Guiding Lines: Save On Moving But Don’t Be Left Without An Office

Constantly growing rental rates for office premises is forcing tenants planning to move to a more spacious office in good time to look for ways to freeze them at a lower level. According to Armen Shavarshyan, an expert in the commercial real estate department at Penny Lane Realty, western companies that try to reserve an office not less than one year prior to relocating are especially scrupulous, having concluded preliminary rental contracts on premises in business centers under construction.

As Olga Shirokova, head of the consulting, analysis and research department at Blackwood, explains, at the stage of the start of building work rental rates can be 30-50 per cent lower than at the stage of launching the premises into operation. Maxim Zagoruiko, director of the brokering services department at MIEL - Commercial Real Estate, thinks that the market cost of completed office premises is 10-15 per cent higher than in unfinished buildings. And Svetlana Yarova, head of the development department at Astera, notes that the closer the premises is to opening, the less chance there is of receiving any discounts in signing a preliminary rental contract. "Growth in rental rates is caused both by a change in the stage of construction, and a change in the general price situation in the real estate market, for example, in 2007 rental rates increased almost 30 per cent," adds Shirokova. In the most prestigious areas of Moscow in 2007, rental rates grew 50 per cent per sq.m, which, in the opinion of Andrei Petrov, partner at Knight Frank, is an unprecedented case in the market in the last 10 years.

"Many companies prefer to conclude preliminary rental contracts and pay a deposit in order to avoid the problems of looking for quality premises in the future," says Roman Sokov, director of the consulting department at Becar Commercial Property Moscow.

Completed premises may not always correspond to the requirements of the tenant. Concluding preliminary agreements and entering into a project at the design stage can help tenants to avoid subsequent problems, says Alexei Sidnev, director of the development of business at МТ Development. But, as Shavarshyan notes, constructors only agree to conclude preliminary rental contracts on large-area premises - from 1,500 sq.m or if a company is prepared to lease the whole floor. For example, in Federation Tower, VTB took up 33 floors at the stage of construction. IBS has signed a preliminary rental contract for 13 floors (36,840 sq.m) in the 42-storey Nordstar Tower office complex, and multinational corporation ВР has signed a preliminary rental contract for 37,000 sq.m of office space in the Western Gates business center.

Experts consider the probability of these companies being able to rent the same areas in existing, quality office complexes, is pitiful, as in the market of completed premises there are no such offers. "The tendency has become for premises to be 60-80 per cent leased out already when they are put into operation, and some premises are even launched with 100 per cent of areas already rented out," says Shirokova. When put into operation 10 per cent of areas, a maximum of 20 per cent, remain free, confirms Dmitry Roshchin, head of the investment and valuation department at Reskor.

It is favorable for developers to conclude preliminary contracts. As Capital Group explains, it allows for money invested in the project to be made back at the final stages of construction. For example, according to Penny Lane Realty, business centers Noah’s Ark and Hermitage Plaza, etc, were completely rented out at the stage of construction. In some cases the preliminary contract exists even at the design stage or at the earliest stages of construction, which allows tenants to choose for themselves the most favorable conditions of rent.

However, experts think that such a step should only be taken with large development companies that already have a number of realized projects. The reason being that if the developer cancels the preliminary contract it will compensate the tenant with their deposit (as a rule, 2-3 months rent). But if you take into account that at the time the preliminary contract was concluded market rates were lower and a new rental contract for premises of another builder will already be as the situation on the market, the financial losses of the tenant would not be as irreconcilably great in comparison to the expected benefit of the first contract. According to Russian Research Group, in the first three months of 2008 alone, rental rates in the central part of the capital grew, on average, by 10.8 per cent and outside the Garden Ring rose 15.9 per cent averaging $1,397 per sq.m and $788 per sq.m accordingly.