by Paul Blackman
Regional Director, Office Property Department,
Colliers International (Moscow)

The Moscow office market had a record year in 2006, with a take up figure of 1.3 million square meters, which was an all time high, rental rates at levels of those prior to the 1998 financial crisis, and deal volumes increasing signifi­cantly. What then does 2007 hold in store? There are a number of trends that will influence the Moscow real estate market in 2007, which are discussed below.

Increase in deal size

Historically a 1 0,000-square-meter lease transaction was a big deal. In today's market, where in 2006 three deals of over 25,000 square meters were signed, this is no longer the case. The current biggest lease deal signed is that of Vimpelcom, which will occupy a total of 39,000 square meters in Forurr Properties' Hermitage Plaza develop­ment. I believe that 2007 will see this figure exceeded. In this regard, if is also worth noting that the average size of office developments under construc­tion is increasing. There are a number of buildings in the pipeline, each of which will offer in excess of 100,000 square meters of office space.

Increase in lease length

The economic and political out­look for Russia is positive and stable meaning that occupiers are not afraid to tie into longer lease contracts. Also with the renaissance of the real estate investment market, owners are also looking for longer ease contracts in order to maximize the possible investment value of their property. A number of deals were signed in 2006 for lease lengths of 1 0 years.

Diversification of rental structures

Last year saw the dollar depreciate. Whilst I do not doubt that it will remain  the  major denominatingcurrency of the Moscow real estate mar­ket, I do feel that 2007 will see an increase in the number of developers seeking to hedge their exchange rate risks by quoting rental rates in euros or dollar/euro hybrid convertible units. 2007 will probably also see the concept of rental indexation become more preva­lent, where rental rates are increased annually in line with a Consumer Price Index for the country/region of the denominating currency.

The growth of business parks and the front office/back office split

Last year saw significant increases in both city center rental rates and traffic conges­tion levels. As such I believe that 2007 will see some occupiers asking themselves, "Do we really need 1,000 people sitting in the city center at very high rental rates?" If the answer is no, alternatives will be sought and these occupiers might look at a front office/back office split with only those employees that actu­ally need to be in the city center stay­ing (the front office) and the other employees, usually support staff, being relocated to a less central and thus more cost effective location (the back office). This is one of the driving factors behind the growth of the Moscow  business  park  market,   a good example being Khimki Business Park, developed by IKEA. Here occupiers can enjoy the benefits of the business park such as the amenities (hotel, conference center, etc.) in a relaxed and landscaped office environment of a sufficient critical mass to allow for the future expan­sion of the occupiers business.

The continued rise of the Russian occupier

On the back of high oil and gas prices and a resur­gence of Russian business and geopolitical confidence, Russian occupiers are increasingly entering the market for high quality office space. A good example is that of GazExport acquiring 12,000 square meters in the Pushkinsky Dom development. 2007 will see this trend continue.

Increased involvement of international devel­opers

Although I have no doubt that the  market will continue to be  dominated   by Russian developers, 2007 should see a num­ ber of new international players enter the market in partnership with Russian companies.

Real Estate Quarterly, Q1 2007

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