Market Know-how: A Marriage of Convenience

The ideal tenant is a large international brand with a long history, using a maximum area in a complex at a maximum rental rate, which is punctual in payments and unpretentious, describes Forum Properties. Other developers of commercial real estate set their sights more modestly. "The ideal tenant is a company with a high credit rating, renting a significant area for a long term," says Mikhail Golomb, general director of Promsvyazhedvizhimost. But, he specifies, significant discounts are given to such companies if they want to be part of the project.

This is logical: all developers want to get tenants; therefore there is a war between them and other landlords to get them. "The capitalization of the project depends among other things on what companies are the tenants of the premises,” says Lyudmila Potapova, director of the marketing department at AFI Development. “The cost of buildings with such characteristics, but with a different set of tenants can essentially differ." Considering the heightened interest of western investment funds to commercial real estate premises, in the last few years this factor has been of crucial importance in brokering offices, retail and warehouses. "The main criterion in choosing tenants is how reliable and solvent the future investors – the buyers of buildings – will find them," continues Potapova.

Ideal The image

In each segment of the market, tenants have specific requirements defined by the structure of the premises, its positioning, location, etc. Therefore, according to Leonid Kaprov, director of operations at KR Properties, for any premises, its marketing concept, characteristics and other nuances create the portrait of the ideal tenant to which the proprietor subsequently tries to rent to. "The same factors for different premises may be similarly just as positive, or may be completely unacceptable," the expert adds.

"For some the image of the tenant is important, for others higher rates are important, for some it is important that only international corporations will be located in their office building, and for others it is better to conclude short-term contracts with small companies and start-ups, but at a higher rate,” argues Daria Afanaseva, head of projects at Storm Properties, part of PIK. “The only general requirement is the solvency of the tenant."

Favorites

Potapova remembers that several years ago class A offices were only accessible to foreign companies, but that now the situation has changed and large Russian companies are now considered on the same level as foreign firms. Although there are still developers on the market who consider Russian companies with mistrust, the nationality of the tenant already has much smaller value than its size. "Reliable reputation is the most demanded product on the market,” believes the managing partner of investment group Sesegar Irina Zharova-Wright. “It is easier to develop business with a tenant with a faultless financial history.” Stability and readiness to conclude long-term rental agreements are also appreciated among proprietors.

Only a few developers are prepared to rent out premises in small units, with the majority preferring to rent out whole floors or larger areas. This requirement leaves small companies that need less than 500 sq.m of office real estate, less than 50 sq.m of retail premises and less than 5000 sq.m of warehouse premises at a loss.

No less important for the developer is the name of the company. "In particular players that are well-known in the world market are welcomed, while companies that are little known are reluctantly leased by the proprietor," explains Alexei Averyanov, general director of Vesco Consulting.

The brand in retail real estate is especially important: tenants with a known name draw consumer streams to a premises and increase the passability of a shopping center and the income of the owner, than operators with lower status. "This, as a rule, is famous chain operators. Their strong brands are capable of increasing the value of a premises in the long term, and interaction with landlords is clear and standardized for all shops," says Viktor Rosenberg, head of the rental department at RosEvroDevelopment.

"The main criteria which tenants of high class real estate should correspond to are a famous brand, good business and financial reputation, and conformity to the concept of the project," summarizes Elena Tkach, marketing expert at Sawatzky Property Management.

Delicate Refusal

Sometimes the developer is forced to reject t the most lucrative tenant that fits all the formal requirements. The reasons for this can be different. "For example, an indispensable requirement of the tenant may be that it needs a kitchen with the possibility to prepare hot dishes or accommodation of the trade mark of the company on the facade/roof of the building, while landlords for some reason may not be able to provide such a possibility," says Golomb.

According to Popatova, sometimes landlords sign "agreements on the refusal of competition," according to which it should not rent out premises in a complex to a direct competitors of the first tenant (usually there is an exhaustive list of such companies). "Such agreements can only include a limited number of companies - direct competitors," adds Kaprov. It is only possible to conclude such agreements if the premises is already filled as much as possible with tenants, he is convinced. In particular, companies such as the “big four” auditing companies and large law firms like to sign such agreements.

