Occasion for Optimism
The year 2009 was very difficult for the Petersburg real estate market. Some have already christened it as “the worst year in history.” The depth of the fall was different in different segments but problems were common for all. The drop of rental rates, shrinking demand, and credit crunch resulted in the suspension of development projects. At the same time representatives of the business community are consoled by the fact that everything could be worse. Everybody mastered volens nolens the new rules of the game and went on working.
Offices
The office segment went through the hardest ordeal. Already in the 4Q of 2008 the market was confronted with plummeting demand. Having noted this trend, the managers began lowering the rates. The acute reduction phase lasted through the first half of 2009. As estimated by Jones Lang LaSalle, from October 2008 through January 2009 the rates dropped by 20%. A radical reduction both in rubles and dollars could be observed in the IQ of 2009 (30% in dollar terms); the rates were then falling by 6–7% per quarter in dollar terms (8–10% in rubles).
By the springtime all tenants (even those that did not experience serious problems) noted the sinking rates and began bargaining with their landlords. Meanwhile all office “tycoons” realized the inevitability of rent reduction and launched a vigorous campaign of enticing clients. This put more pressure on the rates, since on learning the rates offered by their landlords to new clients longstanding tenants went to see their managers and threatened them with leaving their office facility. Frequent moves became a true scourge of the market. In the words of Andrei Pushkarsky, Commercial Director of Imperia Holding Company (running the Senator business centers), nearly 80% of all St. Petersburg companies studied a possibility of changing their office premise, negotiating with several business centers at one time. Eventually around 30–40% of tenants moved to new offices. The rest were granted a radical rent discount. The spring and early summer was the period of most intense moves. All market experts agree that they have not witnessed such a number of moves for several years.
As noted by the experts of Colliers International, the main bulk of deals closed in this year were caused by the rotation of tenants. For all that, most premises were leased at business centers whose owners pursued an aggressive pricing policy. Almost no “new” tenants leased office areas in this year. Out of 100 transactions 90 fell on moves and “new” tenants accounted only for 5,000 sq m. The biggest deal was stricken by WiMAX, an operator of Scartel (Yota trademark), which moved from a Senator on Vasilievsky Island to Atlantic City on Savushkin Street. The company leased 7,800 sq m for five years, having occupied nine out of 27 floors in Atlantic-City.
Pursuant to a survey made by Praktis, 97% of properties have vacant areas. The average vacancy rate is 16.1% of the rentable surface. Not only did the managers lower the rates and converted them into rubles for the sake of tenants’ attraction; they began including a much wider range of services in the price. In the words of Lilia Eremenko, coordinator for dealing with the tenants of EKE (Pulkovo Sky), now operating expenses are included in the rate. Many offices are offered already with fit-out, which was done very seldom before.
By the fall of 2009 the market participants began pursuing a more weighted policy. In the third quarter the trend to rate stabilization even developed. As reported by BTK-Development, although the level of demand for office real estate remained at a low level, the rates stopped sinking and a growth by a symbolic 1% was fixed in September.
The drop of rates is said by many to be inevitable even without the crisis as a result of overproduction: the projects announced for the nearest years were too large-scale and complex developments. The same overproduction crisis brought the markets of Western Europe to those rates which are now being set in St. Petersburg.
It is indicative that practically none of the players have left the market. The only exception is Stroymontazh which applied for bankruptcy. However the experts do not exclude that the reason is the abundance of residential projects developed by the company.
It should be noted that during the year the market volume has increased, though not so radically as was predicted. Projects in early development stages were put off. Out of the 836,000 sq m announced for the nine months only 320,000 sq m were actually commissioned. Over 300,000 sq m expected on the market back in 2008 never saw light. However projects with 50–80% readiness degree proved easier to commission than to conserve. Therefore during the nine months of 2009 the supply swelled by 23% (to 1.16 million sq m, as estimated by Praktis). This aggravated market competition and pressed the rates further down. In analyst estimation the accrual of office space may exceed 260,000 sq m in 2009, whereas only 90,000 sq m in classes A and B (according to the consulting department of Colliers International) were actually absorbed.
