The delivery of new office centers remains scarce: about 95,000 sq m were delivered over the first nine months of 2018. As of Q3 2018, the vacancy rates stand at 13.6% for Class A offices and at 9.9% for Class B offices, which totals to about 1.78 million sq m. The average weighted asking rent rates rose by 9.5% to 25,104 RUB/sq m/year for Class A offices and by 1.4% to 14,254 RUB/sq m/year for Class B offices, over Q1 through to Q3 2018. HIGHLIGHTS OFFICE MARKET REPORT Moscow Q3 2018 RESEARCH
Transcript
The delivery of new office centers remains scarce: about 95,000 sq m were delivered over the first nine months of 2018.
As of Q3 2018, the vacancy rates stand at 13.6% for Class A offices and at 9.9% for Class B offices, which totals to about 1.78 million sq m.
The average weighted asking rent rates rose by 9.5% to 25,104 RUB/sq m/year for Class A offices and by 1.4% to 14,254 RUB/sq m/year for Class B offices, over Q1 through to Q3 2018.
HIGHLIGHTS
OFFICE MARKETREPORTMoscow
Q3 2018
RESEARCH
2
OFFICE MARKET REPORT. MOSCOW
Q3 2018 Q4 2017
Total stock, thousand sq m 16,358 16,263
including, thousand sq m Class А 4,196 4,149Class В 12,162 12,114
Deliveries Q1–Q3 2018, thousand sq m 94.55*** 408
including, thousand sq m Class А 46.7*** 258
Class В 47.85*** 150
Net take-up Q1–Q3 2018, thousand sq m 3965 657including, thousand sq m Class А 1915 296
Class В 205 361
Vacancy rate, %Class А 13.6 17.1
Class В 9.9 11.5
Average weighted asking rental rate**, RUB/sq m/year
Class А 25,1045 22,923
Class В 14,2645 14,074
Average weighted asking sale price**, RUB/year
Class А 267,086
Class В 128,992
OPEX rate range***, RUB/sq m/yearClass А 6,7745 6,490
Class В 4,5055 4,080* Compared to Q4 2017** Excluding operational expenses, utility bills and VAT (18%). OPEX rate does not consider change related to property tax rate increase*** Compared to Q3 2017
Source: Knight Frank Research, 2018
Class A and B new delivery volume dynamics
Key indicators. Dynamics*
Konstantin LosiukovDirector Office Department Knight Frank
Office market report Moscow
Source: Knight Frank Research, 2018
"The market of quality offices is still in the phase of rapid development: the rental rates keep growing, the vacancy rates are declining, while the demand is quite high and constant. New delivery is currently the main leverage, for it is the deficit of new buildings that fuels key market trends. We saw a similar picture of the market after the recession of 2008-2009, when the demand had recovered before the new supply was delivered. New delivery is normally subject to lagging due to objective factors, namely the two-to-three-year construction cycle and certain conservatism of developers, who do not want to put at risk their money before they realize the demand on the part of prospective tenants is strong".
SupplyAs of Q3 2018, the total take-up in the Moscow market of quality office spaces amounted to 16.4 million sq m, 26% or 4.2 million sq m of which are Class A offices and 74% or 12.2 million sq m are Class B offices.
After there had been a scarce new delivery of only 39,000 sq m in H1 2018, as many as 55,100 sq m of new quality office spaces were delivered in Q3 2018. It is worth mentioning, that 85% of new development volume built in Q3 are Class A office premises. And over the first nine months of 2018, the delivery amounted to 94,500 sq m, which is similar to last year’s figure.
The total delivery volume of new office spaces is forecast to reach about 220,000 sq m by the end of 2018. Meanwhile, there is a strong possibility that the delivery of announced properties will be rescheduled for the beginning of 2019, which will renew the record low delivery over the last 10 years.
The main reason behind the low pace of new office space development is the recession of 2014–2016, when many developers rescheduled the deliveries of their properties for better years.
The vacancy rates kept decreasing in Q3 2018 against the backdrop of the low delivery along with a strong demand. It went down by 3.5 percentage points between January and September and amounted to 13.6% for Class A offices and it declined by 1.6 percentage points to 9.9% for Class B offices.
Key office projects delivered in 2018* and due to be commissioned in 2019
The cumulative volume of available premises for both Class A and Class B offices stands at 1.78 million sq m, as of Q3 2018. That embraces 0.58 million sq m for Class A and 1.2 million sq m for Class B. The vacancy rates for both classes are expected to further decrease till the end of 2018.
