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2013 Office Market Review: Total Volume of Prime Office Space in Moscow Reaches 14.45 Million Square Meters

In 2013 Moscow’s market for high quality office space continued to develop dynamically. The market added 888,269 sqm of new space, which is 56% more than the volume of new build in 2012. In total, 48 Class A and B business centres were commissioned in 2013, and the total supply of prime office space in the Russian capital reached 14.45 million sqm. Developers have publicized plans to bring another 1.4 million sqm of prime office space to the market in 2014. However, according to the projections of experts at Colliers International, only approximately 900,000 sqm of this space will actually be built this year. More than half of the new premises planned for this year are in Class A buildings, 30% should qualify as Class B+, while the remainder will be Class B-.
In 2013, the largest volume of newly inaugurated office space appeared in the Central Business District, where 23% of the new space was commissioned. Moscow City accounted for 11% of new office premises. Outside the business districts, the top areas for new office centres were the western and south-western districts of the city, which accounted for 14% and 10% respectively. The largest office projects commissioned in 2013 included the office centre Park Pobedy (92,000 sqm), Mercury City Tower (87,574 sqm) and White Gardens (63,900 sqm).

At the same time, as the volume of new build increased, demand for office space decreased by 10% in 2013. The total volume of office deals amounted to 1.5 million sqm. The most highly sought after locations are in the Central Business District, Leningradsky District and Moscow Citi. Notably, demand for space at Moscow City shot up 65% last year, which points to a rise in interest in this district as the territory’s development approaches completion. One of the largest deals of the year was Gazprom’s lease of 24,606 sqm in the Varshavka Sky business centre.

The simultaneous decline in demand for office space and increase in new supply meant higher vacancy rates. At the end of 2013 the average vacancy rate in Class A premises stood at 17.2%, up 2% from the end of 2012. For Class B offices the impact was not so substantial: Class B+ centres saw vacancy rates reach 9.3%, up 1.4%, while the vacancy rates for Class B- premises declined 1% to 4.4%.

As far as lease rates are concerned, the average rate for Class A dipped approximately 5% to $785 per sqm per year. At the same time, the stable high demand for Class B+ offices led to a 4% increase in the average rate, which reached $500 per sqm at the end of the year. Lease rates for Class B- did not change during the period, with the average remaining at $415 per sqm.

Vera Zimenkova, Director of Corporate Solutions, Colliers International Russia, noted: “In 2014 demand for office space is holding steady at the same level seen in 2013. Tenants continue to be cautious about moving offices and prefer to extend current lease arrangements. The decision to move is only made when remaining in the current office is not an option or when office quality can be improved without impacting the company’s lease budget. At the same time, the relative dynamics of demand for office premises and new construction coming to market point to higher vacancy rates in 2014. For Class A buildings the volume of vacant space could reach 25%.

Given the decreasing volume of vacant premises in Class B, demand could rise for Class A premises offered at accessible rates. This factor could limit growth in vacancy rates and also put downward pressure on lease rates for Class A buildings. At the same time, the Class B segment could see a slight rise in asking rates, but not more than inflation.”