Guiding Lines: Image is nothing

Just half a year ago moving to lower class office premises could have had a negative affect on the reputation of businesses, as a feature of the Russian market was enhanced attention on the image of a company, says Dmitry Zolin, a managing partner at London Consulting Management Company | LCMC. During the crisis the situation has changed completely: all companies are now trying to minimize costs. LCMC has seen a trend in the last few months of companies moving to more modest class offices. Saving costs is everything, for the big fish and the little fish. Optimizing costs has been placed higher than image and reputation.

Advisers not an appreciable reduction in activity on the office rental market. The majority of potential tenants have postponed plans to rent new office premises, waiting for rates to fall, says Natalia Blankova, a marketing expert at Peresvet-Invest. "Demand has fallen but the market has not died," adds Ruben Alchudzhyan, managing director of Praedium Oncor International.

Of those that remain in the market, many are looking for reasonable variants. The most widespread requirement today is premises of a smaller area. But there are others, notes Ian Al-Nuri, a leading expert in the office department at Penny Lane Realty. Large companies that previously preferred to have several offices, are asking consultants "to optimize their business" by bringing them together in one premises with more reasonable rental rates. Genfa Medica (has an office at 99 Leninsky prospekt) has remained in its rented building under more favorable conditions, notes Alchudzhyan. But, he continues, a painless move to cheaper offices is only possible when the conditions of the existing rental contract allow it. Then the saving can reach 50%. Although more often it is not easy and difficult negotiations with landlords to restructure rental obligations take place, he says.

For the majority of clients of high class offices located in the center of the capital, prestige is very important. With cutting costs in mind these companies prefer to reduce the volume of space they rent, and remain in the prestigious business center. The freed up areas in all classes of business complexes, move to the subrent market. According to advisers, PricewaterhouseCoopers, Renaissance Capital, Yandex, Intel, Alcatel, Orange Telecommunications, Colliers, Deloitte, etc, have all offered areas for sub rent. In particular, Deloitte has offered 7,000 sq.m. Another example is TNK-ВР, which in summer 2008 signed a rental contract for about 50,000 sq.m in the Western Gate business center, but now, in connection with a significant reduction in staff will reconsider the conditions and reduce the rented area, assumes Praedium Oncor International. In the Krylatskiye Kholmy business park 2,500 sq.m are offered in sub rent, although in the last two years there has been no free space, notes Elena Gerasimova, a leading analyst in the marketing department at GVA Sawyer.

Advisers predict further growth in supply in high class (class A and B) business centers and a fall in demand. According to Irina Florova, assistant director of the market research and analysis department at CB Richard Ellis, many office premises that entered the market at the end 2008 have not found tenants. This has been more so the case for buildings located far from the center and metro stations. The share of the free areas in class A premises has increased 4% in the space of two months (November and December 2008) and now stands at 9%, and in class B premises has increased by 3% and as of the beginning of January stood at 15% (data of CB Richard Ellis). In the submarket of Moscow-City, according to GVA Sawyer, the level of vacant areas in the fourth quarter of 2008 was 25%.

A fall in demand has forced proprietirs to become more compliant.

"We have reconsidered the volumes of rented areas: previously we offered whole floors measuring 1,500-2,500 sq.m. Now we are considering requests by potential tenants for areas measuring from 300 sq.m," says Anna Shishkina, head of marketing at Moskovsky Biznes Inkubator.

Since the beginning of 2009 the majority of proprietors of office centers have been prepared to lower rental rates (one of a few exceptions is the complexes of Enka).

In January alone, the fall in rental rates in class A and B business centers was 10-15%, notes Blankova. According to Al-Nuri, it is now possible to find premises in class A business centers at a rental rate of less than $1,000 per sq.m a year, and in class B complexes for less than $400 per sq.m a year. According to Geracimova, average rates in class A premises at the end of 2008 were $950 per sq.m a year, in class B+ were $650 per sq.m a year, and in В- were $500 per sq.m.

According to a forecast by London Consulting Management Company | LCMC, in 2009 demand for class A offices will be 20% lower. But the most significant fall - up to 40% - is expected in demand for class B premises. In 2009 GVA Sawyer expects demand to fall by 234,000 sq.m for class A offices and by 287,000 sq.m for class B offices in comparison with 2008.

A share of former tenants may move into the now cheaper class A premises but the rest will choose the cheaper class C segment, explains Zolin. Praedium Oncor International thinks that revival of the market cannot be expected any earlier than the third quarter of 2009.

Intensive recovery of demand for office premises will be directly dependent on the economic stability of the country. When the economy and the financial condition of companies improve demand for areas for business will become more active, and will lead to a growth in rental rates and sale prices at the end 2009. However a sharp increase in prices like in 2007, will not occur, the maximum will be 10-15% a year, notes Alchudzhyan.