Market Know-how: The Ingredients of Rates

"The rent for office areas first of all depends on the class of the building, and the class of the building, in turn, depends on a set of factors, such as engineering systems, design features, transport accessibility and location, parking, structure of the property and management of the premise," lists Olga Yasko, regional director of the analytics department at Colliers International.

All these factors to a different degree influence the rental rate of office premises and form them. To this list market participants add macroeconomic parameters. "The state of the market has a big influence, as does the ratio between supply and demand. After the crisis in 1998 a class A building on Tverskaya street would be rented for $450 per sq.m a year, despite its characteristics and central location," says Anastasiya Khomenchuk, head of the department of office premises at DTZ.

Fixed location

Until recently location has defined the class an office building. Market participants have often repeated Donald Trump's statement about location, location, location, and it has become a persuasive stamp. When the Moscow Research Forum developed the classification of office real estate in 2003, class A buildings appeared to be those located inside the Garden Ring. However in 2006 when a new version of the classifications were issued, location was no longer a criterion among the major factors, but there were increased requirements to engineering systems.

"It’s wrong to think that in the city centre any building can be rented at high rates. Tenants are prepared to pay a lot but they demand a certain quality. A central location is essential only for companies whose image in the most direct sense influences their business, for example consultants or lawyers," approves Khomenchuk.

To define how much the location of a premises influence its rent rate, it is necessary to compare two identical complexes located in different places, and this is not an easy task. "Every building has unique distinctive features irrespective of its location. To say that buildings are absolutely identical on all parameters, except for location would not be absolutely correct," Yasko says. According to her, in the market it is possible to find examples of buildings that are located far from the center and in inconvenient places that are rented out at higher rates than buildings whose location, at first sight, is faultless.

"Nevertheless the level of rates in the peripheral areas differ quite significantly from central areas. The difference can reach 30%," says Yasko.

According to Khomenchuk, "a normal developer scrutinizes whether this or that class of building is suitable for the specific location." "By defining the necessary sums of investment in the construction or reconstruction, the developer can come to the achievable rent rate and potential audience of the premises. There is no sense in copying the buildings in Kotelniky under construction on the first row of Tverskaya street, the expenses on construction will not be recouped, as the project has a different target audience," she explains.

However some patterns can be followed all the same. According to the president of CMI Development Boris Kiperman, it is enough to analyse the rent rates of class A offices within the Garden ring and in immediate proximity from the MKAD. These stand at $1,300-$2,000 and $450-$700 per sq.m a year accordingly.

In the opinion of Kira Smirnova, head of the commercial real estate department at Vesco Consulting, the difference in rent can reach up to 100% depending on the location not only of class A premises, but also class B. "For example, to rent an office in a class B business center in Tushino will cost on average $550 per sq.m a year, and to rent a similar premises on Tverskaya will cost on average $1,300 per sq.m a year," she says. Khomenchuk gives an example of when the premises of one company are located in different parts of the city: "The office projects of Horus Capital, Burevestnik on 3rd Rybinskaya ulitsa and Luch on Bolshaya Pirogovskaya Ulitsa are both reconstructions and in general are similar to each other. Both offer approximately 30,000 sq.m of office premises. However the rate in the first building is 560 euros per sq.m a year, and in the second are 1,150 euros per sq.m a year excluding maintenance costs." It is interesting that in the advertising of both these projects the factor of location is used. In one case the affinity of the Kremlin - 3 km – is emphasized, and in the other – the affinity to Losinoostrovsky park.

Rental rates similarly depend on location in the St. Petersburg real estate market, however there are divergences as there are not as many places and prices, as in Moscow. According to Alexei Lazutin, commercial real estate director at Becar Realty Group SPb, in particular, in the Renaissance Plaza business center on Ulitsa Marata (near Nevsky prospekt and the Moskovsky station) the rent rate is $840 per sq.m a year, including operating costs, and in the Benua business center on Sverdlovskaya Naberezhnaya (quite far from the city center, in the area of the 50-Letiya Oktyabrya Park) are from $770 per sq.m a year, including operating costs.

The right stuff inside

"The characteristics of a building are also important when choosing a premises. If you take into account premises with similar locations and their other components, offices with less attractive engineering equipment will simply be of a lower class," says Smirnova. According to Yasko, the engineering solutions of a building directly affect the class of the building. According to the classifications of office buildings introduced by the Moscow Research Forum, all criteria concerning the engineering of a building are obligatory for it to conform to class A. If we’re talking about the Central Administrative District, if a building doesn’t have sufficient technical parameters it will be classified as class B, adds Smirnova.

To rent a hi-tech class A office at Mayakovskaya 5 minutes from the metro will cost about $1,500 per sq.m a year, and to rent premises in a neighbouring business center with less modern technical solutions and class B will cost approximately $1,000 per sq.m a year. However the owner of an office building always has the possibility of upgrading engineering. "After modernization of an office building its rent rate increases depending on the level and quantity of innovations. Rates in a modernized class B business center can grow 15-20%,” Smirnova gives an example.

