Money Growing: From a basement office


In truth there are a lot of projects at the stage of realization. The first premises will start to be built in 2007-2008. The most promising developments are the construction of business-parks and multifunctional complexes just outside the MKAD in the northwest, and also on areas by Sheremetyevo and Domodedovo airports.

According to experts, the current volume of operating class A and B office space is 400,000 to 600,000 sq.m. The such wide range in volume can be explained by the fact that offices are not only located in business centers and business parks, but also within warehouse complexes, hotels and shopping centers where the area of actual office space is not always separately defined.

Quality and Quantity

The majority of premises used as offices in the Moscow region are buildings of former scientific research institutes, factory buildings, enterprises of various economic orientation, and uninhabited premises and basements in apartment buildings. Only some premises have been reconstructed and transferred to the category of business centers. According to Aleksandra Kadchenko, deputy head of the department of research and analysis at Praedium, the largest office premises in Lyubertsy is the class B "Na Krasnoi" business center which was formerly the administrative building of Ukhtomsky Factory. Edward Apsit, general director of Facilicom, says that the class B "Don" business center is also a reconstructed factory building. Vladimir Zhuravlyov, director of the department for commercial real estate and investments at NAI Global, also notes that in Naro Fominsk they changed the administrative complex of Naro-Fominsk silk factory into office premises.

There are few new office complexes in the suburbs of Moscow. According to Andrei Malkov, a junior analyst at the department of office research at Cushman & Wakefield/Stiles & Riabokobylko (C&W/S&R), one of the first modern high quality offices outside the MKAD was the class B+ Country Park business center constructed at the beginning 2004.

"New projects located in towns outside Moscow, as a rule, are small buildings with areas of up to 5,000 sq.m," says Vladimir Zhuravlyov. "The realization of some projects are complicated by delays in receiving documentation. For example, the construction of the Olympus business complex in Korolev has been frozen for 3 years."

New Quality agency divides office real estate for rent in the Moscow region into six classes: A, B, C, D, E and F.

Class A business centers are mainly those still under construction (Khimki Business Park, Greenwood, Residentsiya, etc.), with the majority of them located just outside the MKAD. Outside the MKAD is still considered outside of Moscow, but buildings constructed or under construction here or 1-3 km from the motorway are oriented first of all to tenants from the capital, namely large Russian and international companies," Paul Lebedev, vice president of RIGroup says.

Class B and B+ offices in the outskirts of Moscow can be both new or reconstructed premises. One of the first and largest was Country Park in Khimki with a 18,000 sq.m commercial area.

Class C offices are mostly buildings constructed no more than 20 years ago, or are premises after repair. These areas are demanded by regional companies, which, having reached a certain level of success, aspire to improve the working conditions of their employees and their own image.

Class D office premises are located in buildings of scientific research institutes or on the territories of former or operating industrial enterprises. The usual tenants of such offices are representatives of local, small and medium sized businesses working in the services or administrative sphere of manufacturing or trade: pharmaceutical companies, architectural and design workshops, advertising agencies, printing houses etc.

The most widespread are class E and F premises. These are basements and uninhabited premises on ground floors of residential buildings.

The Economies of Rent

Renting an office in the Moscow suburbs is noticeably cheaper than in Moscow. Depending on the distance from the MKAD and the prestige of the area, the rental rates of office premises can vary from $150 to $500 per sq.m a year (not including VAT). According to C&W/S&R, base rental rates in the Greenwood business park are $300 per sq.m a year, in Khimki Business Park are $450, and in Country Park are $530. "Among office complexes situated near Moscow there are also a few records: for example, rental rates in the Residentsiya business center located in the Rublevskoye enclave, match those in the center of Moscow and are in the range of $700-$1,500 per sq.m a year," says Michael Gets, vice president for strategic development at Blackwood.

But in towns in the Moscow suburbs rental rates, in the opinion of experts, do not always correspond to the quality of the premises, and the range of prices is great. For example, in Balashikha, according to New Quality, the range of rental rates for class D offices is from $175 to $462 per sq.m a year, and in Korolev class F premises are offered from $120 to $360 per sq.m a year. According to Vyacheslav Limonov, general director of New Quality, often uninhabited premises on ground floors of new buildings without furnishings are more expensive to rent than more equipped office premises in buildings of scientific research institutes or on the territories of factories. "This can be explained by the fact that tenants, and as a rule, smaller firms rendering services to the population, are attracted to being in close proximity to new residential buildings and therefore the potential for clientele," he argues.

Paul Lebedev says one of the central problems for the developer who has decided to build office real estate in towns outside Moscow is forecasting rental rates. This is connected with the absence in the market of similar office areas, and, for example, with local tenants not being prepared to calculate the rate using the triple net system (the base rate without taking into account additional charges), that for a long time has been standard in the Moscow market.

