View from Within: Underground Trade

In many megacities of the world commercial real estate is gradually going under the ground. This is connected with a sharp shortage of constantly rising in price land on the surface, which in the end gets bought for the construction of new residential buildings and surrounding landscape.

Magnificent underground cities are created, for example, in Montreal and Toronto (Canada). Local residents and tourists like cozy underground palaces with innumerable shops as it is easy to get to them from underground stations and you don’t even have to go onto the street. In the numerous supermarkets and shopping rows underground it is always light and clean, it is warm in winter, and cool in summer. And Moscow has started to develop real underground gold mines, a blessing for the city, its inhabitants and developers.

It’s started

In March of this year city authorities accepted the concept of development of underground space, and in September an order of the Moscow mayor Yuri Luzhkov, stipulating the regulative and technical questions of the realization of the given program, planned for 2008 – 2010, was issued. By that builders are given green light to start work capitally with all the modern requirements.

In the transitive 1990s and at the start of the new century builders who felt a weakening of state control, quite often constructed both above ground, and underground premises without precise observance of specifications (old regulations were dead, and new ones had not been thought up yet). Therefore streets and roads frequently. Moscow scientists and public figures not once indicated the inadmissibility and dangerous consequences for Moscow from thoughtless and construction not approved by experts. Mikhail Moskvin-Tarkhanov, head of the commission of Moscow City Council, has repeatedly emphasized that in Moscow it is possible to build under ground when speaking about future development and town-planning. The city is based on a hard stone plate. At the same time he paid attention to that fact, that the first 30 meters from the surface of the ground are not so reliable - at this level there is a water-bearing layer with covered rivulets and streams, and also the remainder of old bases. It is necessary to carry out careful and large-scale geological investigations, and also use the experience of previous builders and study old documentation.

Besides the strengthening of supervision over the capital’s building processes by the mayor’s order, a detailed geological map of the capital is being created, which will reflect the natural features of all Moscow areas.

Design methods calculated by the normative cost of construction of various types of underground constructions subject to negative natural influences and technogenic factors, and also a technique for the provision of economic incentives of development of underground space is being developed. Registration of all put into operation and projected underground constructions is starting. The supervision of all underground issues will be under the direction of the first deputy mayor Vladimir Resin.

Downward for purchases

Currently, according to Konstantin Korolevsky, first deputy head of the Moscow department of town-planning policy, development and reconstruction, the share of underground construction in the total area of premises that have been put into operation, does not exceed 8 per cent whereas in western countries this parameter is about 25 per cent.

In 2008, the total area of underground construction in Moscow stood at 700,000 sq.m and by 2010 should total 1 million sq.m. The share of underground constructions in the total amount of residential and administrative buildings within a year will reach 10 per cent, and during the next 2- 3 years will reach 15 per cent. Volumes of underground development will grow in the future. As Luzhkov has emphasized, in Moscow it is necessary to enter onto the market not 8 per cent of underground premises from the total area of buildings, but 80 per cent. By 2010 it is planned to provide 268.7 million rubles for the development of underground space. At the same time private investors will be involved.

According to the accepted concept within the next two years underground premises with a total area of 1.8 million sq.m (minimum) to 3 million sq.m (if everything goes well) are planned to be put into operation. First of all, the construction of large multipurpose complexes in especially attractive areas from the investment point of view will be constructed. Among them are Krymsky Val, New Аrbat, Paveletskaya ploshchad, the territory between the Metropol and Moskva hotels, Prospekt Akademika Sakharova, Vodootvodny kanal, Staraya, Sukharevskaya, Triumphalnaya ploshchad and Turgenevskaya ploshchad.

Work is already at a full speed on Pavaletskaya ploshchad at Pavaletsky rail station. There will be above ground 3-storey pavilions here. The first one will be connected to an underground subway between Paveletskaya metro station (circle line) and the vokzal. It will be possible to enter it from both the street and the subway. The second pavilion will be a front entrance to the complex. Builders will connect it underground with the metro station, Paveletsky vokzal and Shlyuzovaya Naberezhnaya. The project also provides for the construction of a 5-level underground garage with 1,000 parking spaces. The total area of the complex is more than 136,000 sq.m.

According to Yuri Roslyak, Head of Moscow's Economic Policy and Development Complex, an unprecedented project is being carried out under the aegis of AFI Development on Tverskaya Zastava ploshchad. As Yuri Gorelov, director for business development at AFI Development emphasizes, the purpose of the project in not only the large- scale reconstruction of Tverskaya Zastava ploshchad, but also streets adjoining it. “The construction of large multipurpose premises is envisaged. Among them will be the largest underground shopping and entertainment center in Moscow. And the construction of a large traffic intersection, multi level parking and a branched out network of pedestrian crossings will essentially increase the throughput of the busy transport unit in the area of Belarussky vokzal, he says. There will be a 2-storey underground shopping complex with a total area of more than 116,000 sq.m with underground parking for 1,000 cars, and with four entrances/exits.