The following districts recorded the highest drop of vacancy over Q3 2018 as compared to the beginning of the year:
� Thanks to several transactions in Krasnoselsky Business Center and Lefort, the vacancy rate for Class A offices fell by 9 percentage points to 11.7% or 23,600 sq m in the east of Moscow, between the Third Transportation Ring and the Moscow Ring Road.
� The vacancy rate in the southwestern part of Moscow dropped by 18 percentage points to 12,300 sq m or 9.8% because of the sale of 13,000 sq m in Lotos Business Center to Zenit Bank and the take-up of the premises in Icube Business Center.
� The vacancy rate went down by 8 percentage points for both Class A and Class B offices to 14.4% or 10,000 sq m and to 3.1% or 6,700 sq m respectively due to the major transac-tions in Efremova,10 Business Center and Demidov Business Center.
DemandOver the first nine months of 2018, the net take-up amounted to 396,000 sq m showing a 17% rise compared with the same nine-month period in 2017. At the same time, the net take-up has slowed down in Q3 2018 to 25% of all net take-up since the beginning of the year. However, it is incorrect to call the current decrease in demand a trend as we expect it to grow back making it possible for the net take-up volume to reach 650,000–750,000 sq m by the end of 2018 and thus match the level of 2017.
The sector of telecommunications/media/technology has become the leader by the number of transactions in Q3 2018. Its share in the total volume of deals amounted to 20%. Bank structures, transport companies, and manufacturers showed a high level of activity in the occupier market of Moscow. Their share in the total trading volume amounted to 12% for each type of tenant.
Distribution of leased office space by sector
* Technology, media and telecommunications** Government sector*** Fast moving consumer goods
Source: Knight Frank Research, 2018
Distribution of transactions by type and location
Source: Knight Frank Research, 2018
Source: Knight Frank Research, 2018
Distribution of leased office space by location
20%
12%
12%12%
8%
8%1%
10%
9%
8%
TMT *
Banking/ Finance/ Investment
Transport&Logistic
Manufacturing
Oil / Gas / Mining and Energy
B2B
Non-profit **
FMCG ***
Real Estate / Construction
Confidential
11%
23%
30%
25%
11%
4%
37%
14%
24%
21%
TTR–MKADGR–TTRBR–GRBR MKAD
Lease Renegotiations
33,892
84,232
49,253
62,136 62,882
5,247
38,108
76,625
89,008
29,267
TTR–MKADGR–TTRBR–GRBR MKAD
Class А Class В
6
OFFICE MARKET REPORT. MOSCOW
Key lease and purchase transactions closed in Q1 – Q3 2018
Company Area, sq m Office building Class Address Transaction
type
Structures of the Government of the Moscow Region 29,900 Pallau-RB А Rublevo-Uspenskoe Hwy, 1 km Sale
Aeroflot 18,447 Arbat St, 1 А Arbat St, 1 Lease
Bank "Avangard" 14,000 Lesnaya St, 6 B Lesnaya St, 6 Lease
Bank "ZENIT" 12,817 Lotos А Odesskaya St, 2 Sale
Transneft-technology 12,666 VEB Arena B+ Peschanaya 3-rd St, 2A Lease
Zolla 6,000 Kuntsevo Plaza А Yartsevskaya St, 19 Lease
* Knight Frank acted as a consultant of the transaction
Source: Knight Frank Research, 2018
to an increase in the share of transactions in the office centers outside the Garden Ring. The share of transactions within the Boulevard Ring went from 2% up to 11% due to a major deal by Aeroflot in Arbat, 1 Business Center.
The demand for office blocks of under 1,000 sq m in area increased over the first nine months of 2018 compared with last year’s figure. The share of the transactions with office blocks under 1,000 sq m in area grew by five percentage points to 50% of the total trading volume. The share of deals with the premises of 1,000 to 2,000 sq m decreased by three percentage points to 24% over the same period of time.
However, the demand for larger office blocks keeps growing as seen from the average deal size, which amounted to 1,945 sq m over the first nine months of 2018, and that is 8% higher as compared with last year’s nine-month figure.
Source: Knight Frank Research, 2018
Distribution of leased office units by size
As much as 65% of all volume of transactions with quality office property of Moscow were signed outside the Garden Ring in Q1 through to Q3 2018, which is similar to first nine months 2017.