According to research by RIGroup, the base rental rate of office centers is $200-$350 per sq.m a year. For example, the rental rate for a business center in Klin starts at $290 per sq.m a year, in Sergiev Posad from $300 and in Serpukhov from $310. A feature of the market outside Moscow is the desire of businessmen to rent premises furnished, whereas in Moscow the norm is for shell and core.

Changes are coming

According to Anton Korotayev, a leading analyst at consulting company Russian Research Group (RRG), the office real estate segment essentially lags behind in terms of development compared with shopping centers or warehouses. Unlike the commercial real estate market as a whole, demand for office areas is less than supply. And this is where the Moscow region differs from other regions.

The fact is that in the last decades the majority of inhabitants of towns in the Moscow region work in Moscow firms, explains Korotayev. Large companies have not developed in the Moscow Region, moreover, the solid "regional" companies aspire to organize representative offices in the capital. And small firms do not require class A or B premises.

Alexander Novikov, director of office real estate at Prime City Properties, says that the cause of low demand for high quality offices in the region is insufficiently developed infrastructure, transport, hotels and recreational areas. "Tenants in Moscow do not yet wish to go outside of Moscow, in fact their partners and clients, generally have offices in Moscow," he says.

But in the process of business activity moving to the periphery of the capital and to the suburbs the probability of being relocated is growing. The main criterion in choosing an office is the balance between the quality of the rented area, the services received and the rental rates.

Despite lagging behind, the number of offices being constructed in the suburbs of Moscow is growing. Experts believe that the Moscow region will never compete with the capital in terms of the quantity of high quality office areas, but nevertheless can see certain prospects. The territorial features of the region, the close proximity to the capital, and the improved transport communications allow the development of commercial real estate that in Moscow would be difficult, firstly owing to a lack of land.

According to Andrei Malkov, the construction of business parks is one of the main trends of development of office real estate in the Moscow region. "By world experience, this format, as a rule, is the most demanded outside megacities where the ground is much cheaper and there is the opportunity to create a complex of buildings of various purpose - from industrial to housing."

Natalia Moskalenko, the deputy director of the office real estate department at Colliers International, explains that by moving to a business park outside the MKAD, companies have the opportunity to cut expenses on rent, while simultaneously improving conditions for the organization of the business.

Vyacheslav Limonov considers the construction of business-incubators as a future trend In the Moscow region. "Business-incubators focus on granting premises to enterprises that are mastering new kinds of manufacturing or production and have good infrastructure for manufacturing," he explains. According to Alexander Novikov, the construction of business-incubators, in particular in Dolgoprudny and in the Stupinsky district In the Moscow region, is part of the plan for the development of the Moscow region and at a legislative level (amendments to the law "About the regional target program of development and support of small business in the Moscow region for 2004-2007") has been approved by the Moscow Region Duma.

Andrei Bushin, director of management of commercial real estate at Miele, pays particular attention to the construction of small office complexes in science towns - Dolgoprudny, Dubna, Pushchin and Korolev - where so-called offshore programming (the development of software for foreign customers) is being developed. "Here the greater role is played by the anchor building, usually a well-known higher education institute around which the whole infrastructure is built, for example, MFTI in Dolgoprudny," he says.

The brightest trend, in the opinion of experts is the construction of multipurpose complexes where office premises are combined with other kinds of commercial areas in the Moscow suburbs. These are office-shopping centers, office-warehouse complexes, office-housing complexes and hotel-office complexes.

Kupon will construct the Kupon-Istra industrial park on a 34-hectare site close to Istra (40 km from the MKAD from Novorizhskoye shosse). The total area of construction will cover almost 170,000 sq.m, 100,000 sq.m of which will be for an industrial-logistic zone, 50,000 for industrial premises, and almost 20,000 sq.m for an office zone including a number of premises for social purposes and a technology service center for the park. The total amount of investments in the project is expected at $70 million.

The Domodedovo industrial park is under construction on a 10-hectare site, located in an industrial zone of the airport, 14 km from the MKAD and 10 km from the airport. The total area of the project is almost 50,000 sq.m, of which 38,500 will be used for warehousing and 7,500 sq.m for office space. The cost of construction is estimated at about $25 million.

Serious interest

Currently in the Moscow region the quantity of projects under construction and those announced to be constructed having an office component, is estimated in the tens. Experts explain the arrival of developers to the Moscow suburbs by easier procedure to obtain land plots, especially when it is a question of large projects, among other things. For example, IKEA has received 11 hectares of land for the construction of Khimki Business Park.

