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Яндекс цитирования

  Analytics
   Articles archive

03.12.2008

Commercial real estate market overview. The 3 quarter 2008

Office Market

Summary


The third quarter of 2008 saw slower growth of the office market, with lower volume of new international quality supply, fewer announced projects, a number of frozen construction projects, therefore stalling the growth of rental rates and sale prices. The number of transactions completed in the 3rd quarter has dropped significantly due to a wait-and-see policy of the majority of tenants and buyers. In this situation property owners are, naturally, interested in leasing or selling available space quickly and reinvesting the funds into other developments in the pipeline and, therefore, are showing greater flexibility during lease or sale negotiations. However, the asking rental rates and sale prices have not seen a drastic fall yet.

Some of the earlier trends such as decentralization of the office market, development of new business districts, and redevelopment of industrial areas in the city continue to gain momentum. For example, it has been announced in the third quarter of 2008 that several large projects will be developed near the Third Ring Road and in residential areas of the city; the territories adjacent to the Small Ring of the Moscow Railway are scheduled for redevelopment. In the 3rd quarter foreign investment funds showed some activity in the market. Several foreign investors entered the Russian real estate market in the third quarter. Israeli EngelInvest intends to invest nearly $1.6 billion into developing about 1.1 million square meters of residential and commercial real estate. Finnish Evli Bank has recently created a second real estate equity fund, Evli Property Investments Russia II, with designated total equity finance amount of 700-900 million euros, in order to acquire development projects in all segments of the commercial real estate market.

Supply

The number of square meters of new international quality office space continue to decrease. A total of 150,000 square meters of space – 50% less than announced and 60% less than in Q3 2007 – were delivered in the third quarter of 2008.

Russian and foreign developers have been forced to freeze the construction of a number of projects as a result of the world financial crisis. The delivery dates for several major projects, including the White Square, the Brent City, and parts of the Metropolis multifunctional complex, have been moved to later dates. About 700,000 sq.m of international quality office space are scheduled for delivery in the fourth quarter.

Demand

Despite the negative effects of the world financial crisis large Russian and International companies have not lost interest in the Moscow office market. But the overall uncertainty in the market and the expectation by tenants and buyers of a further decrease in rental rates and sale prices have caused the absorption rate to decrease. Tenants have shown a greater demand for Class B office premises.

Despite the shortage of international quality space, the decrease in closed transactions have instigated a higher vacancy rate ranging between 5 and 6% at the moment. We are forecasting that the vacancy rate will not change by the end of the year.




Rental Rates, Sale Prices

For the first time after a long period of the market growth, rental rates and sale prices stopped to grow and remained at the level of the previous quarter. Rental rates and sale prices for Class A properties located within the Garden Ring were the only exception.

Moreover, at the final stages of contract negotiations landlords are beginning to show more flexibility and are prepared to offer better terms in order to secure a quicker lease execution rather than waiting for a better candidate for its space. With stronger competition in the market especially with the increase of availability of the existing space in finished condition we expect lower asking rates in the future.




Main Trends of Q3 2008

• No growth of rental rates and sale prices;

• Decrease in new developments; some projects have been stopped due to a lack of financing;

• Delay in deliveries of the new builds or reconstructions;

• More flexibility on the part of the landlords;

• Continued decentralization of the office market;

• Greater demand for Class B office space;

• Tenants are putting on hold their expansion plans;

• The market is showing signs of becoming a Tenant market



Most Significant Transactions of Q3 2008




Warehouse Market

Summary

In the third quarter of 2008 the warehouse market witnessed decreasing activity of development companies. The world financial crisis and, consequently, lower investment activity resulted in fewer announced projects and more postponed delivery dates.

Many developers freeze the construction of new projects or sell their properties before construction begins. After a long period of rapid development the Moscow warehouse real estate market appears to be stagnating. Developers are still interested in expanding their operations in the Russian regional markets – over 2,000,000 sq.m of new warehousing have been announced in Q3 2008 – however, as of today most projects are put on hold because of financing difficulties.




Supply

As a result of project financing difficulties, tougher terms of financing and higher construction costs, most of the announced projects have not been delivered on time. About 330,000 sq.m of international quality warehouse space were scheduled for delivery in the third quarter and only 53,000 sq.m. of space (part of the Tomilino techno-logistics complex) were actually delivered.