The scale of work being carried out here is evident from the fact that OOO Avtostoyanka Tverskaya Zastava (an affiliated company of AFI Development) and Sberbank RF have concluded a credit contract for the sum of $280 million. The line of credit has been opened for financing expenditures on the construction of the traffic intersection, multi level garage parking and the shopping complex. As Alexander Khaldey, general director of AFI Development, has declared, the receiving of credit testifies to the quality of the project and its high investment appeal. The project is being developed and realized according to the General plan for development of Moscow providing complex reconstruction of Tverskaya ulitsa, Leningradsky prospect and Leningradskoye shosse.

Another underground construction is being developed under Bolotnaya ploshchad next to Polyanka metro station. Here there will be four underground levels. On the first two floors (counting from the top) shops and children's game stores will be open, on the third floor an administration and warehouse will be located, and on the fourth level, motorists can leave the cars in a car park with 400 spaces. The total area of this complex is 31,000 sq.m.

Underground constructions will also appear in the suburbs: at VDNKh, next to Sokol, Petrovsko-Razumovskaya, Tekstilshiki, Nagatinskaya metro stations and in other places.

Expensive underground

In the center of Moscow interest in the development of underground space in the central part of the city is caused by a shortage of land plots for construction, including for trading real estate premises. The major task of underground construction is to solve the transport problems in the capital and update engineering communications, Mikhail Gets, vice president for strategic development at Blackwood, considers.

“Underground shopping centers are usually under construction in the busiest, most expensive places in the city center, solely because there is no place on the surface” says Natalia Oreshina, director of the trading real estate department at Cushman Wakefield / Stiles Riabokobylko. “The first of such premises was the Okhotny Ryad shopping center (62 000 sq.m).”

Maria Stolnikova, senior adviser of the strategic consulting and valuation department at Jones Lang LaSalle, adds that, as a rule, such projects are realized in historical quarters near to the Kremlin, in crowded places, and on the crossings of main pedestrian and transport streams. “Basically all these projects are intended for people who constantly use the metro and commuter trains, and also aboveground transport. In addition they are aimed at employees of large office centers located nearby” Stolnikova summarizes.

Alexei Averyanov, general director of Vesco Consulting, is convinced that underground shopping complexes will be popular only in places with large volumes of passenger traffic – more than 100,000 people a day. These may be the most popular quarters of the city, especially in the historical center, or at traffic intersections, for example at railway stations. In his opinion, the returns of such projects will be rather high, and profitability may stand at more than 30 per cent.

Considerable prices

At the same time development of underground space is faced with a number of specific difficulties that negatively reflects the cost of projects. According to Andrei Bushin, general director of MIEL Commercial Real Estate, underground construction on average, is 50-70 per cent more expensive than construction on land and if the cost price of land premises is approximately $1,000-$1,200 per sq.m then under the ground it increases to $1,800 - $2,100 per sq.m. According to the calculations of experts at the capital’s department of town-planning policy, with every level deeper, the cost of construction increases approximately 30 per cent.

Olga Yasko, head of the analytics department at Colliers International considers that on average, the construction of one underground level costs 10-12 per cent more than one above ground level, a second underground level increases the cost price of work on average by 25 per cent, and a third level by 40-45 per cent.

“For developers, underground construction is a forced measure, when there is no opportunity to erect premises above ground,” explains Sergey Lushkin, director of marketing and sales at Kvartal. “Construction under ground has a number of nuances and complexities: it is necessary to consider the geological features of the district and the character of the soil, to strengthen the ground etc, and it inevitably carries a rise in price of the premises and restricts the number of floors in a complex.”

Greater attention is given to underground premises from the point of view of safety. “For underground constructions there are sanitary regulations,” says Bushin. “Special requirements of such constructions are put forward by the fire inspectorate. In case of a fire, probable ways of evacuation should be thought over and technically executed, the evacuation of people from a third underground floor will be more difficult than from a fifth above ground floor.”

“As a rule, underground complexes consist of three shopping levels and two levels of parking which forces developers "to dig in" below a mark of 15 meters,” says Stolnikova. “This is especially hard in the historical city center.” Except for special geological problems under the ground, sometimes there are different sorts of surprises for builders that are capable of breaking the course of construction. For example, Alexander Ulanov, general director of First Managing Company shares his experience of coded cables of special communication, military premises and dug out traces of the old epoch of archeological value.