According to Michael Gets, the most actively developing part of the Moscow suburbs is the outer edge of the MKAD in a zone by Leningradskoye shosse. "Large scale construction in the region of 1.8 million sq.m is taking place in the Myakininskoi district on an area of the 65th-66th km of the MKAD," he says. According to Novikova, developer Crocus Group plans to construct offices on a 1.5 million sq.m land plot on the 66th km of the MKAD and RIGroup is building a class A business center with 105,000 sq.m of office space also in the Myakininskoi district not far from where OSK is building a 83,360 sq.m business center.

RIGroup regards the Myakininskoi district a successful place for construction of class A offices. A center of business activity is forming here and there will be an administrative-social center of the Moscow region. "The site predetermines a special group of tenants," Lebedev says. "Potential tenants may be foreign and Russian companies that have manufacturing in the Moscow region, commercial structures working with the government of the Moscow region or large international companies who have frequent fliers." The building currently under construction by RIGroup will have 22-25 floors and is planned to be handed over in the second quarter of 2009. The building will have offices, banks, bars and cafeterias, a conference hall, customer service center, and underground parking for more than 1,200 cars. Total investments in the project will stand at more than $150 million.

A little bit further, on the 71st km of the MKAD, between Leningradskoye and Volokolamskoye shosse, Greenwood business park (130,000 sq.m) is being built by Coalco together with the Moscow Consultation Centre. The complex will have 13 office buildings, hotels, apartments and entertainment facilities. Investments in the project will total almost $150 million and the first phase will be ready in 2007.

Country Park business center (first phase - 18,000 sq.m) in Khimki is continuing to be built by Race Communications. Nearby Michaniki Russia is building a high-altitude office-hotel complex with an area of more than 150,000 sq.m. Platzdarm Development has started the large-scale project Khimki-City, where the class B office part will measure almost 100,000 sq.m Khimki Business Park, 100,000 sq.m of class A offices is a project of IKEA. The international business center Sheremetyevo (35,000 sq.m) is to be constructed by a company by the same name. Sherrizon office-hotel complex is to be realized by companies Citi-Hotel and Moskva.

According to Tigrana Aleksanyana, general director of Platzdarm Development, the site for Khimki-City was chosen because the Leningradskoye shosse connects the two Russian capitals, and also the prospects of building a tariffed high-speed road and the close proximity to Sheremetyevo international airport. The project was developed under a site measuring 17 hectares, of which the developer now has 12 hectares under its control (the land is being long-term rented from Joint-Stock Company "Football club "Khimki"). negotiations with the owners of the remaining 5 hectares are continuing, Aleksanyana said, though refusing to name them. The decision of the Khimki administration, allowing the company to design the project of the complex, was made at the end of the last year. Khimki-City's total area will be more than 350,000 sq.m of which 100,000 sq.m will be office space. The company plans to start construction on the site in the autumn of this year, and complete it in 4-5 years. The volume of investments is more than $500 million. "Negotiations with VTB and Deutsche bank are currently in process on the financing of the project," said Aleksanyana.

Business park Riga Land on Novorizhskoye shosse 7 km from the MKAD will be constructed by Polysilk development company. Office space will measure 120,000 sq.m and there will also be a hotel, a congress-center, a bank, shops, cafes, restaurants and a fitness-center. According to Evgeny Varov, general director of Polysilk, the first phase of the project (almost 48,000 sq.m) should be handed over by the end of 2007, and the second in the third quarter of 2008. Market participants consider the required investments for the project at no less than $150 million.

Greater hopes of developers are connected with the development of the territory adjoining Sheremetyevo international airport. According to Sergei Lazarev, president of KFC-Group, in the Sherrizon free economic zone the company has a 35-hectare site for the construction of a warehouse terminal on which about 5-7 hectares will be allocated for the construction of a business center. The budget of the project is almost 3 billion rubles. A1 Alpha is KFC-Group's partner.

In terms of size the development of a zone at Domodedovo airport promises to come in second. Realization of projects in this area have been announced by several companies. For example, in 2007 East Line will begin construction of the Airport-City Business Park, with 20,000 sq.m of office space. Coalco is intends to develop the large-scale project Big Domodedovo. Which on a site measuring 3076 hectares, planned for construction are 10,830 million sq.m of housing, 322,000 sq.m of offices, 411,000 sq.m of shopping areas, 2 million sq.m of warehousing and 75,000 sq.m of hotels. Total investments stand at more than 300 billion rubles.

Belaya Dacha development plans to construct Belaya Dacha Park micro district with 200,000 sq.m of offices. In total, by 2012, within the limits of the project 650,000 of housing and commercial real estate are planned to be built. The cost of the project is estimated at $1 billion. According to Bushin, an office component is present in practically all projects to build complexes in the Moscow region, including the Ruzskaya Switzerland, A101, Rublevo-Arkhangelsk projects, etc.