At the end of Q3 the inventory of international quality warehouse space totaled 3.4 million sq.m. 220,000 sq.m more are scheduled for delivery in the fourth quarter. Thus, the year’s total of new supply is expected to reach 530,000 sq.m. and the total volume of warehouse space to exceed 3.6 million sq.m.

The southern direction where the majority of the existing and planned projects is located is still in greatest demand. The construction of Phase 1 of the PNK-Chekhov logistics complex on Simferopolskoye Shosse commenced at the beginning of the 3rd quarter with its delivery scheduled for the third quarter of 2009.

The space of the whole complex will exceed 270,000 sq.m. As a result of the constant shortage of available land plots, the western and northern directions are still experiencing undersupply of warehouse space.




Demand

As is the case before, demand for international quality warehouse space significantly outpaces supply. The main share of demand is still generated by large logistics companies and retail chains. Warehouse space located in the southern and northern directions is still in greatest demand.

Lack of new international quality warehouse space and late delivery dates of a number of logistics complexes are still keeping the level of unsatisfied demand high. Most of the lease agreements for warehouse space are signed in advance, at the construction stage of a complex, which results in zero vacancy rates by the time a project is completed, which, in turn, causes active development of sublease market. The development of the sublease market is also driven by the existing stable demand for smaller units of up to two thousand square meters. Vacancy rates still do not exceed 1%.

Rental Rates

The instability of the world markets, financing difficulties and the lack of debt financing lead to lower business activity in the commercial real estate market. Banks have been raising both the creditworthiness criteria of a borrower and interest rates.

The rental rates for international quality warehouse space reached their record high at the end of the first half of 2008 and have not changed significantly during the third quarter. Currently rental rates are at $140-160 per sq.m. per year for Class A warehouse space and at $110-140 sq.m./year for Class B space. Class A warehouse space is sold for $1,500-1,700 per square meter and Class B for $1,000 to $1,400 per sq.m.

Main Trends of Q3 2008

• Postponed delivery dates of most announced projects

• Considerable difficulties with project financing

• Slower growth of rental rates

• Further development of regional warehouse markets


Major Transactions of Q3 2008




Retail Market

Summary

In the 3rd quarter of 2008 the retail market entered a period of slowdown. The instability of world financial markets, difficulties with new project financing and stricter terms of financing in general resulted in postponed delivery dates of many shopping centers and fewer announced projects. A number of development companies reviewed their project portfolios, put on hold all new projects and announced that they would not be starting any construction for at least a year. For instance, Midland Development cut its development plans from 200 to 20 shopping centers and GK Corston froze construction of 11 multi-functional complexes for an unknown period of time.

In order to minimize risks and retain a strong position on the market during the crisis, retail real estate developers have been diversifying their investments by either selling some of their assets or transferring funds into the regional markets in order to invest into construction of large regional shopping and multi-functional centers.




Supply

The liquidity crisis had an impact on obtaining debt financing for new retail developments and, as a result, delivery dates of many projects have been postponed and some projects have been stopped. During the 3rd quarter deliveries of most projects have been rescheduled for the end of 2008 – beginning of 2009, thus, a lot less than planned international quality retail space was actually delivered. It was initially announced that 270,000 square meters would be delivered in the third quarter of 2008 and less than 10% was actually brought on line (25,000 sq.m. in the Semionovsky Shopping Mall and Saturn Shopping&Business Center). About 470,000 sq.m. of international quality retail space are scheduled for delivery in the 4th quarter of 2008. Therefore, addition of new retail space this year is expected to total 725,000 square meters with the total supply reaching 3.1 million sq.m. by year-end. In addition, several new projects with the total space of over 370,000 sq.m. were announced in Q3 2008.




Demand

Despite general drop in business activity, the demand for international quality retail space remains high and significantly outpaces supply. Retail space in modern high-quality shopping centers where vacancy rates do not exceed 1% is in greater demand.




Rates

The rapid growth of rental rates typical for all of 2007 has finally come to a halt. The rates were growing during 2007 and the beginning of 2008 and reached record high by the end of the first half of 2008. In the third quarter of 2008 there has been no change in the level of rental rates.

There is a possibility of slight growth in the last quarter due to the growing construction costs and higher cost of debt financing.  However, general uncertainty of the Russian real estate market will keep the growth of rental rates at a minimum.

Main Trends of Q3 2008

• Postponed delivery dates of most announced projects

• Demand still outstripping supply

• Slower growth of rental rates

• Diversification of development companies’ assets


Major Transactions of Q3 2008



 

/ Source: Praedium



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