As the traffic accessibility of some locations outside the Garden Ring improves due to the construction of new metro stations, the demand for the business centers in these districts will grow. It is likely to lead
28%
22%24%
18%
5%3%
26%
18%
27%
21%
4% 4%
< 500 sq m 500–1,000 sq m
1,000–2,000 sq m
2,000–5,000 sq m
5,000–10,000 sq m
> 10,000 sq m
Q1–Q3 2018 Q1–Q3 2017
7
RESEARCHQ3 2018
Rents The average weighted rent rates continued their growth over Q3 2018. However, while they rose by 9.5% for Class A since the beginning of the year, they only increased by 1.4% for Class B. As of Q3 2018, the average weighted rent rate for Class A offices amounted to 25,104 RUB/sq m/year and to 14,264 RUB/sq m/year for Class B offices.
Such a significant growth in Class A rents is driven by their increase in the buildings in prime locations as well as by signing a number of major transactions in the buildings with the rents just under the market average. It is worth mentioning that the higher pace of rent rate growth for Class A offices against Class B offices is due to the available supply of 580,000 sq m against 1,200,000 sq m respectively. So, the comparable volume of transactions in each class affects differently the way the available supply decreases.
As a result, the rents grow faster in Class A offices.
The rent rates are expected to further increase till the end of the year up to 25,500 RUB/sq m/year in Class A offices and to 14,500 RUB/sq m/year in Class B offices.
The most striking changes in the asking rent rates were recorded for the following districts over Q1–Q3 2018:
� The rent rate in Leningradskiy business district went up by 14% due to the rise in the rent rates in Metropolis Business Center and Sky House Business Center. The average weighted asking rent rate in this location amounted to 28,933 rubles per sq m per year.
� A 22% rent rate rise to 35,773 RUB/sq m/year was recorded for Moscow City business district thanks to
the increase in the rent rates in Oko Business Center and Naberezhnaya Tower.
� Paveletskiy business district reported a 19% increase in the rent rates to 31,564 RUB/sq m/year because of the rise in the rent rates in Paveletskaya Plaza Business Center and Rosso Riva Business Center as well as due to the affordable blocks of Central City Tower Business Center having gone off the market.
As before, tenants are interested in signing lease contracts for the period of 5 to 7 years, with an early termination possibility. The indexation of rent rates in most contracts is linked to the consumer price index, but it remains subject to negotiating, since both the tenants and the owners of business centers realize that the rent rates might grow over the five-year period.
Average asking rental rates for Class A and B offices, RUB/sq m/year
When negotiating, landlords differentiate clients quite substantially according to the leasable area, company name, or the significance of this particular company for the business center. While in the years 2015–2017, business center owners were happy to accommodate any tenant, right now landlords are prepared to discuss flexible rent conditions only with major and/or unique tenants for the particular business center.
The owners of business centers tend to avoid investing into finishing and pass the premises to tenants ‘as is’. At the same time, a lot of major tenants being in the middle of their search for new office space budget finishing expenses and are ready to consider the properties of any state.
ForecastA minimal volume of quality office premises is forecast to be delivered by the end of the year, taking the annual figure to about 220,000 sq m, which will break the new anti-record.
The delivery of new business centers is still likely to be rescheduled from 2018-2019 for later. Some developers who have properties
41,224
31,227
27,800
38,553
35,773
28,933
31,56424,108
19,576
13,799
22,617
14,964
31,481
11,234
–
–
10,223
20,924
Moscow submarket data. Average weighed rent
Source: Knight Frank Research, 2018
Class А Class B
in highly liquid locations have moved from a frozen stage to active construction. Alcon II Business Center is among such.
Considering the current pace of decrease in vacancy rates, we expect them to sink to 13% for Class A offices and to 9% for Class B offices by the end of 2018. The Class B office market will maintain the market equilibrium in 2019, with the vacancy rate at 7-10%, while the Class A office market will continue to level. Yet, there will be a lack of quality office space in some locations like Paveletsky business district.
The average weighted asking rent rates will grow as the supply keeps decreasing. They will reach 25,500 rubles per sq m per year for Class A properties and 14,500 rubles per sq m per year for Class B offices by the end of the year.
The net take-up will amount to 650,000–700,000 sq m over 2018.
Office investment The decrease in available supply remains the case because of the scarce volume
of new delivery of quality office properties and the strong demand for purchasing office space.
