q3 2012 office market report - knight frank...day: the office space market decentralization....

RESEARCH

Q3 2012OFFICE MARKET REPORTMoscow

Knight Frank

HIGHLIGHTS• Thenewconstructionvolumeofqualityofficecentersremainslow.During9monthsof2012,

152thousandsqmofClassAand242thousandsqmofClassBofficespacewasdelivered.Thesevolumesare24%lowerthanonesforsameperiodlastyear.

• Decentralization of business life in Moscow continues: 75% of new business-centers are locatedoutside the Third transport ring. On the other hand, quality offices in the city centre remain indemand.

• Demand for office spaces in Classes A and B remains at the level of 2011: for the period fromJanuarytoSeptember2012,theacquisitionsvolumeamountedtomorethan600thousandsqm,42%ofwhichareofClassA.

• The vacancy rate space has dropped from the beginning of the year from 12.5% to 11.7% inClass A and from 17.2% to 14.3% in Class B. Hence, net absorption amounted to approximately150thousandsqminClassAand480thousandsqminClassB.

• Rentalratesremainstableforalreadyayear:intherangeof$700–1,200persqmp.a.forClassAofficebuildingsand$350–650persqmp.a.forClassB.


2

Supply

By the end of 9 months of 2012, total sup-ply of quality office space exceeded12.3millionsqm,almostonefifthoftheareacomplieswithClassArequirements.ByJanuary2012,152thousandsqmofClassA(4objects)and 242 thousand sq m of Class B (21 object)havebeendelivered.

Deliveryvolumeremainslowduetotwomainreasons.Firstly,–adropindemandduringtherecessionof2008–2009bienniumhasledtoadeclineinnewconstructionvolume.Secondly,in 2010, when economic conditions began toimprove, the city-planning politics of Mos-cow administration underwent significantchanges,andthedeveloperswereinnohurrytostartnewprojects.Itshouldbenoted,thatthe number of announced projects graduallygrows.

Atrendoutlinedbackin2007continuestothisday:theofficespacemarketdecentralization.However,ifinthepastthetenantswerereadyto move further away from the center due tohighleaseratesandshortageoffacilitieswith-intheGardenring,nowadays,itisalsothepoli-ciesofMoscowauthorities,aimedat"unload-ing"ofthecitycenter,andrestrictionsonnewconstruction within the Third transport ring.Three quarters of the area put into operationin2012,arelocatedoutsidetheGardenring.

OFFICE MARKET REPORT

Nikola Obajdin, Director,OfficeDepartment

"It has already been a year since we have been taking notice of market performance stability, which testifies to the "maturing" of office real estate market in Moscow, a relatively young one compared to those of Europe.

The market development in pre-recession years has been somewhat chaotic: the de-mand was so high that practically any avail-able space was being absorbed. Rental rates were often unjustifiably high, which was coupled with shortage of quality facilities. During the recession of 2008–2009, rental rates on the Moscow market underwent a significant correction, especially when com-pared to more developed markets of Europe, where the rental rate matched the objects’ quality.

Presently , we do not observe significant changes in average rental rates: supply and demand remain in balance for more than a year already. A slight increase in the rental rates, as well as relocation of tenants (of-ten without increase in leased space) be-tween business-centers of the same class occur due to quality changes in supply structure. We believe that the develop-ment dynamics of office real estate mar-ket in Moscow in the future will be similar to Western economies".

Key indicators. Dynamics*

Key indicators Class A Class В+ Class B-

Totalstock,thousandsqm 12,306

including,sqm2,492+6.5%

6,654+3.7%

3,160+0.1%

DeliveredinQ1–Q32012,thousandsqm 394

including,thousandsqm 151.86 237.56 4.76

Vacancyrate,%11.76

-0.8p.p.*14.36

-2.9p.p.*

Averageweightedrentalrate**,$/sqm/p.a. 830= 480=

Rentalratesrange**,$/sqm/p.a.650–1,200

(1,000–1,300***)350–650 260–400

Operationalexpenses,$/sqm/p.a. 110–210 80–120 50–95

*Comparingtotheendof2011

**ExcludingOperationalExpensesandVAT(18%)

***Rangeofaskingrentsforpremiumspace

Source:KnightFrankResearch,2012

BCWallStreet37ValovayaSt

www.knightfrank.ru

3

Demand

Highactivityofbothtenantsandbuyerscouldbeobserved on theoffice real estate market of thecapitalduringthefirsthalfof2012.Eventhevola-tilefinancialmarketindicatorsandenergypricescouldnotpreventthissituation.Notwithstanding,thetake-upvolumeduringQ3wasquitelow,duetothetraditionaldeclineinbusinessactivityintheperiod of summer vacations. Current activity onthemarket,however,promiseshighresultsinQ4.

