Money Growing: Temporarily Vacant

Brokers unanimously state that the office market is far from saturation and that there are not sufficient good quality premises. According to CB Richard Ellis, by the end of the first half of 2008 only 6.5 per cent of class A and 8 per cent of class B premises were vacant. Colliers International has even more optimistic results for those building offices: the average level of vacant premises in class A premises is 6.3 per cent, in class B+ premises is 3.2 per cent and in class B- is 3 per cent. Although in the capital there are buildings that tenants are in no rush to occupy. In the Embankment Tower business center (class A) about half of the area has been leased, and in the class B Espace office complex (Kosinskaya Plaza) the percentage of vacant premises is close to 80 per cent. Complexities in putting projects into operation have also been characteristic for the Avilon Plaza, Nagatino i-Land and Sokolinaya Gora office complexes among others.

In the wrong place

Experts do not think that the large volume of free areas in separately standing business centers is an indicator of saturation of the market. Demand still noticeably exceeds supply; therefore it is not necessary to talk about non-liquid areas in terms of a sharp shortage, says Kira Smirnova, head of the commercial real estate department at Vesco Consulting. Several years ago tenants queued up to get into any modern business center but now they can choose. Elena Denisova, deputy director of the department for work with owners of office premises at Jones Lang LaSalle, considers that perfect projects do not happen. And choices are often made from a subjective base. Based on their own individual requirements tenants should weigh up the benefits of renting an office space on against the all disadvantages and see which one weighs more than other. According to Marina Morgunova, a senior adviser in the office real estate department at CB Richard Ellis, the most successful projects are those with a good location and good transport accessibility - near to a metro station or on one of the main arteries of the city. Infill office construction deep in a district, in small streets, in quiet areas with a soviet period housing estate or in an industrial zone creates premises that are non-liquid for offices. "This trend is most closely represented in the northeast and southeast region of the city outside the Third Transport Ring," she specifies. For example, the class A Avilon Plaza shopping and office complex (the investor of the project is a European realtor company) completely corresponds to class A standards, but has been constructed among textile factories (at 45 Volgogradsky prospekt), where demand for class A premises is small. A similar situation has occurred with the Espace business center (class B), which was previously the Kosinskaya Plaza (Placon Property Management). The weak link of this project is that the office complex has been constructed on the MKAD, in an area not intended for an office building, and therefore there are not may interested parties in renting the premises. Business-park Nagatino i-Land (the investor is Moskovsky Biznes Inkubator) is near the center of the business life of the capital (only 8km south of the Kremlin and 1.8km from the Third Transport Ring), but the territory is in an industrial zone (the complex has been constructed in place of unprofitable manufacturer ZiLa) and this has played a role - tenants are in no rush to occupy this office space. An additional disadvantage is that construction of the complex is divided into five phases. As a consequence, tenants of the first phase (includes six class B office buildings which should be put into operation at the end of this year) will have to work with building noise from the following phases. The project is planned to be completed, at best in three years. According to Maxim Zhulikov, a leading expert in the office real estate department at Penny Lane Realty, this situation is characteristic for many capital projects realized in several phases, including Moscow-City. According to CB Richard Ellis, the share of vacant areas increases as you move away from the center and in the zone between the Third Ring Road and the MKAD is 10 per cent, outside the MKAD is 12 per cent, while in the city centre it is 3 per cent with the exception of Moscow-City where tenants have not been found for 13 per cent of areas.

