of space. In 2007, we plan to expand our office for another 1,000sqm. Acquisition of the building was not discussed as it is not conform to the strategy of our parent company. Property ownership is a separate business that distracts from core operations."

Finding such a large property in St. Petersburg was not easy, Labzovsky admits. Besides, the company had a number of specific requirements as to power capacity, load-bearing structures, etc. “Transaction processing continued for six months. Then we had to wait for another 12 months before the refurbishment was completed," Grigory Labzovsky recalls. The developer had to adjust the project to the anchor’s needs. As a result, the entire property was upgraded. For example, at the request of the tenant the builders have put in a centralized air conditioning system.

In late 2006, class A business center Langenzipen was launched on Divenskaya Street, in Petrogradskaya Storona district. The owner and developer of the project is the property management company Teorema. One of the largest prime office complexes in the city, Langenzipen provides 10,200sqm of rentable space.

Earlier, that spot was occupied by the Znamya Truda factory (Langenzipen Plant) – an 19th century architectural monument and an unfinished Soviet-era development. The manufacturing facility was closed down in the 1990s. Teorema acquired the factory properties in the spring of 2004. The redbrick factory building underwent redevelopment, and another building has been transformed into a stylish property designed by Sergei Choban. The building’s fa?ade is covered with 3D glazing with internal illumination and features digital images of Greek-Roman motifs. Even before the project was completed the developer let three floors (3,300sqm) to Baltinvestbank for 15 years. Other anchors are companies Sintez Development (2,000sqm), Evrosib (1,500sqm) and Doctor Web (1,070sqm).

The developer intentionally decided against dividing spaces into smaller units. “Major tenants have more stable performance and they usually pay on time. We do not offer any discounts to tenants who rent larger units. But if they wish to save they may have a unit with a basic fit-out where they can install partitions and lay wiring at own expense,” Boris Zhukov, general director at Teorema, explains.

All units at Langenzipen have already been let. Offices in the “glaze” building are rented at 18,000 per 1sqm per year; units at the historic factory building are cheaper, 12,600 rubles.

Other office centers commissioned in 2006-2007, with leases of 2,000 to 3,000sqm in place, are Gustaf (class A), Prizma, Rumba, Isten (class B), and others.

Office Without Neighbors

Major tenants willingly rent small office centers as whole. Class B Cerean business center has been rented by software developer Reksoft. The 3,145sqm property is a redeveloped shoe factory building at 10/2 Parkhomenko Street, acquired by the corporation Adveks-ROSSTRO; the business center is run by Adveks-ROSSTRO’s affiliate Adveks Trast.

Imperiya Group, a St. Petersburg developer of Senator chain of class A and B+ business centers, reported three such deals in 2006-2007. The chain comprises nine complexes measuring over 70,000sqm.

In late 2006 a lease at Senator at 10 Sadovaya Street was secured by Impexbank, which is part of Raiffeisen Group. The bank rented the entire 5-storied building (2,500sqm), near Nevsky Prospekt, for its head office in the city. The 5-year tenancy deal was signed before construction was completed.

The size of rent is kept secret. Smaller office units had been offered for rent on the market at 600 c.c.u. per 1sqm per year (1 c.c.u. = 33 rubles). Offices were transferred to the tenant on a turnkey basis. Specialized facilities such as vaults were fitted by the bank.

Another class B+ office building providing large office units is under construction by Imperiya at 37 Popov Street (Petrogradskaya Storona), on the site of a former manufacturing facility Rossiyanka. The investor purchased the 6,000sqm property of the factory that stood idle in 2004 and secured the right to lease the 1.8-ha plot of land beneath it. The new complex comprising rebuilt factory buildings and new developments measures 40,000sqm. Two factory buildings have been fully refurbished. One of those properties, measuring 2,100sqm, was rented by a company Naturprodukt last summer. Not long ago bank Russky Standart rented the second detached property providing 2,400sqm of space, for a period of five years. Properties there are let at 468 c.c.u. per 1sqm per year, according to official reports. Valery Khlamkin, Senator's management director, says that several applicants vied for that building. The demand for spacious office is generated namely in high-price range, he explains.

Building Corporation Vozrozhdeniye Sankt-Peterburga (Revival of St. Petersburg) is about to launch a unique product in the city. The company’s prime housing estate Paradny Kvartal, raised on a 10-ha spot near Tavrichesky Garden, will feature six detached office buildings, each 4 stories tall and measuring 4,600sqm, to be let long-term at rates that are yet to be set. .

Wholesale Benefits

“For a business center, as well as a shopping complex it is important to attract an anchor tenant who would enhance the property's image and mitigate risks. And then it is possible to allot smaller offices, as well," holds Sergei Igonin, managing partner at IB Group.

Most owners and property managers agree that major tenants bring higher proceeds. “Letting Cerean as whole has proved more profitable," general director at Adveks Trast Yelena Afanasieva admits. “Reksoft rented both offices and common space.”

That is the main argument in favor of large tenants. Those who occupy an entire floor (let alone an entire building) usually pay for offices proper, common use area and toilets at equal rates. Quite often such tenants hire cleaners themselves, unwilling to let strangers onto the premises.

Of course major tenants require special treatment and discounts. But against the backdrop of an acute shortage of large units they can hardly expect any substantial favors. “At most, they can count on a 5 to 10% discount off the base rate,“ says Marina Sharova, head of sales and advertising at Management Company PSB. “Deliberately undermining performance in order to attract an anchor is unreasonable." PSB runs several office buildings across the city including 38 Nevsky.

But then, major clients may count on other bonuses, such as additional spots in car parks. When negotiating the deal the parties take into account duration of the tenancy and costs of repairs and decorations assumed by the tenant. “Banks, for example, require additional spending for equipment of depositaries, vaults, cash offices, special fire alarm systems, etc. That is why the terms of payments are set on a case-by-case basis. Before discussing actual discounts we need to understand our client’s economy on the whole," says Khlamkin.

However, there are also certain disadvantages. Anchors are fastidious. “We have calculated that when looking for a major tenants one loses aproximately 50% of prospective proceeds at the stage of exposition," says Yelena Cherevko, deputy board chair at BCM Group. If an anchor moves out his departure deals a serious blow to the project's performance. “Of course, we take such risks into account and seek to offset it in our agreements.

For example, a tenant willing to move our is obliged to inform the landlord not later than six months before doing so. The agreement also envisages penalties and various compensation mechanisms," Sharova says.

“Of course, the demand for larger offices will grow. This is brought about by improving economic situation, expansion of operating businesses and emergence of new ones, arrival of operators from Moscow, other parts of Russia and foreign businesses. Offices measuring 500 to 1,000sqm have long become common in Moscow. We, too, will come to that," Alexei Chizhov, head of office real estate at Becar Realty Group, assumes.

Colliers International St. Petersburg anticipates a 15 to 20% increase in demand for prime office space in the city per year.

Andrei Lushnikov, board chairman at Best Group that builds and operates several office projects in the city, says: “Today many major international companies abandon their plans to launch branches in St. Petersburg failing to find suitable properties of 10,000 to 20,000sqm. They need properties available forthwith, not in several years, after the development is completed. That is why the market will calmly "swallow up" Gazprom's office towers and Marine Facade, as well as other ambitious office projects planned here. Thanks to them the market situation will eventually stabilize."