Thevolumeofofficespacetake-upinClassesAandBfromJanuarytoSeptember2012amount-edtoabout630thousandsqm.Thisisinsignifi-cantly(7%)higherthanforthesameperiodlastyear.Itshouldbenoted,however,thatthisfig-uredoesnottakeintoaccountthedealsextend-ingexistingleasecontracts.

Transactions resulting frommigrationof tenantsinto the building of the same class constituteaboutathirdofthetotalClassAofficespacetake-up,furthermore,theycommonlyresultintransferswithoutincreaseintheleasedspace.Itshouldbesaidthatthereisalargenumberofoutdatedfacili-tiesamongClassAbusinesscenters.Whileformal-lytheystillcomplywiththeclassificationrequire-ments,theylosetonewerobjectsintermsofquality,engineeringsystemsandtechnologicalsolutions.

It isnoteworthythat in2012,ashareofofficespace acquisitions for private use has greatlyincreasedwithinthetake-upstructurereachingalmost25%.

Office properties delivered* in Q1-Q3 2012 and due to be completed by the end of 2012

*Officeprojects,thatpassedStateCommissioninQ1-Q32012.ClassesaccordingtoMoscowResearchForumSource:KnightFrankResearch,2012

Class A Class B

0

400

300

200

100

500

600

700

20102009200820072006 2011 2012

thousand sq m

II IIIII IIIIV IVI I II III IVI II III IVI II III IVI II III IVI II III IVFI

New delivery remains low compared to the pre-recession figures


BusinessHouseDomino74PyatnitskayaSt


4

Vacancy rate shows only slight variation: fromthe end of 2011 it dropped by 0.8 percentagepointsinClassAandby2.9percentagepointsinClassB,amountingto11.7%and14.3%inClass-esAandBrespectively.

Concerning the market for high-quality officespace in general, one can speak of its advancetowards a more mature stage of development:5–7 years ago, we observed a large numberofnewcompaniesontheRussianmarket,asig-nificant increase of existing stock and activetransfer of developing companies from admin-istrativeobjects intoqualitybusinesscentres.Presently,thisprocesshasbecomelessdynamic.Nonetheless,newtenantsonthemarketofqualityofficespacestillconstituteasignificantshareof demand (about 60%), they commonly movefromtheofficesoflowerclass.

Commercial terms

Averagerentalratesforhigh-qualityofficeob-jectsremainatthelevelofmiddleof lastyear,and account for $830 per sq m p.a. for Class Aand$480persqmp.a.forClassB.

The maximum rental rates are observed in thebusiness centers located in the city center($850–1,200persqmp.a.).ClassArentalrateintheThirdtransportringis20–25%less:$600–900 per sq m p.a. Class A office space outsidetheFourthtransport ring is leasedata rateofaround$500–550persqmp.a.

For severalyearsalready,Moscow isoneof thethree leaders among European cities in termsoftherentalratesforpremiumoffices.AlthoughLondonstillholdsthefirstplacewiththeratesinWest-Endreaching$1,600persqmp.a.,Mos-cowtakesthesecondplacerecording$1,200persq m p.a. Paris closes the top three, with pre-miumratesat$1,077persqmp.a.

PremiumobjectsrentalrentsincreasedinmostEuropeancitiesoverthepastyear.ThehighestgrowthwasnotedinsuchcitiesasLondon,Ge-nevaandParis.Rentalratesforpremiumofficespace dropped in the capitals of the countrieswithdifficulteconomicsituation:negativedy-namicscouldbeobservedinDublin,Madrid,Bar-celona,LisbonandMilan.

Key deals in Q1-Q3 2012


Take-up Delivery Vacancy rate

0

200

150

100

50

250

300

2011

Class A Class B

2012

thousand sq m

II III IVI II III IVFI0

20%

15%

10%

5%

25%

30%

2011 2012II III IVI II III IVFI

The vacancy rate in Classes A and B is gradually reducing


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5

Forecast

According to our estimates, the volume of of-ficespacecommissioningfor2012,willamountto roughly 672 thousand sq m, which is lowerthan the past year’s figure by 7%. We antici-pate several major objects to be delivered inQ4.AmongsuchClassAobjectsonecouldnameALCON, City Point of Moscow-City and CountryParkIII,whilemajorobjectsofClassBincludebusinesscenterW-Plaza2andbusinessparkAt-mosphere. According to our forecasts, the vol-umeofofficespacedeliveryin2013willapprox-imatelyamountto330thousandsqminClassAand670thousandsqminClassB.