Mistakes and miscalculations

An important factor stimulating the absence of interested tenants to office areas, are disadvantages in the construction of the buildings. According to Morgunova, this includes low ceilings (less than 2.7m after decorating and furnishing), and a shortage of natural light. "The aspiration of architects to make beautiful facades results in people working in such buildings suffering from a lack of light at their workplaces," says Olga Yasko, regional director of the analytics department at Colliers International. According to Yury Yudakov, head of the office real estate department at Praedium Oncor International, the reason may be the absence of a separate entrance to the offices (if it is a multipurpose complex) and inefficient floor lay-out. Slants in the facade of a building lead to losses of useful space, and having to pay for unused space scares off tenants, Yasko argues. Anton Korotayev, a leading analyst at consulting company RRG, considers that socle and basement floors, penthouses, premises which the lift does not reach, and also offices located too far from an entrance onto a floor where it is possible to reach lifts only through a long corridor are less liquid. In the opinion of Olga Kosenkova, head of the analytic and consulting department at Novoye Kachestvo, the higher the class of business center, the higher the requirements. In new class A and B business centers there should be no problem areas, and if there are then it testifies to poor quality design work of the project, notes Andrei Bushin, general director of Miel Commercial Real Estate. "There s much higher probability of unsuccessful premises being offered in reconstructed buildings for example class B- and class C premises in former industrial buildings. By virtue of this or that design feature in such buildings it is not always possible to achieve effective design solutions," says Kosenkova. Bad specific characteristics such as being next to premises that attract large streams of people, for example markets and railway stations, can affect the speed with which premises are rented out. For example Zhulikov connects the slow speed with which the class A Severnoye Sviyaniye business center (Ulitsa Pravdy) has been rented out with its proximity to a railway and unsuccessful environment for a business center in the given class. In Bushin's opinion, undemanded areas in shopping and office complexes can be a consequence of the wrong division of streams of people - consumers of the shopping center and tenants of the office premises. "Basically the wrong zoning of areas," he specifies. Among the reasons for an office premises staying on the market for a long time Yasko names not many secured parking places and no possibility for employees to park in nearby territories; an inefficient marketing policy - positioning the business center in a price and class segment that does not match the real quality of the building; incorrectly targeting specific audiences of potential tenants to whom obviously unsuccessful advertising campaigns are directed; a discrepancy in the declared and announced characteristics of the premises with its current position, etc. The occurrence of temporary non-liquidity may be caused by the policies of the constructer in defining the sizes of minimum and maximum blocks. In Smirnova’s opinion, offices areas measuring 100 sq.m are most in demand today. "There is practically no supply of this in the market. Developers of office centers deliberately reduce the number of tenants by making areas large, thus minimizing transaction costs and simplifying the managerial process of the premises for themselves," he emphasizes. On the contrary, there are much more premises measuring from 2,000 sq.m, and there also a lot of buildings offering whole floors in the market, but demand is less than supply for these areas. "Although the number of applications for larger areas in office centers increased last year," recognizes Sergei Bogdanchikov, director of the consulting department at London Consulting Management Company. According to Denisova, there are premises, for example Romanov Dvor-2, where the proprietors have adhered to a special strategy in selecting tenants. As a consequence, the time these premises spend on the market is longer. Zhulikov considers that office premises where areas are offered at maximum rental rates on the market (now almost $2,500 per sq.m) are doomed to being on the market for a long time. For example, Berkley Plaza business center (Prechistenskaya Naberezhnaya), Severnaya Bashnya (Testovskaya ulitsa), and the multifunctional complex in the place of Voentorg (Ulitsa Vozdvizhenka), etc. According to Bogdanchikov, renting out a premises becomes complicated if non-conventional contractual terms are offered to the tenant, for example a contract of use of the property, rather than a rental contract.

How to rent out what’s unwanted

The simplest way to rent out an office premises with disadvantages is to lower the rental rate. Though Kosenkova recognizes that not all proprietors will agree to discounts straight away, adhering to policy: to rent out areas with high rates at discounts – is an extreme measure. Irina Dzyuba, sales manager at MR Group, says that nevertheless there are precedents when areas with no defects have been discounted $200-$300 per sq.m. "But they more than likely concerned ground floor premises and were when the parties could not find an alternative solution," she specifies.

In Denisova’s opinion, the discount depends on the stage of realization of the area. "On average it is 5-15 per cent," specifies Korotayev specifies. Ashot Barsegyan, head of commercial real estate at MIAN, thinks that the difference in rental rates between successful and unsuccessful spaces can reach up to 50 per cent. "For example, premises without windows or with "bad" views in a class B business center will go for a rate of $400-$500 per sq.m a year, while standard office premises in the same building will be $700-$800 per sq.m a year," he says. The professionalism of the brokers involved in renting out the premises has great significance. In Denisova’s opinion, skilled brokers reveal any defects in a premises in advance and try to convince tenants that the situation is not as bad as it seems. For example, tenants of technological park Nagatino i-Land are put off by the fact that not only is the complex being built in an industrial zone but it is difficult to get to the site as there is no over ground or underground transport routes nearby. Therefore brokers should focus attention on the fact that the concept of the project provides for the construction of new traffic intersections, several bridges and a new metro station called Technopark between Avtozavodskaya and Kolomenskaya metro stations, and also that construction is taking place near a new passenger railway platform. However, the small volumes of vacant space allow the proprietors to be unafraid of non-liquidity. Moreover, the opportunity to rent the premises on more favourable financial terms has generated a pool of consumers. For example, companies are renting “dark” space in addition to the main offices and are using it as storehouses, for archives, and for warehouses of product samples, etc. Also, companies that can afford the more comfortable space in the business center are approaching the proprietors for space with defects, explains Kosenkova. According to Yudakov, tenants for whom location is not so important rent areas in unsuccessfully located business centers, but the rental rate is a key factor. However, according to Kosenkova, the presence of unsuccessful areas directly influences the period it takes to recoup funds invested in the project. "Therefore the primary goal for the investor, adviser and architect is careful analysis of design solutions and scrutiny of all factors that are capable of affecting the demand for the space," she notes. In Dzyuba's opinion, it is necessary to avoid wrong shapes of a building and to not forget about optimum lighting of office space, the arrangement of windows, and the depth and length of the floor. "One compromise is panoramic windows on a front that is south facing. This way it is possible to balance the lack of light exposure." Bushin considers that it is necessary to provide the possibility of changing the layout of an area in a finished premises, and also advises to develop several variants of a floor plan of the project, in view of the total and already rented out areas. "The more professional the approach of the developer, including choosing architects and advisers, the lower the risks," agrees Denisova.