"Upgrading, as a rule, can relate not only to engineering systems, but also to internal lay-out and the design features of a building, such as the height of ceilings. As a result a proprietor improves the quality and class of a premises and raises its rent rate," Yasko explains. According to Natalia Ignatova, deputy director of the department of work with corporate clients at Cushman & Wakefield / Stiles & Riabokobylko, buildings with identical engineering systems belong to the same class.

However, in Khomenchuk’s opinion, it is impossible to separate the engineering of a building from its architecture and lay-out. "Nobody needs an “intelligent” building if the area of a floor is 300 sq.m, and the height of the ceiling is 2 m. The engineering of a building can significantly affect prices in a large, newly constructed project, but not in reconstructed premises.”

The rental rate of an office in a former private residence in a quiet center does not essentially depend on the engineering of a building. For example, business parks abroad have been standing up to their competition with "green" engineering-architectural solutions for a long time, and skyscrapers with the speed of their lifts. The superiority of characteristics in such projects are capable of attracting tenants, who are prepared to pay for technical innovations," she says.

Waiting for a shuttle

Participants of the market estimate the factor of transport accessibility, which some time ago was an extremely important one for successful office projects, differently. "The importance of transport accessibility has gradually started to fade into the background. If an office building has a good view of the Kremlin, one-way traffic or insufficient parking will not reduce its profitability," Smirnova is assured. In her opinion, a difficult turn or a narrow road to a business center can lower its rental rate by a maximum of 10%.

However not all experts share this point of view. "The transport accessibility of an office building can significantly be reflected in its rent rate. Buildings with an inconvenient location both for pedestrians, and motorists can lose out to the competition. To rent offices located further than 10 minutes walk from a metro station, can be up to 20% cheaper," Yasko says.

This mainly influences offices located outside the center. According to Elena Gerasimova, a marketing expert at GVA Sawyer, for business centers located outside the MKAD, the commercial conditions depend on the distance from the motorway, the prestige of the area for office accommodation and the presence of shuttle buses. The expert notes that for premises located within the limits of the MKAD, but outside the Third Transport Ring, transport accessibility becomes a key factor. Gerasimova cites as an example two premises of company Placon: the Barklay Plaza complex measuring 16,000 sq.m (6 Ulitsa Barklaya) and the Berezovaya Alleya complex measuring 20,000 sq.m (5a Berezovaya Alleya). Both complexes offer identical conditions to tenants: the step of columns is 6 and 9 m, they have open lay-out, they are in shell-and-core condition, there is one car parking space per 150 sq.m of office premises and even identical LG lifts with a capacity of 1000 kg. However in the first complex, according to GVA Sawyer, the rent rate is $1,000 per sq.m a year, and in the second is $570 per sq.m a year.

The only difference is that the first office complex is 5 minutes walk from the metro, and the second is approximately 15 minutes by transport. Moreover, in the first complex traffic intersections are located nearby, and in the second it is some distance to reach them.

"Depending on the location of the project and the target audience transport accessibility will have a varying influence on the rent rate. If the project is in the center, it will be close to the city’s infrastructure, and 5 or 7 minutes to a metro station will not be reflected in the rent rate. Complexes outside the Third Ring, where there are less metro stations and increased distances between each one, are more dependent on transport accessibility as the majority of tenants do not like to have "shuttle buses" as the only transport connection with the city," Khomenchuk explains.

Components of the future

Market participants differently assess the prospects of various factors that define the rental rate of office premises. "As before, the class of premises and location will play a key role in defining the rental rate. The change in their influence will most likely be insignificant," says Boris Kiperman. According to him, since the very existence of the commercial real estate market, the main characteristics of an office building have been a favourable location, a good level of finishing, and enough parking. "But already now, in connection with the transport and environmental problems, the trend for tenants to move outside the Garden Ring has already started. Therefore in the future the engineering and other characteristics such as the level of furnishing, and the convenience and general condition of the office, will have more value," he explains. A gradual decrease in the importance of location is a trend noted by market participants.

"All factors are quite important in forming the rental rate and they are considered no matter how long the building has been on the market. It is natural that in due time the engineering systems of any building will become outdated, thus reducing the rate, and perhaps lowering the class. Moreover, as the market becomes more mature and competition becomes stronger, requirements for the quality of a building, its engineering systems and management will become more important. It is clear that location is not subject to improvement, but transport accessibility and the environment of a building can be subject to some slight improvements, and therefore these factors will always be important," considers Yasko.

In connection with the possible occurrence in the Russian office market of new formats, such as business parks outside the city, one of the key factors in defining rental rate may become an ecological component. "Parking places and multi-storey car parks have growing importance at business centers," Lazutin adds. Thus, in the opinion of experts, the Russian office real estate market is moving ever closer towards western standards.