As reported by LCMC, almost all properties delivered to the market in 2009 represent classes A or B. As for new C-class properties, the only one is the 8,000-sqm BC Nevskaya manufactura, which accounts for less than 5% of total office space put into operation from January to September 2009. Nevertheless it is this property that attained to 100% occupancy due to fortunate location and low rental rates.
Retail
According to Colliers International, the St. Petersburg market currently counts 148 large retail properties with gross built area amounting to 3.8 million sq m and GLA — to 2.4 million sq m. The segment of shopping centers still holds sway: 72 shopping centers have the GBA of 2.5 million sq m. and GLA of 1.66 million sq m. Jones Lang LaSalle estimates the quality rentable area in St. Petersburg at 1.27 million sq m in 39 conceptual shopping malls. Such is the stock the city inherited from the period of booming growth. Only three properties were delivered to the market in 2009: the 22,000-sqm SC Cruise developed by Nevsky Alliance, 10,800-sqm SC Rybatsky developed by LLC Krom, and the second phase of SC Felicita-Pionerskaya. Four more projects are announced for commissioning in this year: SC Aura, SC Smile, mixed-use Nevsky Plaza and SC Khoroshaya zhizn (the aggregated surface of these properties is 62,000 sq m).
The existing players had to be accommodated for the new conditions. Since the beginning of the year all retailers have been affected by waning turnover. Many closed down unprofitable stores and a lot of space has been vacated in lame malls. High quality properties operated by a professional team were able to quickly replace the tenants that moved out. Thus the Grand Canyon mall could quickly replace the anchor tenants (Nash hypermarket) that exited the market by another player of the same segment — O’Key hypermarket.
Grocery retail was the least to suffer as could be expected. Thus with the general fall of retail by 17% (the data of the Petersburg Statistics Committee), nonfoods sagged by 34%. The sphere of democratic entertainments was not much affected either: cinemas proved the only segment in the entertainment industry which suffered no losses in times of crisis. The premium segment suffered most and some stores operating in this segment closed down; yet the shopping malls did not get empty as luxury brands were substituted with more democratic formats.
In spite of the growing share of vacant areas, the landlords had not reduced the rates until April 2009. The a slow process of market stabilization commenced, since the landlords realized that the set rates were out of tune with the state of the market and corrected them. Experts point out that the reduction of rates was differentiated and ranged from 5% to 50%.
Since September the market perked up and the rates somewhat grew against their summer level. Ludmila Reva, Business Development Director of ASTERA SPb, estimates the current level of rental rates at shopping centers for clothing and footwear retailers at 30,000 rubles/sqm/year including VAT; for anchor tenants and entertainment operators — 4,000–10,000 rubles/sqm/year including VAT and for grocery chains — 10,000–15,000 rubles/sqm/year including VAT.
The street retail segment saw a deeper dive — by 35–50% in the first quarter (compared to IIIQ of 2008). However the rates had also stabilized by autumn and at some premises the rates even grew. The stabilization of prices motivated tenants and many are in a hurry to improve the location of their stores. This is particularly apparent in street retail where the properties strung out along the main retail routes are being steadily occupied by democratic establishments.
The analysts of Jones Lang LaSalle add that regional and super-regional centers with professional concepts are most effective under the crisis. The occupancy of 70–80% is now considered a very good index. In 2009 such projects under construction as Galeria, Stockmann and Leto reported on signing contracts of lease with future tenants regularly, which stirred other market participants to envy.
