2009 - CRE

"classy"­decor­then­who­will­compensate­thelandlord­for­the­standard­finishing­that­is­nolonger­needed?"­Nevertheless,­providing­fullyfinished­
premises­ can­ be­ compensated­ fromfuture­leasing­payments­–­and­can­provide­acompetitive­advantage­to­those­developers­whocan­offer­this­to­their­tenants.­Those­buildings­which­are­in­a­bad­locationor­are­poorly­conceived­are­not­in­demand­today.­
Oleg­Efremov,­retail­real­estate­consultant­at­
Cushman­&­Wakefield­Stiles­&­Riabokobylko,believes­that­weaker­projects­can­be­made­moreattractive­by­offering­installment­payments,­andsignificantly­reducing­security­deposit­requirements.­Finally,­if­the­refinancing­of­a­project­isnot­possible,­the­owners­should­be­willing­tomeet­with­retailers­and­investors­and­offer­thema­significant­discount­for­the­purchase­of­thepremises.­According­to­Alexander­Bolotnikov,real­estate­consultant­at­RRG,­landlords­mayoffer­other­incentives­as­well­including­providing­exclusive­rights­to­a­tenant­for­the­sale­ofspecific­
goods­ and­ services­ in­ the­ shoppingcomplex.­Other­market­participants­are­expecting­to­see­co-investments­into­shopping­centerscoming­from­large­international­retail­chains­inthe­near­future­–­and­especially­from­the­'bigbox'­networks,­which­are­the­only­ones­that­havemoney­to­invest­today.­
But­ Tatyana­ Klyuchinskaya­ claims­ therehas­
been­ no­ significant­ drop­ in­ consumerdemand­in­the­Moscow­region­and­she­doesnot­see­much­reason­to­grant­concessions­totenants­under­any­circumstances:­"Despite­thedemands­of­tenants­for­reduced­rents,­thoseprojects­
with­ clear­ completion­ timetables­
(opening­in­2009­or­2010)­and­which­have­thefinancing­needed­for­completion,­­will­haveno­trouble­in­attracting­tenants­without­anydiscounts­–­because­many­shopping­centerprojects­have­been­frozen­or­are­at­very­earlystages­
of­ implementation­ and­ thus­ supplywill­be­limited­in­the­next­few­years."­As­anexample­
of­ this,­ TriGranit­ will­ not­ be­ lowering­its­leasing­rates­at­its­already­operatingshopping­centers,­but­the­company­is­willingto­consider­making­concessions­to­help­attractnew­tenants­to­those­shopping­centers­that­arestill­under­construction.­However,­accordingto­Oleg­Efremov,­the­changes­happening­inthe­commercial­real­estate­market,­caused­by­asignificant­drop­in­consumer­activity­will­havean­impact­on­all­projects.­And­the­downturnhas­just­begun­and­it­will­take­some­time­for­allparties­to­adjust­to­the­new­reality.
Offices:­the­individual­approach­
Just­like­in­the­retail­real­estate­sector,­officetenants­are­seeking­discounts­and­other­concessions­–­from­leasing­rate­reductions­to­nothaving­to­pay­VAT.­Most­owners­are­giving­in­tothe­demands,­with­only­a­few­companies­holding­firm­–­like­Enka­and­Capital­Partners.­
According­ to­ Charles­ Boudet,­ European­
Director,­Russia­&­CIS,­Head­of­Office­Agencyand­Industrial­and­Warehousing­Departmentat­
Jones­ Lang­ LaSalle,­ one­ can­ find­ manythings­today­that­were­totally­unavailable­awhile­ago:­"Just­last­summer­when­'shell­&core'­
properties­ were­ selling­ like­ hotcakes,most­
owners­ did­ not­ want­ to­ even­ discussfinishing­works­and­now­they­gladly­provide­
'turnkey'­premises­to­their­tenants."­
#06 (112) / 16–31.03.09
"And­ rental­ 'holidays'­ have­ also­ beenextended­–­now­2-3­times­greater­that­in­thepre-crisis­period­and­quite­longer­than­whatis­needed­by­tenants­to­complete­finishingoperations,"­says­Anastasia­Milovanova,­deputy­director­of­the­office­real­estate­divisionat­CB­Richard­Ellis.­Access­to­quality­finishedpremises­has­also­opened­up­in­the­subleasing­