In addition, Averyanov says, underground construction is faced with additional expenditures on strengthening and waterproofing ceilings and overlappings. In addition underground premises demand the constant pumping of fresh air, the creation of a stable microclimate, and original solutions in the organization of illumination.

“The experience of Kvartal shows, that the construction of more than 3-4 underground levels is unprofitable. As a whole across Moscow, construction below 20 meters from the surface is extremely complicated. And in a number of Moscow areas where soil-quicksand prevails, such construction in general is impossible,” ascertains Lushkin

The expenditures of this or that construction depends on the professionalism of the specific developer, Oreshina considers. She cites as an example the Okhotny Ryad shopping center, which actually turned out to be 3-4 times more expensive than the same above ground. In her opinion, the premises is as expensive as its recoupment is long. If an underground shopping center has a favorable location then the recovery of outlay period can be comparable to large above ground premises.

Tenants will not lose

Of all the nuances of development of underground space there is clearly one: it is necessary for developers to carefully weigh up everything and in advance provide ways to compensate for expenses. One way is rental rates. If the location provides an underground shopping center with high attendance, and accordingly, high turnover, then rental rates will not be below those on the surface, says Stolnikova. Nevertheless, according to Gets, the recovery of outlay period of such projects will be longer than above ground shopping centers.

In turn, Averyanov approves that the recovery of outlay period of underground shopping centers does practically not differ from the parameters of above ground shopping centers and on average is 5-7 years. In his opinion, people are tired of the uniformity and dullness of traditional shops, and supermarkets, and underground shopping centers owing to their newness and non-standard approach look more attractive.

Underground trade in the capital is still not so strongly developed. Nevertheless the interest of tenants in projects is being swept up. According to Bushin, the number of those wishing to be located, for example, in an underground complex on Paveletskaya ploshchad is rather great. And rental rates practically do not differ from premises above ground: even if they are less, it is only slightly.

Averyanov pays attention to that fact that in underground shopping complexes the order of accommodation of tenants differs from above ground. Anchor tenants, for example, are located at the lowest levels. In connection to this, he believes it is necessary to approach the choice of anchor more carefully. Unsuccessful selection and location of tenants can deprive some tenants, and even the whole complex of profit.

Stolnikova reveals the features of the structure of an underground shopping center: “In above ground projects on the first level, a supermarket and small shops that pay the highest rental rates are usually located, and on the second floor to a greater degree sports goods and youth clothes are presented. Entertainment establishments in this case are always placed on the uppermost level. Underground everything is just the other way round. The entertainment component should be located at the deepest level so that visitors can pass through all the shops/levels.”

Large operators who can provide the necessary stream of buyers in the given zone of a shopping center will suit the renting of premises on the ground floors, Averyanov considers. By his calculations, the annual rental rate in such projects can start from $3,000 per sq.m.

Stolnikova is convinced that underground projects will be a success only with a successful concept, and subject to location. Underground shopping centers should be more focused on the mass buyer, on people who use the metro and have an average level of income. Accordingly there should be an entrance to the shopping center directly from the metro or train station.

She pays particular attention to the Okhotny Ryad shopping center which was originally intended for buyers with a level of income hardly above average with the opportunity to go to expensive shops. In the beginning the complex was completely unsuccessful. Down the line the policy of the shopping center changed, and it started to be guided by youth and people with average incomes. Attendance and, of course, turnover as a result, has sharply increased.

There is no other way

Speaking about the "underground" future, based on the results and tendencies of the last year and first half of the current year, Yasko draws optimistic conclusions: “There are no doubts that both Russian and foreign developers and investors highly assess the prospects of the Russian market of the shopping real estate. Moscow remains highly appealing to market players, which is proved by the number and impressive sizes of projects for future realization. The advantage of creating commercial real estate premises in the heart of the city where the intensity of passenger streams reaches a maximum and where the public, business and cultural life is concentrated and in addition is full of tourists all day long outweighs any complexities of underground development.”

There are also other factors that will in the end directly or indirectly promote the active conquest of underground boundaries. This is first of all the constantly shown determination and high interest of the government of Moscow in the development of this resource, considers Gets. He specifies the current necessity of forming a legislative base as proof of the capital authorities intentions.

The main architect of Moscow Alexander Kuzmin has named the current development of capital underground space as normative and cultural construction. According to him, in other countries underground constructions exceed 20 per cent of premises put into operation, which is approximately three times more than in the Russian capital. This means that there is plenty of work ahead.