Money Growing: Office reservations

ST. PETERSBURG In St. Petersburg several office projects considered grandiose by St. Petersburg standards will practically simultaneously start. The metric area of each of them is in the six figures, and their total area at least doubles the present cumulative space of St. Petersburg’s class A and B business centers.

According to the plans of the developers, the office giants, one after another, will be put into operation from 2010-2012. Consultants are rather reserved in their forecasts and are avoiding these three words "crisis of overproduction." However it is evident that the moment of truth has come for the city’s office market, and investors, who today regularly lay the foundations for business centers have serious occasion for reflections.

According to Colliers International (Colliers), in the middle of 2007 the volume of office area in class A and B business complexes in St. Petersburg totaled almost 480,000 sq.m (of which 15 per cent of premises, or 74,300 sq.m were class A). Experts at Jones Lang LaSalle (JLL) put this figure at 750,000 sq.m, including 98,700 sq.m of class A. The data of analysts from other companies, as a rule, keep within this range.

For the first half of this year experts at Praktis Consulting and Brokerage estimate the total increase to the business center market at 93,265 sq.m (66,950 sq.m of rentable premises). According to the estimations of Becar Commercial Property SPb, 106,500 sq.m came on the market. Experts at Colliers cite almost 60,000 sq.m of usable class A and B space. As usual, the consultants do not share a general opinion. But the sequence of numbers is clear. Becar’s results for the year, according to announced deadlines for the realization of projects, predict that more than 40 new office centers (a total of 395,000 sq.m) will come onto the market. However the company stipulates: traditionally no more than 50-70 per cent of the premises will be put into operation on time. Colliers predict more than 270,000 sq.m of high quality premises will enter the market.

Supply does not yet exceed demand, the vacant offices in business centers opened more recently, and in long time operating complexes is insignificant. The asking rental rates in class A have increased for the first half of this year on average 3.3 per cent, to $500–$940 per sq.m a year (including operating costs without ), in class B the average increase was 3.6 per cent, with prices varying from $300–$580 per sq.m (data of Colliers).

According to JLL’s forecast, in 2007 the market will be ready to absorb approximately 260,000 sq.m of high quality areas, and in 2008 another 330,000 sq.m. Experts at Colliers calculate that the annual demand for modern offices increases 15-20 per cent. "The supply of office premises per 1,000 St. Petersburgers is still insignificant (the actual figure is 260 sq.m). In Moscow it is 460 sq.m per 1,000 people, in Warsaw – 1,450, in Paris – 4,450, and in London – 7,100 sq.m. Comparing these cities directly is hardly possible. They have different places in the international hierarchy and carry out different functions. However there is a belief, that St. Petersburg’s office market is capable of digesting much more areas. Developers are obviously guided by the same feelings. "By our estimations, the supply of the class A and B business center sector will grow approximately 20-40 per cent per year," Boris Yushenkov, general director at Colliers International (Petersburg), comments.

Experts at JLL believe that in 2010 the St. Petersburg market of high-quality offices will exceed the 2 million sq.m mark, of which more than 600,000 sq.m will be class A.

About this time supply and demand will probably cross. In the meantime there will be hundreds more thousands of square meters of premium class office real estate at the construction stage. And this is without taking into account the mega projects Okhta-center on Malaya Okhta (previously Gazprom-City) and Morskoi Facad in the alluvial territories of the western extremity of Vasilevsky island (within the limits of the recent creation of a business center City with 1.6 million sq.m of office premises).

If we don't consider St. Petersburg as a candidate for the capital of Russia, the city, obviously, would already be overstocked with offices in 5-7 years. Developers will have to accept more modest profitability, tenants at last will have choice, and the rate for class A premises will come closer to Central Europe.

It is necessary to take into account, however, that chronic extension of deadlines and correcting of projects makes any forecasts for their realization rather approximate.

Office autonomy

The scales of future construction is not the only unprecedented thing. A new wave of developers are realizing another ideology. They are not engaged in separate business centers, but are forming business quarters with a closed territory, extensive parking and a developed social infrastructure including kindergartens, medical centers and apartments. In other words, they try to make everything so that the keen workaholic would practically not have to leave the office.

In the absence of a formed City, large centers of investment activity are spontaneously springing up in former industrial territories, mainly on the quays adjoining the center of St. Petersburg.

The first example of an office enclave, occupying the whole area of the Petrogradsky embankment with practically independent engineering infrastructure, was the City Center project, realized in 2001-2004 on the territory of the former Vibrator factory. The factory buildings have been subjected to complex reconstruction and have been turned into class B and B+ office buildings. In addition there is also a fitness club with a swimming pool, a center for oriental combat sports, restaurants and cafes, several bank offices, a beauty salon, a business-hotel, a conference hall, etc. The total area of City center is 28,000 sq.m, of which almost 21,600 sq.m are leased. The investors of City Center plan to construct another class A business center on the territory (measuring approximately 15,000 sq.m).