market:­ many­ companies­ rented­ extraspace­to­meet­their­future­expansion­plansand­now­have­no­need­for­this­and­are­subleasing.­Many­companies­are­even­refusingto­make­planned­moves­into­freshly­finishedpremises.­
Operating­ expenses,­ once­ reaching­
$170­ (in­ Class­ A­ buildings),­ thanks­ tothe­cheaper­services­of­subcontractors­havecome­
down­ to­ $100.­ The­ base­ rental­ ratesfrom­last­August­have­fallen­on­average­by­25-50%.­Of­course,­an­important­role­here­wasplayed­by­the­strengthening­dollar­exchangerate­–­by­25%.­"We­have­seen­Class­B­officesbeing­offered­at­$1,500­–­which­were­finallyleased­at­$550,­which­in­fact­is­more­in­tunewith­current­market­realities,"­says­Tatyana­
Romantsova,­head­of­PR­and­advertising­at­
Praedium­ONCOR­International.­
If­you­have­a­preliminary­agreement­thenthere­
is­ almost­ a­ 100%­ guarantee­ that­ thetenant­will­come­back­to­renegotiate­it­priorto­moving­in.­However,­if­a­building­is­70-80%occupied­then­brokers­see­no­point­in­loweringrents­and­aggravating­their­tenant­mix:­if­theyoffer­discounts­to­new­tenants­then­their­existing­tenants­will­soon­want­the­same.­Also,­for­the­first­time­in­many­years,­we­areseeing­a­trend­to­reduce­the­length­of­leasingagreements.­"Long-term­agreements­lasting­3-5years­are­now­things­of­the­past­with­companiespreferring­only­one­year­leases.­The­reason­isquite­simple:­tenants­do­not­wish­to­be­lockedin­at­current­rates,­anticipating­further­declinesin­
rates­ by­ next­ year,"­ says­ Omar­ Gadzhiev.­
Landlords­ are­ also­ granting­ significant­ discounts­to­tenants­who­pay­for­the­entire­term­ofthe­lease­up­front.­Another­typical­consequence­of­this­crisis­isthat­companies­are­accelerating­the­trend­whichstarted­a­while­ago­–­moving­away­from­the­citycenter.­The­reason­is­cheaper­rents.­"Currentdemand­for­an­office­located­in­close­proximityto­the­Kremlin­has­dropped­sharply­with­tenantsalso­forgoing­expensive­buildings­which­offerbeautiful­views­over­the­city.­And­demand­isincreasing­for­offices­within­the­region­of­the­Third­Transport­Ring­and­the­Moscow­Ring­Roadand­5-10­kms­beyond­the­Moscow­Ring­Road,"noted­Anastasia­Milovanova.­We­should­also­note­that­many­small­companies­are­able­to­find­rent­in­Class­A­buildingstoday­whereas­before­the­crisis­there­were­nosmall­units­available­in­these­premises.­Today,developers­are­more­willing­to­adjust­to­theneeds­of­tenants,­including­dividing­up­largeareas­to­meet­the­requirements­of­smaller­companies.­"Previously,­the­minimum­that­you­couldlease­was­1000-1500­sq.­m­–­today­that­minimum­is­200-300­sq.­m,"­noted­Omar­Gadzhiev.­
Finally,­ office­ brokers­ have­ noted­ a­ newtrend:­a­strong­desire­shown­by­an­increasingnumber­of­tenants­who­want­their­leasing­ratescalculated­using­a­"multi-currency­basket"­(i.e.the­rate­is­split­into­portions­denominated­invarious­currencies)­in­order­to­reduce­the­risks­of
| Investment |
| : Property Management |
| Moscow Neighborhoods |
| Architecture&Design |
exchange­rate­fluctuations.­Often­landlords­areforced­to­agree­on­a­fixed­dollar/euro­exchangerate­for­the­first­year­of­the­lease.­However,­
Sergey­Gogolev,­general­director­of­TriGranit­
Development­Russia,­believes­that­the­volatility­of­such­a­practice­only­increases­currencyexchange­rate­risks.­In­doing­so,­he­does­saythat,­"Class­A­office­owners­must­be­prepared­toprovide­discounts­to­their­tenants,­and­providepreferential­conditions­to­attract­new­tenants­–like­allowing­monthly­rental­payments,­insteadof­quarterly­payments."­
Warehouses:­islands­of­stability­