However, apart from these three projects, developers are not going to delivery any large and conceptual projects to the market in 2010. As reported by ASTERA, the following shopping-entertainment and mixed-use projects were frozen in 2009: a 26,000-sqm project on Dumskaya Street developed by PAN and 200,000-sqm Apraksin Dvor developed by Glavstroy. The developers also quitted such projects as the 250,000-sqm Nevsky Coliseum by Margheri, 85,000-sqm Mandarin by Arsenal, 50,000-sqm Shkipersky Mall by SiB and all projects by RTM Development. Adamant put off the realization of its new projects and Makromir retained a single project on Dolgoozernaya Street. Colliers International estimates the amount of frozen projects at one million plus square meters, of which 300,000 sq m were already under construction at the time of conservation.
Hotels
St. Petersburg owes the grand scale of hotel construction to a municipal program of hotel infrastructure placement. The crisis has already corrected the plans of the city government. While adopting the program in 2007 the authorities intended to have increased the urban accommodation stock to 34,000 rooms by 2010, now the matter concerns 32,000 rooms by 2011. Yet the hospitality segment looks better than others all the same — this is the only sector where developers still announce new projects albeit with delivery dates after 2011.
According to Aleksey Chichkanov, Chairman of the Committee for Investments and Strategic Projects, now there are about 580 hotels or more than 26,000 rooms in the city’s hospitality market. Aside from mini hotels, 66 quality hotels from 3 to 5 stars and with the aggregated lodging stock of 13,736 rooms operated in the city, as of late IIIQ, 2009. The 557-room three-star Holiday Inn St. Petersburg — Moskovskye Vorota and the second phase of Corinthia Nevsky Palace (107 new rooms and a congress area) became the largest projects completed in 2009.
In the words of Irina Solonova, Director, Consulting Director, GVA Sawyer, four-star hotels prevail in the structure of quality accommodation stock (49%) followed by three-star hotels (38%) and five-star hotels (13%).
“New interest in the hotel segment is manifested in the peripheral on the parcels earmarked for creating sporting and recreational facilities. Thus a number of developer initiatives have emerged in Primorsky district during the recent half year. As regards the center, construction of the already launched hotel construction projects continues even in the upper upscale segment (5*) which suffered most,” says Oleg Gromkov, head of the market research group at Knight Frank SPb. True, compared to the pre-crisis period, fewer projects are announced anyway while the delivery dates of projects under construction are put off.
In the words of Andrei Sokolov, in charge of analytics at the Property Managers and Developers Guild, the occupancy of St. Petersburg hotels has dropped by 25–45% by comparison with 2008. Large and upmarket hotels incurred highest losses. At the turn of the year the situation was so deplorable that many of them were forced to conserve part of their accommodation stock till better times: this is what Grand Hotel Europe, Corinthia Nevsky Palace, Park Inn on Pobeda Square and Sokos did. The best performance was demonstrated by the mini hotels operating in the middle-price and economy segments.
The high season gladdened the hoteliers, as notwithstanding the crisis the level of hotel occupancy was still very high — around 90%. Yet with the first colds the tourist flow ran low again. The occupancy of St. Petersburg hotels in the IIIQ of 2009 fluctuated between 35% and 50%. The flows of business and leisure tourists sagged by 10–15% and 15–20% on average, respectively.
The segment of congress or corporate tourism saw the greatest decline (in excess of 85%). Yet it is these segments that will recover sooner than others; in expert opinion, this can be expected already in 2010. According to Mr. Isaenko, the maximum reduction of prices was fixed in the three-star segment. Mini hotels and the hotels of large chain operators characterized by flexibility in their pricing policy and high quality standards look most viable in times of general instability.
Knight Frank’s Oleg Gronkov that RevPAR (revenue per average room) dropped by 14–32% in different categories during the three quarters of 2009; owing to the shortage of supply in the three-star category, the same indicator did not drop here as low as in the market at large.
The increasing number of hotels is put up for sale. In the beginning these were peripheral and suburban hotels having low liquidity, but now hotels with prime location also go on sale. For instance, the construction corporation Elis offers the three-star 221-room 8,950-sqm Dostoyevsky Hotel accommodated in the mixed-use complex Vladimirsky Passage in central Petersburg for 50 million euro.