Developers who are at the starting level, have different scope. Already the Progress-City complex is being built at 41 Chyornaya Rechka Nabarezhnaya. The project is being carried out by a company with the same name created specially for its realization. Discussions are also taking place about the development of the premises of the Progress factory, which covers a 4.5 hectare area on Grafova ulitsa and Starobelskaya and Lisichanskaya Nabarezhnaya. The land plot is privately owned. The enterprise, specializing in the development and manufacturing of compression moulds and stamps, will gradually move to another territory.

The architectural shape of the building has been developed by international bureau SUAR.T in mysterious "pseudo-kinematics" style. The project combines reconstruction and new construction. In December 2006, the first class B office center measuring 10,500 sq.m was put into operation here. The 3-level office building has grown to four-storeys and is completely different inside. The whole premises has been filled mainly with large tenants, with an asking rental rate from 9,600-10,800 rubles per sq.m per year (including VAT and maintenance). Almost 10.5 million euros were spent on creating this first-born center. In total, investors intend to invest about 150 million euros in the project, using their own and extra funds. The construction is divided into several stages and according to plans should be completed in 2014.

"In a time when transport has collapsed, when it is impossible to move in the city even within the limits of one area in a day, we have tried to design self-sufficient business condominiums with everything that is necessary for workers, including and a recreational zone with park," says Alexander Suponitsky, head of the SUAR.T bureau.

The total area of the complex will be 170,000 sq.m including parking. Office space, including four, 65-meter high towers, measuring 70,000 sq.m is planned. Approximately 9,000 sq.m is allocated for a hotel or apartment-hotel, nearly 5,500 sq.m is allocated for public catering, and another 5,000 sq.m for a sports center with a pool. A supermarket and other shops, small exhibition areas, a private polyclinic etc are also envisaged.

Works have started on the former territory of the Rossiya factory. The area covering about 16 hectares, located at the corner of Piskarevsky prospekt and Sverdlovskaya nabarezhnaya, opposite Smolny cathedral, was acquired in 2005 by the operating company Teorema (which owns almost 100,000 sq.m of office and trading space in St. Petersburg). The land together with the workshops, which mostly been demolished, were bought by the investor for $60 per sq.m. Here the Polyustrovo business building covering a total area of 500,000 sq.m, of which 300,000 sq.m will be office premises of class A and B+, is planned. On approximately 50,000 sq.m there will be residential buildings, shopping and recreational purpose buildings and parking for 5,500 spaces. The design of the complex, consisting of more than from 20 buildings, has been developed by German architect Sergei Choban. Teorema estimates the cost of this project at $650 million and it is expected to be completed in 2012.

In the autumn the first class A business center "Benua" will start operating. It has original glass facades in which decorative figures in theatrical suits are embellished into it which was by Alexander Benua for the ballet Petrushka. The total area of the building is 17,000 sq.m, with a further 12,000 more sq.m to be added to it in 2008.

Near to Teorema's building site, at 65 Malookhtinsky prospekt, a joint project is being realized by Bank St. Petersburg and Setl City (part of the Setl Group holding). The consultant and broker of the project is Praktis Consulting and Brokerage. The business complex is expected to comprise approximately 150 000 sq.m of high quality office premises. The structure of the complex will include several business centers, and also trading premises, a fitness club and a two-level car park with 1,800 spaces. The bank's headquarters will be located in a 97-meter high tower. The budget of the project is almost $430 million. Approximately 30 per cent has been financed by Setl City, with the remaining funds being provided by the bank. Designing is now taking place, which is being carried out by an alliance of architects from the St. Petersburg bureau Evgeny Gerasimov & Partners and Germany's Sergei Choban & Partners.

At 10 Prospekt Medikov (the Petrogradsky side), the largest office projects of LSR will be realized. The Electric City business complex will be located on the former area of the Elektrik factory (LSR owns a 97 per cent share in the enterprise). The complex should be constructed by 2011 on a site covering 7.3 hectares. Its total area will be 340,000 sq.m. Class A offices, shops and other commercial premises will cover 190,000 sq.m, in 10 buildings forming a blocked atrium street. The architectural design is being formed by the same team as above Sergei Choban and Evgeny Gerasimsov. Under practically the whole of the territory will be a two-level underground car park for 2,800 cars is planned. The accompanying infrastructure for workers will be a fitness-club (approximately 6,000 sq.m), various restaurants and cafes (almost 8,000 sq.m), a medical center and even a kindergarten.