Owners­of­warehouses,­unlike­those­in­other­realestate­segments­are­less­likely­to­compromiseand­reduce­their­rental­rates.­Some­owners­areprepared­to­reduce­the­minimum­rental­periodfrom­7­to­5­years.­Vladislav­Ryabov,­head­ofindustrial­and­warehouse­real­estate­at­Colliers­International,­has­noted­a­reduction­in­depositrequirements­in­preliminary­and­main­leasingagreements.­There­has­been­a­review­of­securityrequirements­as­well­and­some­are­agreeing­tobank­guarantees­instead­of­hard­cash.­Today­storage­facilities­are­often­rented­outwith­office­space­accounting­for­less­than­10%of­the­total­area.­"Before­the­crisis­the­entirearea­would­be­offered­only­in­a­shell­&­corecondition­but­developers­today­are­ready­tooffer­office­areas­that­are­completely­finished,"explains­
Yegor­ Dorofeev,­ head­ of­ warehousing­and­industrial­real­estate­at­Cushman­&­Wakefield­Stiles­&­Riabokobylko.­"Some­developers­have­even­started­to­provide­shelvingin­the­warehouse­–­before­this­was­left­up­toeach­tenant."­However,­according­to­experts,even­if­the­area­is­leased­in­a­ready­state­thetenant­eventually­pays­for­this­–­perhaps­not­ina­single­payment­but­spread­out­over­the­entireterm­of­the­lease.­­As­far­as­actual­rates­are­concerned,­lowerrates­are­not­the­main­factor­in­choosing­a­warehouse.­Ryabov­says­that­if­you­lower­your­rentsyou­will­only­motivate­the­tenant­to­haggle­formore­discounts.­"Also,­all­major­tenants­are­wellaware­of­the­profitability­levels­of­warehousedevelopers­therefore­if­significant­discounts­areoffered­they­start­to­wonder­why­a­developer­isbeing­so­generous,"­explained­Dorofeev.­However,­Helen­Stark,­real­estate­consultantin­the­warehouse­and­industrial­department­at­CB­Richard­Ellis,­believes­that­given­the­reducedcommercial­
activities­ in­ almost­ all­ sectors,owners­of­warehouses­need­to­consider­doingmore­to­attract­tenants,­or­else­they­will­remainempty.­Most­other­brokers­feel­that­the­warehouse­market­is­far­from­saturated­and­even­intimes­of­lower­demand,­quality­warehouses­willfind­tenants.­The­only­exception­being­warehouses­in­the­early­stages­of­development­sincetenants­are­not­prepared­to­take­additional­risksand­prefer­to­deal­with­ready­built­or­almostfinished­complexes.­Brokers­are­advising­against­granting­discounts­for­premises­which­are,­for­the­most­part,already­occupied.­It­is­not­always­necessary­toreach­90-100%­occupancy­rates­in­a­warehouse.­Standing­firm­are­those­owners­who­can­dividetheir­warehouse­easily­into­1000-square-metersections­–­or­less.­Least­in­demand,­accordingto­Vladislav­Ryabov,­will­be­projects­with­a­largeoffice­component­and­which­are­harder­to­divide
Egor Dorofeev /
Егор Дорофеев, Cushman & Wakefield
Stiles & Riabokobylko
into­smaller­sections.­"If­you­must­seek­compromise­then­concentrate­on­the­structure­of­rentalagreement:­
especially­ the­ schedule­ of­ leasepayments,­
the­ structure­ of­ security­ depositsand­lease­guarantees­together­with­additionalbenefits­to­the­tenant­in­the­form­of­increasedrent­holidays,"­recommend­experts­at­Cushman­
&­Wakefield­Stiles­&­Riabokobylko.­
In­conclusion
Because­developers­will­be­forced­to­providediscounts,­their­profit­levels­will­be­lower­thanpreviously­expected.­However,­experts­do­notexpect­new­construction­sites­to­be­opened­in­Moscow­this­year­so­we­can­expect­that­afterthe­current­projects,­which­are­still­under­construction,­are­brought­on­the­market­–­therewill­
be­ a­ pause­ in­ construction­ and­ no­ newbuildings­will­arrive­until­2012.­There­are­fearsthat­the­market­will­face­severe­shortages­inthe­future­–­but­it­is­also­possible­that,­giventhe­
lower­ demand,­ the­ properties­ currentlyavailable­will­suffice.­­
Alexandr Tishkov /
Александр Тишков,
Jones Lang LaSalle
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