Guiding Lines: Who Will Wait the Longest?

A psychological stand off between proprietors and tenants has already lasted a month in the office market.

The former hold their prices, the latter are in no hurry to rent areas. The volume of supply is increasing. According to Cushman & Wakefield/Stiles & Riabokobylko (C&W/S&R), vacant office premises in completed buildings has grown 1.5 times in two months from about 1 million to 1.5 million sq.m. At the same time the number of transactions is falling - according to Praedium Oncor International, in the third quarter there were practically no sale and purchase transactions.

But interest in real estate has not gone. The number of calls at C&W/S&R, according to Lada Belaichuk, deputy head of the research department at the company, has even increased. Potential tenants are waiting for discounts. Asked rental rates since the end of September have decreased by 15-25%, notes Olga Shirokova, head of research and consulting at Blackwood.

In October and the first week of November, according to C&W/S&R, in 20 buildings prices have been officially reduced. In November, rates were reduced on average by 20%. According to GVA Sawyer, in October - November in the Federation tower multifunctional complex rates were reduced on average by 35%, having reached $1,400-$1,990 per sq.m a year. In the Nordstar Tower project rental rates have decreased by 15%, and the minimum by 30% ($900-$1,300 per sq.m).

Sale prices have also fallen. Unofficially brokers quote discounts of 10-20%. There has been a reduction in the sale price of the Federation tower complex from $15,000 to $14,500 per sq.m within the last two months (data GVA Sawyer). In the opinion of Elena Gerasimova, an analyst in the consulting department at GVA, a reduction in demand to purchase office areas will cause a further decrease and correction of sales prices to be observed at the beginning of 2009.

Gerasimova expects rates to have fallen 10-15% by the end of 2008 – start of 2009, and in some cases by 20-40%. A correction in rental rates will occur first of all in premises that don’t meet the standards of the class assigned to it by the proprietor and in initially overpriced business centers. In the medium term prospect, in her opinion, prices will stagnate and, possibly, at the end of 2009 - the beginning of 2010 begin to increase within the limits of 10-12%.

Tenants are already trying to optimize outgoings. With a view of reducing expenditures, VTB has postponed its move to the Federation Tower in Moscow-City from 2009 to 2010. The company has tried to decrease the period of rent, "some tenants are trying to conclude rental agreements for a period of about a year in connection with the uncertainty in the market," notes Gerasimova. In immediate prospects reduction of terms of rent from 5-7 years till 3-5 years is expected. Preliminary conditions and even operating rental contracts are being revised but the conditions of the bargaining are not being disclosed. A unique "public" example of a breakdown of a significant preliminary rental contract is the refusal of IBS to rent 36,800 sq.m in Nordstar Tower business center.

The companies "dump" surpluses of the areas. While the prices of sub rent above market. In opinion of experts, it means, that to tenants yet so it is bad, as they try to show. For last two months the offer on sub rent has grown on 50, having reached 100 000 sq.m.

Shirokova is convinced that the main changes in the office market – the mass reduction of rental rates for already occupied buildings and moving of offices to more remote areas - can be expected no earlier than December, when the majority of rental contracts are renewed.

Next year Shirokova expects the redistribution of demand to continue. In her opinion, in the center small blocks will be popular while larger premises will be more popular in more remote premises – outside the Third Ring and in the area of the MKAD. There will be a growing trend for the minimum area of a block for rent to fall. Already now in business centers where previously you could not rent blocks less than 500 sq.m, it is possible to now rent 200 sq.m.

More and more areas are becoming vacant. Valentin Stobetsky, head of office real estate at Knight Frank, considers that in 2009 the share of vacant premises in the market will increase to 8-10%.

But Stobetsky is assured that the Moscow office market is not under threat from saturation: in 2009, only a share of the large number of announced projects will be realized. And in the regions up till 2011 he predicts that no more than half of announced projects will be realized.

Among the developers who have declared a freeze on their projects are Mirax Group (Admiral business center, the Rotating Tower project, Poklonnaya-11 business center, multifunctional complex on Luzhnetskaya Naberezhnaya), Peresvet (the construction of projects that should begin in 2012 are frozen). Sistema-Gals has suspended the construction of Leningradsky Towers, Evokom the Evokom Plaza business center, and Orekhovo-Domodedovo business park and the construction of a multifunctional complex on the crossing of Leningradskoye and Mezhdunarodnoye shosse. The realization of the Rossiya Towers in Moscow-City has been postponed. And ground work for the construction of the Mercury multifunctional complex (Moscow-City) have not begun. Tech Invest, which entered into an agreement on the receipt of credit with VTB for the construction of a transport terminal with a multipurpose complex has temporarily suspended financing because of the crisis. The premises of RIGroup – Dva Kapitana business center and Spartak-Mytishchi multifunctional complex will be completed by the Moscow region government.