In the wake of the crisis a number of developers eliminated the hotel function in their mixed-use projects. Thus Raiffeisen Evolution decided to curtail its mixed-use project San Gally Park Center and to exclude a four-star 230-room hotel. OAO AKB Eurofinance Mosnarbank also gave up on a hotel: the company plans on taking down the Northern Crown Hotel on River Karpovka Quay and develop a residential project in its stead. The delivery of many hotels is delayed and at the present time about 50% of all hotel construction projects have been suspended. Among the frozen projects under construction is Sheraton in Pulkovo, Domina Prestige on Bolshaya Morskaya Street, Starwood on River Karpovka Quay and a hotel which is part of the Nevsky Coliseum complex.
On the other hand, some other developers whose projects had not anticipated any hotel function before the crisis, on the contrary, thought hotels were more attractive investments properties than offices and revised their concepts in favor of the hospitality function.
Industrial
Despite the widespread opinion about the heaviness of the industrial segment, industrial real estate developers promptly responded to a falling market engulfed with the crisis. Since the autumn of 2008 they began postponing the delivery dates of many warehouse complexes till 2009; a number of projects were suspended and some were altogether discarded. Meanwhile the occupancy of the new properties still leaves much to be desired. Hoping to reverse this trend, developers turn to the built-to-suit scheme and complement warehouse projects with industrial functions.
The demand for warehouse surfaces already delivered to the market has shrunk remarkably because of declining turnovers of logistics operators, the waning freight turnover of the Petersburg port, railway and motorway cargo traffic, the sinking volume of production and retail etc. According to various estimations only 30–40% of the announced class A and B storage space was delivered to the market in 2008, although the supply of quality warehousing space increased by more than 400,000 sq m (1.5 times against the level of 2007). The trend to the reduction of warehouse space delivered to the market persisted in 2009. The experts of Colliers International reckoned 135,000 sq m of industrial areas delivered to the market in the IIIQ of 2009, but according to Vera Boykova, spearheading the industrial real estate department at ASTERA SPb, only 90,000 sq m can be reckoned as commissioned (all of those in the first half year). Meanwhile back in the IQ of 2009, at the height of the crisis developed planned on delivering 550,000 sq m of quality industrial surfaces till the year’s end; yet later this commitment was cut down to 163,000 sq m. In the final analysis the total quality industrial area in the region amounted to 1.7 million sq m as of the end of 2009, having roughly swelled by 15% during the year.
More than 300,000 sq m of industrial projects was frozen at the construction stage, as estimated by Knight Frank SPb, and over 1 million sq m were frozen at the stage of design and conceptual development. Among the frozen projects under construction the experts of Colliers International and ASTERA SPb mention an almost complete 205,000-sqm first phase of the industrial park Kolpino developed by Eurasia Logistic, the 104,000-sqm logistics complex Optima Logistics Park developed by Hanner, the 18,000-sqm Panteon complex in Utkina Zavod, warehouse complexes developed by Agroinvest in Yanino community (15,000 sq m) and by UIMP in Kudrovo (11,000 sq m).
In addition to the temporarily suspended developments, there are a number of large projects altogether repudiated by developers. Thus White Days Investment planned to build 170,000 sq m of warehouse real estate in Yanino, Hermitage Construction & Management — 164,000 sq m in Shushary, M-Industria — 95,000 sq m in Utkina Zavod. In addition, the large-scale projects developed by MLP and Immo Industry Group in Shushary and by Pantikapei in the Yukkov area were also frozen.
The developers are not going to complete the “frozen” projects or expand those under construction until the first signs of stabilization in the national economy show up. Managing partner of MC Teorema Igor Vodopianov says he does not plan to complete the construction of the third phase of Teorema-Obukhovo terminal scheduled for delivery in 2009. “The third phase is 80% complete but it does not make sense to finish it off, for we see that nothing has changed for the better in the real estate market during the outgoing year.”