As of the first nine months of 2018, the vacancy rate declined by 3.5 percentage points to 13.6% for Class A offices and by 1.6 percentage points to 9.9% for Class B offices, while the rent rates rose by 9.5% for Class A and by 1.4% for Class B. Only 76,000 sq m of quality office spaces are expected to be delivered by the end of 2019 to be further placed on market for sale. Inspired with the above-mentioned trends, multiple major companies as well as private investors consider investing into office property.
Over Q1–Q3 2018, the office market has become the most attractive property market for investing; it’s share of all investment transactions has amounted to 43%.
Thus, the cap rates for office spaces purchased for rental businesses are 10% for Class A offices and 12% for Class B offices.
Among the supply under construction, the buyers currently prefer office spaces of 100–400 sq m in area located in Class A business centers.
9
RESEARCHQ3 2018
Moscow submarket data. Average sale price*
DM TOWER, 9 Novodanilovskaya Emb.
Apart from end user purchases, there is a rise in demand on the part of private investors. The most popular request is for 100 to 300 million ruble investments into a ready-to-go rental business in a new Class A or Class B+ office building or purchasing office spaces for further lease in order to receive regular income.
Almost 65% of requests for office space purchases in Moscow target Moscow City business district. Second most popular location is the central business district as
well as the recent business districts including Danilovskaya Manufactura.
The trading volume of office spaces has been rising during the past two years. The share of sale transactions has grown by eight percentage points to 15% of all deals, as of the first nine months of 2018 against last year’s figure.
There were 77,600 sq m of office premises purchased in Q1–Q3 2018, which is 2.2 times more than the first three quarters of 2017. The prices for quality office spaces that were
on the Moscow market for sale in Q3 2018 have grown as compared to the end of 2017. Thus, Class A office spaces have recorded an 8% increase.
The average weighted prices amounted to 267,086 RUB/sq m for Class A office blocks, 128,992 RUB/sq m for Class B, and 246,091 RUB/sq m for mansions. The average weighted price for general purpose premises on the ground floors of residential complexes stands at 254,855 RUB/sq m.
Class A, RUB/sq m Class B, RUB/sq m Mansion, RUB/sq m Premises for free use, RUB/sq m
Boulevard Ring – 228,214 335,432 384,392
Garden Ring 272,139 213,002 281,591 390,900
Third Transport Ring 273,774 148,426 187,675 374,101
MIBC Moscow-City 340,343 – – –
TTR–MKAD 259,555 111,786 140,288 158,302
Out MKAD – 120,208 – –
Total 267,086 128,992 246,091 254,855
* Excluding VAT (18%) The price calculated for delivered properties.
Source: Knight Frank Research, 2018
10
OFFICE MARKET REPORT. MOSCOW
Moscow submarket data. Key indicators*
SubmarketLease Area,
thousand. sqm
Class A Class B
Average rent, RUR/sq m/year* Vacancy rate, % Average rent,
RUR/sq m/year* Vacancy rate, %
Boulevard Ring
Central business district 712 41,224 16.6 22,705 6.3
Garden Ring
South 985 31,564
30,374
6.4
7.1
22,011
22,755
5.4
6.8West 546 38,553 10.4 25,727 10.1
North 660 31,481 5.3 22,336 5.6
East 407 24,108 13.3 18,914 6.1
Third Transport Ring
South 1,263 –
31,007
–
12.6
14,387
17,269
8.9
7.9West 785 31,227 9.8 18,043 8.9
North 975 27,800 17.0 20,958 6.1
East 1,121 20,924 70.1 16,198 5.6
MIBC Moscow-City 1,153 35,773 11.0 34,453 10.6
TTR-MKAD
North 1,003 19,576
20,307
0.7
15.6
12,656
13,345
6.6
10.3
Northwest 741 28,933 12.1 16,137 22.0
South 1,997 22,617 9.6 13,574 11.9
West 1,412 – – 10,082 8.7
Southwest 591 14,964 13.7 15,232 14.7
Preobrazhenskiy 992 13,799 60.4 11,198 3.9
Out MKAD
Khimki 266 11,234
10,460
19.0
30.9
7,336
8,313
28.5
21.9West 405 – – 9,253 22.4
New Moscow 345 10,223 42.4 6,304 12.1
Total 16,358 25,104 13.6 14,264 9.9
* Excluding operational expenses, utility bills and VAT (18%)