Thetake-upvolumebytheendoftheyearwillap-proximately amount to 900 thousand sq m, thatalmostmatchestheresult2011.Itisworthnotingthatsomelargetenantsarecautiousinmakingde-cisionsaboutmovinginviewofinstabilityintheworldeconomy.Incaseofafavourableeconomicsituationin2013,inourview,anincreaseintake-upcomparedwiththecurrentyearispossible.

Atthemoment,high-qualityofficespacemarketinMoscowisstable:deliveryofthenewobjectsmeets the terms of take-up. The vacancy rateis slowly dropping, and rental rents are quitestable(theiradjustmentnotmorethan5%peryear).Wedonotexpect significantchanges inratesinQ4,however,in2013,incaseofpositivedynamics of demand, some growth is possible,butnomorethan5–7%.

Class A

0

1,200

1,000

800

600

400

200

1,400

1,600

2011 2012

$ per sq m p.a.

2010200920082007200620052004II III IVFI

Class B

Rental rates for office space in Classes A and B from mid-2011 remain stable


0 1,2001,000800600400200 1,400 1,600$ per sq m p.a.

Lisbon

Copenhagen

Prague

Brussels

Vienna

Warsaw

Madrid

Dublin

Kiev

Amsterdam

Munich

Oslo

Milan

Stockholm

Geneva

Paris

Moscow

London (WE)

Moscow occupies one of the leading positions in the rating of premium rental rates in Europe


Europe

Austria

Belgium

CrechRepublic

France

Germany

Ireland

Italy

Monaco

Poland

Portugal

Romania

Russia

Spain

Switzerland

TheNetherlands

UK

Ukraine

Africa

Botswana

Kenya

Malawi

Nigeria

Tanzania

Uganda

Zimbabwe

Zambia

SouthAfrica

Middle East

Bahrain

UAE

Asia Pacific

Australia

Cambodia

China

India

Indonesia

Malaysia

NewZealand

Singapore

SouthKorea

Thailand

Vietnam

Americas & Canada

Bermuda

Caribbean

Canada

USA

EstablishedinLondonmorethanacenturyago,KnightFrankistherenownedleaderoftheinternationalrealestatemarket.TogetherwithNewmarkCompany,KnightFrank’sstrategicpartner,thecompanyencompasses243officesin43countriesacrosssixcontinents.

KnightFrankhasbeenasymbolofprofessionalismfortensofthousandsofclientsallovertheworldfor116years.After16years,KnightFrankhasbecometheleadingcompanyinthecommercial,warehouse,retailandresidentialrealestatesegmentsoftheRussianrealestatemarket.Morethan500largeRussianandinternationalcompaniesinRussiahavealreadymadeuseofthecompany’sservices.

ThisandotherKnightFrankoverviewscanbefoundonthecompanywebsitewww.knightfrank.ru

© Knight Frank 2012Thisoverviewispublishedforgeneralinformationonly.Althoughhighstandardshavebeenusedinthepreparationoftheinformation,analysis,viewandprojectionspresentedinthisreport,nolegalresponsibilitycanbeacceptedbyKnightFrankResearchorKnightFrankforanylossordamageresultantfromthecontentsofthisdocument.Asageneralreport,thismaterialdoesnotnecessarilyrepresenttheviewofKnightFrankinrelationtoparticularpropertiesorprojects.ReproductionofthisreportinwholeorinpartisallowedwithproperreferencetoKnightFrank.

Office Real [email protected]

Warehouse Real Estate, landViacheslavKholopovDirector,Russia&[email protected]

Retail Real EstateSergeyGipshDirector,Russia&CIS,[email protected]

Residential Real EstateElenaYurgenevaDirector,Russia&[email protected]

International [email protected]

Professional Consulting ServicesKonstantinRomanovDirector,[email protected]

Financial Markets and InvestingEvgeniySemyonovDirector,[email protected]

Valuation ServicesOlgaKochetovaDirector,Russia&[email protected]

Marketing, PR, Market Research, HRMariaKotovaExecutiveDirector,[email protected]

Business [email protected]

Saint PetersburgNikolaiPashkovGeneralDirectornikolai.pashkov@ru.knightfrank.com

KyivYaroslavaChapkoBusinessDevelopmentDirectoryaroslava.chapko@ua.knightfrank.com

MOSCOW

Russia,115054,26ValovayaStPhone:+7(495)9810000Fax:+7(495)9810011

ST.PETERSBURG

Russia,191025,3BMayakovskogoStPhone:+7(812)3632222Fax:+7(812)3632223

KYIV

Ukraine,04071,39-41HoryvaStPhone:+380(44)5456122Fax:+380(44)5456122

RESEARCH

q3 2012 office market report - knight frank...day: the office space market decentralization....

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