Not simply an office

According to Aleksanyana, the competitive environment in the northwest of the Moscow suburbs, forces developers to undertake construction of unusual business centers, and to develop something original, capable of attracting the most demanding tenants. Platzdarm Development's Khimki-City represents a kind of city in city where there will be not only office premises, but also housing, a hotel with 250 rooms and trading areas. In addition they intend to build a recreation zone and yacht club.

Tenants of Khimki Business Park will also have ample opportunities. Within the territory of the complex as well as office buildings there will be two hotels with 375 and 250 rooms, an apart-hotel with 250 rooms, a 10,000-sq.m shopping center, a congress-hall and a fitness-center.

At greenwood there will also be a residential-hotel complex. And in the central building of the business park there will infrastructural objects: canteens, restaurants, shops, banks, a fitness-center, etc. The most attractive characteristic for tenants is the high number of parking places (1 space per 40 sq.m of rented space

Race Communications, the developer Country Park, on the ground floor of a 17-storey office building has provided an automated warehouse complex. The developed infrastructure of the business center includes a restaurant, a beauty salon, a cafe, warehouse areas, mooring for yachts and a large recreational territory. There are plans to also construct a hotel and a congress hall.

In the center of Mytishchi ZhYuI, which belongs to businessman Yuri Zhukov, will begin construction of a hotel-business complex measuring 36,000 sq.m. According to the project, the hotel will be 3* and the offices - class B. 10,000 sq.m of office space also includes a 500-seat congress hall, two conference rooms, and a showroom. The hotel complex will have 420 rooms, a fitness-center with a swimming pool, mini-shops and parking. The volume of investments in the construction of the center is estimated at $18 million.

According to Korotayev, Moscow Capital Bank intends to construct a 7,500-sq.m office building in Shchelkovo and a 4,900-sq.m office building in Vidno. Investments of the bank in the Capital-Plaza administrative-business center project in Vidno total 270 million rubles, according to a press release by the bank. According to Anatoly Arhipkin, vice president of the bank, it will take 3-4 years for the project to break even.

RIGroup has the most extensive program for the construction of multifunctional complexes that include offices, in the Moscow region. "In the cities chosen for the construction of business centers, the number of B2B and B2C small and medium-sized companies is constantly growing, promoting the stable growth of demand for quality office premises," explains Lebedev. RIGroup's office complexes are mainly oriented for large and medium-sized local businesses, as well as branches of banks and insurance companies.

"The preliminary name of the network of business centers is RIGroup Plaza," the company says. The first business centers, in Klin and Serpukhov, will be put into operation in the second quarter of 2007. The total area of the 7-storey office building in Serpukhov will be 9,700 sq.m. Besides office areas there will be a restaurant, cafe, conference hall, and also a 910-sq.m showroom. The roof of the business center is planned to be used for corporate events in the summer. The business center in Klin will be small at only 3,600 sq.m, with the first floor allocated for a public shopping zone.

In 2008 the company plans to hand over a multipurpose complex consisting of three separately standing buildings (total area 55,000sq.m) in Mytishchi. The complex will comprise an office-business center, a multi-storey residential building with apartments, and a shopping and entertainment zone with a supermarket and a cinema.

According to Lebedev, RIGroup is also the developer of projects planned for construction in Sergiev Posad, Istra, Kolomna, Naro Fominsk, Рuza, Elektrostal, Voskresensk, Odintsov, Orekhovo-Zuyev, Stupino, Fryazino, Shchelkovo, Noginsk, Vidno, Dmitrovo and Dubna.

Chances of rapid growth

According to Alexei Kudryavtsev, head of the analytical service at MIAN, with the increase in investments in the Moscow region, the escalating volumes of construction of warehouse complexes, the opening of new production facilities and active development in the region by retail chains, the appeal of the office real estate market in the Moscow suburbs will grow.

However, in Edward Apsit's opinion, much depends on the transport infrastructure. For example, the further construction of offices along Leningradsky prospekt is probable. And the ability to develop offices in the direction of Sherrizon will depend on the movement of trains to the airports.

"The area along the TsKAD, 30-45 km from the MKAD is promising," Kudryavtsev thinks. Though, in the opinion of one experts, some projects have been frozen here due to the uncertainties over a motorway being built and which sites have already been reserved for construction.

Office real estate in the Moscow suburbs in the near future has every chance of rapid growth, summarizes Limonov. Demand is formed simultaneously from two parties: companies from the capital wanting to minimize expenses on the rent of good quality premises, and local businessmen starting to change their basements into offices with image in modern business centers.