Saint Petersburg’s Business Centers

The office market begins this year with deficit. For the time being this is only the shortage of areas for large tenants, since the owners of business centers split them into smaller units in the wake of the crisis. Yet in a couple of years, pre-crisis demand will return, in the opinion of experts, who advise to launch new projects and unfreeze construction sites already today.

For now there is no agitation in the office market: the rental rates remain stable, and office space delivered to the market is swiftly shrinking. Many market players foresaw this turn of events in Saint Petersburg. Thus early in the year the experts of Praktis CB proposed several scenarios of market development and their most optimistic scenario, implying a transition from stabilization to growing business activity, has proved the closest to modern-day realities. And while analysts forecast the pre-crisis demand to rebound only by late 2012, big projects were to be planned and existing construction sites to be unfrozen yesterday, so to say.

Little does not mean bad

As calculated by analysts, in 2010 the accrual of quality office space in Saint Petersburg was 150,000-170,000 sq m, which is almost twice less compared to the pre-crisis year 2008. “Last year saw a record low ratio of actual to planned office space delivered to the market – the meager 17%. Prior to 2006 roughly 60% of the declared volume had been commissioned; after the peak in 2006 when 92% of the announced office space hit the market, this parameter fluctuated in the range of 45-50%,” affirms Lubava Pryanikova, director of maketing research at Praktis CB.

The past year was marked by the appearance of new quality projects both in the city core (Quattro Corti) and on the outskirts (Technopolis, Pulkovo Sky). Business centers opened in seven districts of Saint Petersburg – Admiralty, Vyborg, Moskovsky, Nevsky, Petrograd and Central. The Moskovsky district accounts for a third of the commissioned volume due to the first phase of Technopolis and two last buildings of BC Pulkovo located in close proximity to the international airport.

According to NAI Becar, newly built projects accounted for 59% of commissioned office space, redevelopments – for another 33%; the remaining projects combined construction with reconstruction.

In the second half of 2010 developers declared the commissioning of more than a dozen business centers with aggregate space in excess of 160,000 sq m, but many put off the grand opening till early 2011. “The announced delivery dates in third and fourth quarters of the previous year were dictated by the desire of the owners of office buildings under construction to evoke the interest of potential tenants, rather than by a real state of construction-assembly and fit-out works on the sites,” comments Zosya Zakharova, director of projects and analytics at ARIN. The business centers Saint Petersburg Plaza, Renaissance Forum, Greek, Scandinavian and some others never opened in 2010. Many of them must receive tenants in the first quarter of 2011.

Some 30 business centers to be delivered to the market in 2011-2012 are currently at the stage of construction. Their cumulative area is estimated at 300,000-320,000 sq m. But only a third of them is scheduled for delivery this year.

Stake on “B”

At the turn of last year quality office space supply in Saint Petersburg reached 1.5-1.6 million sq m. Of this amount, almost 362,000 sq m are graded as “A” by Knight Frank SPb and 1.15 million sq m rank among the B-grade office space.

In 2010 business centers of B+ and B grades accounted for the lion’s share of new supply – more than 75%. Thus per capita office space in the city has reached 539 sq m per 1,000 residents and about 908 sq m per 1,000 of economically active population. Last autumn construction restarted on some construction projects put on hold during the crisis. In the third quarter works resumed at the Sun Gally Park site on Ligovsky Avenue, at the sites of BC Ladozhsky, 44 Industrialny and others.

Notwithstanding, the year 2011 may see further contraction of office real estate to be delivered to the local market. Experts from GVA Sawyer believe that no more than 110,000 sq m of rentable office space may have been built during this year.

Whims are not on tenants’ agenda

Last year demand for office premises grew significantly compared to the year 2009. While the net absorption of office space in 2009 amounted to about 100,000-110,000 sq m, in the previous year this parameter overstepped the mark of 200,000 sq m. According to experts, the absorption of office space could mainly be attributed to the internal demand while new tenants were almost lacking in Saint Petersburg commercial real estate market.