The prospects of carrying forward construction on the large-scale AKM Logistics project in Shushary (winner of CRE St. Petersburg Awards 2009 in the “warehouse complex” nomination).
Experts are at a loss for predicting the future industrial surface to be delivered but agree that less warehouse space will be marketed than in 2009. The experts of ASTERA SPb assume that about 170,000 sq m can be commissioned in 2010. Overall about 650,000 sq m (with planned delivery dates before 2011) are estimated by Maris Properties in association with CB Richard Ellis to be actively constructed.
For all that, the record low occupancy of quality warehouses remained throughout 2009. As estimated by Knight Frank SPb, the average level of vacant areas in Class A is 39% and in Class B it is 15% (on the eve of the crisis it was estimated at 1–3%). According to ASTERA SPb, 43% of quality warehouse surface is vacant in the market, on average. The new upscale properties marketed already in times of crisis are in the most difficult situation. They were faced with plummeting demand further aggravated by expectation of the radical reduction of rates on the part of tenants. Now new A-class warehouses are only 20–30% leased.
The rental rates went down 20–30% a year in dollar terms. For all that, as underscored by experts, the terms of lease are individually set for each tenant with consideration for required surface, the term of lease etc.
The rates were not lowered during 2009 at some new warehouse complexes, as representatives of their owners assure. Thus according to Igor Vodopianov, the relationships between the landlords and tenants of the first two phases of the warehouse terminal Teorema-Terminal are quite stable. “I did not lower the rates, — he says. — Whoever had leased our premises before August 2008 have all remained. Only one section is still vacant.”
Discussing the commercial terms of lease is a rewarding area for a quest of compromises between potential warehouse lessees and landlords. The owners and managers of warehouse complexes are much more flexible now. The contracts of lease are signed for 11 months, rather than 3–5 years as before. Security deposits can be remarkably cut from 3–6 monthly rates to 1. Tenants are granted rental vacations or appreciable privileges for the first year.
The dollar rate is fixed in hard currency within a certain range. Moreover the inclusion of operating and utility charges as well as extra services in the base rent is also a subject of negotiations. The most important step towards the clients is smaller warehousing units for lease. The minimal size of units offered by the owners of high-quality warehouses for lease was 5,000 sq m, although even then units of 1,000–3,000 sq m were in high demand among the tenants. Now the landlords are willing to lease units ranging from 500 to 2,000 sq m.
It is noteworthy that expectation of en masse moves from quality warehouses to Class C or lower class facilities proved unjustified. On the contrary, tenants start moving in the opposite direction from low-quality warehouse to upscale facilities.
Built-to-suit properties are regarded by experts as the most promising approach to the development of industrial projects under the crisis. An important advantage of this scheme is minimization of risks taken by both developer and tenant. The tenant obtains a warehouse best suited to his requirements while the developer gets a project with guaranteed yield. It is easier to attract financing for such a built-to-suit project from banks. Investments in such projects are also best protected. Yet the delivery of such projects is still rather rare because investors must make a firmer decision on the expected yield. Some industrial projects, both under design and already completed, can be subjected to re-conception. Quite indicative in this respect is the Interterminal Market project in Predportovaya industrial zone: accommodating for the parameters of basic demand (lesser rentable units, development of customized warehouses), the company designed its new warehousing format. This is one of the rare examples of building a warehouse complex, falling short of A-class standards, with a minimum self-contained unit of 1,500 sq m, a ramp for loading-unloading works, a possibility of temperature regulation etc.
However the inclusion of the light industrial function is a particularly positive antirecessionary measure. Thus the crisis may push the market towards the solution of an extremely acute problem: the dearth of contemporary industrial grounds with prepared engineering infrastructure. This problem might well be solved through forced transformation of warehouse projects into industrial parks.
Автор: ALexander Sagdiev
Commercial Real Estate №24 (130), December,16-31 2009