Another large office premises (from 100,000 sq.m to 150,000 sq.m) is planned by LSR close to Smolny cathedral in the structure of the Smolnovo Kvartala, where there will also be high class residential housing. The complex should come onto the market in 2013. According to Georgy Bogachyov, the operating director of the LSR group and responsible for projects in the commercial real estate sphere, the huge investment program was preceded by serious market research. According to the results of the research, there is currently a deficit in class A offices in St. Petersburg of about 250,000-300,000 sq.m. Taking into account the present rates of economic development, each year will add the need for approximately 100,000-200,000 sq.m. Therefore LSR are not worried about the future of their business blocks. «Even if the situation becomes less favorable, we will remain in the market due to better offer. It will be difficult for older business centers. The crisis affects the premium segment to a lesser degree. Aside from that, our investments in office projects are below their actual market cost, which gives us additional safety," says Bogachyov.

Another "heavyweight" developer in the St. Petersburg office market is Joint-Stock Company "M", which is affiliated with VTB. This company is realizing the creation of a business complex called Nevskaya Ratusha, on the territory of the former Tram Park No.4 (on a land plot of almost 6 hectares between Predbarutelhy perulok and Moiseyenkaya ulitsa and Novgorodskaya ulitsa). The city administration will receive up to a third of the premises in Ratusha, almost 100,000 sq.m of offices, and almost 200,000 sq.m will be leased. A further 100,000 sq.m will be used for parking. The cost of the project, according to preliminary estimations will exceed $400 million. The city administration promises to redeem the premises at cost price. However, it will receive up to 40,000 sq.m free of charge as payment for the rights to the building, and also as compensation for engineering maintenance of the site and the moving of the buildings located on it. In August an architectural tender for the detailed concept of the building of this territory was announced.

The cost of gigantomania

The advantages of each of the announced projects are obvious: the formation of a convenient and modern business environment which until now has not been present in St. Petersburg. However, having reached a critical mass, they may not only provoke stagnation in the office market, but also aggravate the transport problems of city.

Consultants, refusing to give detailed comments, admit that they are watching the succession of events with great interest. "We are observing today how developers are forming a real business ring around the city centre, says Alexei Tchizhov, director of the department for office real estate at Becar Realty Group. There are rather a lot of announced projects. And we also shouldn't forget that the total volume of the St. Petersburg office market, including extensions and administrative buildings which are not neccesarily classifed, exceeds 3 million sq.m. Tenants will inevitably move to better quality premises, but the question is at what speed. If the announced complexes will enter the market one after another, serious overstocking will not threaten us. "If necessary there will be time for developers to react to a change in the situation, and amend their projects . If there will be a mass emission of premises, parts of complexes may stand idle for a rather long time, while demand will not catch up with supply."

"It is normal, as a result of the realization of new projects, operating class A business centers will lower their rates and will move to class B, and unsuccessful premises will leave the market. But there is also another problem: the city authorities, unfortunately, have not specified a location for business in the formation of St. Petersburg. As a result large business centers are springing up spontaneously, and business activity is scattered throughout the city, which will hardly improve the transport situation. And with accessibility to separate complexes with areas of 300,000-500,000 sq.m there may be serious problems. Imagine how many cars will be going to such a premises during rush hour?" Boris Yushenkov argues.

The developers working in Maly Okhta (Teorema, Setl City, etc.), already fully realize the approaching threat. "We have analyzed, how the realization of the announced projects will lead to a growth in transport flows in this area in 2011-2012. The daily average traffic on Petr Veliky bridge will be about 65,000 cars. If all of the construction, including Gazprom's, takes place, it will increase, by our calculations, by 9,765 machines. There will be a need for parking for 8,138 places. The throughput of the future Oryol tunnel will, according to plans, total about 59,000 cars per day. However it is not panacea, and the efforts of authorities should not be reduced to the realization of this one project. The zone of Maly Okhta requires complex infrastructural preparation. In London, for example, when work had only just started on building the City, a branch of the underground had already been built there. "We have the opposite situation: private investors are already carrying out projects, and infrastructural problems are only just being discussed,” head of the department for development and promotion at Praktis Sergei Fedorov says.

"The main problem, in my opinion in this territory, is the absence of the metro," says Igor Vodopyanov, managing director of Teorema. "I cannot imagine how people without cars will reach the area. For the tenants at Benua we plan to set up a free shuttle service from the nearest metro station, but even from here the bus will take quite a long time to get here. Everyone constructing in the area is inevitable going to face this."

To partly solve the transport problem, Bank St. Petersburg and Setl City have offered a non-trivial solution in the form of a mooring which will allow some businessmen to come to work by water transport. Or, probably, on skis in the winter.

Yury Borisov, managing partner at IB Group pays attention to one important aspect: "Announcing projects of a high level, developers should think about how they correspond with the environment around them. Under strong competition, uniformity of the social environment becomes an important criteria of a tenant in choosing a new office".