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Moscow scrambles to build offices July 24, 2007

Posted by grhomeboy in Architecture.

Moscow has the lowest vacancy rate for high-end office space in Europe, and although developers are racing to finish several large projects, no one expects that situation to change much anytime soon.

The city’s widespread Soviet-style architecture and services fall far short of the needs of international companies. So, real estate professionals say, developers are just barely keeping up with demand for new space, even though the city’s office stock almost doubled to 4.6 million square meters, roughly 50 million square feet, in 2005 from 2.6 million square meters in 2001.

Vacancy rates for prime office space were just 3 percent in 2005, compared with 7.3 percent in London and 5.7 percent in Paris, according to the management company Jones Lang LaSalle. “Business was in a slump in 1998 to 1999, after the economic crisis, when there was a lack of demand and a lack of construction,” said Timothy Millard, the head of research at Cushman & Wakefield Stiles & Riabokobylko, the Russian branch of the international property consultancy.

Then Russia, as the world’s largest oil exporter after Saudi Arabia, began to benefit from rising global oil prices. “When the economy started picking up, a lot of people came back, and new companies wanted to come in,” Millard said. “Russian companies wanted to trade up from their old, Soviet-quality space to have something better.”

Rent for prime space in Moscow, which includes offices in the widely used but undefined categories of Class A and B, climbed to an annual average of $700 per square meter from $540 in 2001. A recent report by Cushman & Wakefield said high-end office space was the fifth most expensive on that basis of 215 major locations around the world. Annual rent on top-end, Class A space was $890 a square meter.

Millard and other real estate experts said they expected demand for such offices to continue growing for the next two to three years, causing prices to increase slightly and vacancies to remain low. The lack of available land for sale or development has limited construction near the Kremlin walls, so almost all new projects have involved large office centers and business parks outside the city’s central Garden Ring area.

One of the largest of these areas, Moskva-City, will have 2.5 million square meters of residential, office, trade and retail space on 100 hectares, or almost 250 acres, along the Moscow River. Its main attraction will be the Federation Tower, which the Russian developer Mirax Group says will be the tallest skyscraper in Europe when it is finished in two years, at 340 meters, or 1,115 feet. The Hyatt hotel chain plans to occupy 44 of the 85 floors of the glass-surfaced structure. Other large multinationals, including Citibank, Procter & Gamble and IBM, have already moved into Moskva-City skyscrapers.

Mayor Yuri Lushkov has promised that the project will be Moscow’s version of Canary Wharf in London, and he plans to move most city offices to the complex as more buildings are completed. “The good thing in Moscow is that people plan big, so there are a large amount of significant projects going on,” said Michael Lange, managing director of Jones Lang LaSalle in Moscow.

Finding space often means a long search or preliminary lease agreements with developers even before ground has broken. “Last year we had 1.2 million square meters of net absorption in Moscow,” said Mark Stiles, managing director of Cushman & Wakefield Stiles & Riabokobylko, referring to the total amount of space that was leased, minus any space that was vacated. “That’s more than London or Paris. We tell clients you’ve got to work at it, because there’s not a lot of empty space just sitting around.”

Moscow’s property market, like other segments of Russia’s economy, is not without risks, though real estate professionals say there have been significant improvements since the early 1990s. But industry perceptions are still low. Industry experts ranked Moscow as having the most risky investment environment of 27 European cities, according to a survey by the Urban Land Institute and PricewaterhouseCoopers released last year. When the question concerned return over all, the city ranked 10th. It rose to 2nd place on office space, with 65.2 percent of the respondents calling it a strong buy.

Experts continue to cite a lack of transparency and weak legal protection of investors’ rights among the serious hurdles that must be tackled for a robust commercial market. But Russia’s economy is expected to grow by 5.7 percent in 2006, and many say Moscow, with its 10 million residents, may be too important to ignore. “The good news is that the risk perception is sinking, and attitudes are rising as the current economic and political situation overshadow the past,” Lange of Jones Lang LaSalle said. “The future of the market depends on where the economy goes and how the 2008 presidential elections go, and how these factors are seen by investors.”

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