Another specific reason for rejecting a tenant is presented by Potapova: "Refusal can take place, if the landlord operates through a representative that has not been registered in the territory of the Russian Federation for taxation purposes. In such cases the proprietor of a new building at the stage of primary marketing has problems including VAT as representatives are released from its payment."

"In retail real estate a landlord may reject a desirable tenant if it does not correspond to the concept of the shopping center or if the operator of such a format is not stipulated by the concept in general," adds Vladimir Zhuravlyov, sales manager at NAI Global. For example, developers reject bowling alleys in some projects.

The main thing in rejecting a tenant is not to spoil the relationship with it, as subsequently, the developer may need to cooperate it with it in other project at a later date.

Non Grata

The majority of companies that are rejected are companies who are undesirable for the proprietor. "Among undesirable companies are mainly those who have a bad reputation. Instability or non-professional visions of business by the potential tenant are reasons for a proprietor to refuse negotiations for rent, says Rosenberg. Companies that want to conclude short-term contracts are frequently excluded from the list of potential tenants, as are firms intending to sub rent the premises.

However, for some people concessions are made: if a large company rents a floor or so, counting on future growth, and it intends to sub rent the surplus, the proprietor will possibly meet with such a tenant, but will keep their finger on the pulse, and register the right to refuse the sub rent of the area to a specific company.

Andrei Postnikov, director for work with corporate clients at Jones Lang LaSalle, says another reason for rejecting a tenant in the office segment may be the high stream of visitors, which come with the tenant. For example, with a recruitment agency, travel company or express service. Some business center owners have quivering concerns over dress code, and therefore any IТ company in which the programmers wear sweaters and jeans to work, may too have a non grata persona.

Many developers do not cooperate with those who want to place kitchens in the premises. And nobody likes small tenants. However, Zhuravlyov specifies that for such companies there are business centers like Smolensky Passazh, where the premises is sub rented in small areas.

Another category of undesirable tenants is state structures. Of course, large state companies will find themselves office without effort, but landlords do not have confidence in various project management groups and municipal unitary organizations. Probably, it is connected with their low solvency and unclear activity, which can do much harm to other tenants of the complex. "It is not particularly pleasant to be in a building with an establishment which tomorrow will be beaten by a neighbor in obtaining a large order, using an administrative resource, or worse still - will come to check it," representatives of business say.

For retail real estate, companies mismatching the target audience of the project are undesirable. For example, in premium segment nobody would want to place a discount store. "The majority of small retailers, offering buyers a narrow range of goods produced by unknown manufacturers are often regarded as undesirable tenants. As a rule, such tenants don’t have a corresponding strategy of development and are sure that they don’t need one as simply being within a shopping center is profitable enough to market their goods," says Elena Obolonnaya, the commercial adviser to the general director of Hermitage Construction.

However, there are also subjective reasons to reject a tenant. "There may be personal hostility between the proprietor and representatives (founders) of the company/tenant," says Zhuravlyov.

Compromise

But practically all companies still have the chance of getting into a modern premises. The main thing is to choose the right means for achieving this purpose. Among tenants there is the opinion that any unwillingness of the proprietor to cooperate can be solved with money, offering it more attractive rental rates. Partly, recognizes Postnikov, this can work, but far from always. Such a rule operates only in the event that this tenant would not harm the image of the premises or affect the other tenants. But, for example, a funeral salon will never rent an area in a high-quality complex, no matter what rate they offer.

The same is also characteristic for retail real estate: developers of shopping and entertainment complexes try not to cooperate with adult shops or slot machine halls, even though they are the most generous tenants.

It is possible to get into a modern office or shopping center by not overpaying at all. Considering the trend towards saturation of the commercial real estate market (except for the warehouse segment), proprietors of office and retail premises even more often should concede to tenants.

"In view of high competition in the market, commercial real estate tenants are starting to dictate conditions to proprietors,” Averyanov says. “Accordingly, 100 per cent fillability is guaranteed by desirable tenants only in the most successful projects, while developers of less successful buildings will have to rent areas to less desirable companies." That is, to enter into negotiations and look for compromise, adapting to the features of each other. "there are significantly more non-ideal tenants than there are ideal,” says Kaprov, “therefore reasonable compromise is an integral component of any business."