Demand was especially notable in the segment of high-quality office areas and representative offices with prime location. This can be explained by the fact that the rent reduction allowed some companies to improve the location and quality of the office space they occupy.

As reported by Knight Frank SPb, in late 2010 the average share of vacant areas in the segment of Grade A business centers amounted to 22.2% and in Grade B – to 12.7%. During the year the share of vacant areas in Grade A shrank almost by 10% and in Grade B – by 3.5%. The average vacancy rate for the entire market of quality office premises dwindled from 20% to 15% during the year and this process is going to continue.

High occupancy is particularly characteristic of the office buildings in central Petersburg. But gradually demand is recovering for office space in those locations which were not very popular during the crisis: Vasilievsky Island, Obvodny Canal, Petrograd side, Staraya Derevnya. The experts of Praktis CB are still prone to rank the business area Pulkovo-III represented by BC Pulkovo Sky and Aeroplaza among the market outsiders in terms of demand. But while the occupancy in all three phases of the former one overstepped the mark of 65%, the vacancy in the latter remained at the same level throughout the year 2010 (no more than 35-40% of office areas were occupied) and only in December a new tenant was contracted to 700 sq m.

A high level of vacancy can be found in the office facilities along Vyborg Embankment. This can be explained by the fact that in the third quarter of 2010 a business center with a zero initial occupancy was commissioned here (namely, Gelsingforsky) – its owner tries to rent out office space by entire floors, but this offer will hardly find any demand on the market.

Sizeable vacant areas can be found only in recently built business centers with unacceptably large office units for lease and poorly thought-out floor plans. As for long-existing business centers with small office units, the vacancy rate there seldom exceeds 10-12%.

Targeting end user

In the words of Aleksandra Smirnova, spearheading the office real estate department at ASTERA SPb, the investment activity in St. Petersburg market of business centers remained at a low level in 2010 – few transactions were completed as investors were sitting on the sidelines. “Western investment funds did not buy office projects. As of today, business centers that could evoke the interest of foreign investors are cannot be found in the local real estate market,” she affirms. “During the two years that have passed since the beginning of the crisis, several big sale deals were closed whereby business centers were sold as a finished business. Thus Promsvyaznedvizhimost sold BC Arena-Hall to a structure affiliated with Gazprom. Some companies decided to use the unique market situation and buy buildings to accommodate their own representative offices therein,” adds Dmitry Zolin, managing partner of LCMC. “Purchase deals were cut only by end users who do not care much about the payback period of office facilities. On the whole, the expectations of buyers are in the range of 12-13% as far as the cap rate is concerned. A group of buyers among non-core market players has also emerged in the market – they are ready to invest in real estate and often contemplate C-grade office facilities with a 15% yield,” concludes Ms. Smirnova.

Three big office space sale deals were closed in 2010: Renaissance Development bought Regent Hall (21 Vladimirsky pr.), Federal Grid Company bought BC Austrian (9 Pirogovskaya Quay), and Jensen Group purchased the business center B&D (32 Makarov Quay).

Rent set to rise

The rental rates have fully stabilized, according to experts. No significant changes took place in 2010. But while in 2009 the owners abstained from indexation of rental rates in their attempt to keep their tenants, now this practice is being restored. The managers of office properties with high occupancy rates also contemplate appreciation of the rent.

In 2010, the asked rental rates (including VAT, operating and utility costs) in the existing business centers ranged from 900 to 2,000 rubles per sqm per month in Grade A and from 600 to 1,300 rubles per sqm per month in Grade B. Their wide spread was observed not only among the business centers of the same class, but also within the same facility, where the gap between the rates for different tenants could be as wide as 20-25%. In addition, according to brokers, some tenants succeeded in negotiating a rental discount in the range of 10-25%.

As forecasted by CEO of Colliers International SPB, Nikolai Kazansky, a relatively stable situation with the rental rates charged by the owners of Grade A and B business centers can be expected in the months to come. “The rental rates can grow very insignificantly and without any leaps in 2011, in view of the increasing occupancy in office centers and limited new office space delivered to the market,” he concludes.

CRE North-West #3 (39), March, 01 2011