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The commercial realty market: welcome to a catastrophe

logo russianconstruction.com
The commercial realty market: welcome to a catastrophe

Unlike the market for residential realty the market for commercial realty is fast and flexible in its respond to both the crisis in the economy and its recovery. So, knowing what is going on in the sector, we may present an objective picture of the condition of the market in 2015 on the whole. We asked expert Andrei KOVALEV, the owner of “Eco-office” GC, to help us do this.

 

From offices to flats

— Mr. Kovalev, what is specific about the current market for commercial realty? Can one speak of the ‘catastrophe’ of 2015 or do we have no reason to do that?

— The market for office and trade realty is a special index of the state of the whole business. If there is a queue to rent an office or a trade area, it is good, as it means that we have a market of owners. As soon as vacant areas appear, we get a market of renters, a sure sign of deterioration.

This is now the case. Companies are closing or reducing their headcount, they are taking smaller offices… Some business areas are shrinking: tourism, many kinds of imports, construction materials delivery. The list goes on.

Our specialists have analyzed the demands of potential renters over the last 4 years. 90% of all enquiries concerned small areas of up to 150 m2. If in 2012 and 2013 this was 91% and 91.5% respectively of all enquiries, during the last two years it grew to 95%. Thus, the crisis aggravated existing demand for small offices.

As far as the total volume is concerned, in 2014 is remained at the previous level. The situation was managed at the expense of renters moving from premium business centers to less prestigious ones but ones located in good areas. Economic complications made many companies abandon expensive rents and choose more economical options.

On the whole, in answering your question I should say that from my point of view the current situation is close to a catastrophe. Customers’ demand is dropping, trade and office centers are empty, and many entrepreneurs are just closing their businesses.

Nevertheless, I’m rather an optimist and I am ready to sell my property now for a good price and buy property I like cheaply.

 

Banker-raiders turn into banker-partners

— What is the difference between the current crisis in the sector of commercial realty and the crisis of 2009?

— Then, everything was too fast. Over several months trading volumes fell greatly, and business was not ready for that. The current crisis is continuous and smooth, and there is no momentarily sharp fall.

The previous crisis taught us something, and now businesses are better prepared for withstanding negative phenomena. In 2009 many companies had currency loans but now they are trying to borrow in roubles. Relations with banks have also changed. I was very sorry to see banks raise currency credit rates from 9% to 20% in 2008-2009.

If at that time banks were almost the enemies of business, now they are more like partners. I’m sure if a critical situation arises, we’ll be able to reach an agreement. Back then, their behavior resembled raiding, where the main task was a seizure of assets, though I did not understand what they would do with them later.

Of course, there are similarities. Like in any other crisis, companies have to reduce the number of security officers and servicemen and abandon transportation services, whilst at the same time opening new kinds of business. It is necessary to look for new niches to occupy.

 

Returning to feudalism

— How actively are companies exchanging expensive offices for cheaper ones? What’s going on with rental rates?

— Commercial realty of B-, С and С+ class is retaining its position. There is both an increase and a decrease, but the owners of A-class realty are on hard times: there is only a decrease there.

The main task of any owner and any commercial realty manager is for now to retain renters. If the latter are having problems, many owners are trying to meet their needs, and trying to attract new tenants with special offers. For example, we have got a free moving service. A little earlier, a campaign called “the first month for free” was initiated.

More than that, I am ready now, as I was in the 1990s, to countertrade: to take construction materials, furniture, cars, products etc. as a fee.

On the photo: "Prices have fallen"

 

It is better to reach an agreement than to risk loss of value

— Can we say that trade center conditions differ from those in other sectors of commercial realty? Is there a chance that investments in trade centers will pay dividends or will they incur losses?

— If a trade center used to make its money back over 5-7 years, the pay-back period has now increased to 12-15 years, and for new projects with the use of credit may be up to 20 years or even more. There is no hope that the term may shorten in the near future.

I suppose that if a company borrowed money for the construction of a trade center and could not pay it back, the banks would accommodate them and help solve the problem. If they devalued the building, it would be very problematic to sell it.

For example, if an object cost the investor$150m, he might get only about $50m for it. That’s why it is not profitable for the banks to take on such assets – it would be better make an agreement to get something at least. It is not good to become the owner of a non-seller.

And we can see examples of a different kind of cooperation: not so long ago, the owners of a retail chain went to a very big bank where they had a currency loan they could not pay back and offered the bank the whole chain. As there were personal securities, the bank lent credit at a 6% rate. I think the bankers acted wisely: in fact, they saved the business and the people, and their own loan.

 

Stores turn into shared apartments

— What is going on in the segment of warehousing property?

 — The number of vacant areas has increased in high-class objects. The storage segment reached a new low point in 2015. The amount of vacant areas in storage premises is 10—12%, whereas with new objects this figure can reach even 25%.

Medium-sized businesses’ activity is decreasing while the small businesses’ demand is growing. The import replacement policy, the transition of medium-size companies to small businesses, and rent expense optimization have caused this.

As an accompanying trend, one may mention small business renters moving from the Moscow region to inside the MRHW and their striving to combine their offices with storage and production premises.

I think that in half a year, 25—40% of storage areas will be vacant. Companies become smaller, and small storage areas will be in demand. And here a problem arises: a lot of vast storage complexes have been built lately, and they cannot be divided into smaller ones.

So, low-class storage inside the MRHW which and ready to provide renters with small areas look quite promising, especially when they are situated close to the office. Storage premises are also in demand with small plants developing actively on the basis of the import replacement policy.

 

“Activity centers” for activity increase

— Is the number of new projects for commercial realty construction reducing dramatically?

— Business and trade centers which are almost ready will be put in operation. Construction projects where only the foundation has been excavated are likely to be stopped or the object concept and parameters reviewed.

Regarding office buildings, they are likely to be frozen. As far as trade centers are concerned their sizes are likely to be reduced and housing construction may be developed on the land lot. They are being sold though the projects’ efficiency has decreased.

The market players have to look for new formats in the current conditions. One of these might be small (under 10,000 m2) “activity centers”. The concept is to gather companies involved in leisure in one place. For example, an anchor renter might be a fitness center, and shops and cafes for healthy food and beauty parlours would be situated in the trade gallery.

The economic efficiency of such “activity centers” will come from their location inside a residential area, the presence of regular customers and a relatively small investment volume. Thus the trade gallery renters will also get regular customers. The projects’ pay-back term would be 10 years in the current conditions, which is half as much as a traditional trade center with a traditional concept. Besides this, the project might be implemented with co-investors drawn from future renters.

In this case, the pay-back term will be even shorter.

 

Moscow - Detroit

— What, do you think, might change the situation for the better, or at least freeze it?

— The situation will keep worsening until the government takes cardinal measures (for example, a tax holiday for small- and medium-size business) and stimulates consumer demand with preferential credit terms.

The most important thing is the program of subsidizing mortgage loans. 90 bln roubles was spent on it. It is too little, if we take into account that a 3% budget deficit equals 1.5 trn roubles. The state should invest more money in this segment.

If construction grows, other segments will follow: sales of furniture, homeware etc. will grow. And in a fairly short period of time we can forget about the crisis. If this is not done, we’ll have to survive hard times.

However, maybe hard times have already come: in some time we might see that Moscow resembles Detroit, with empty trade centers, shops, banks, restaurants, and houses without windows. Alas, the possibility exists.

 

Vladimir GURVICH

 

В, В- class offices areas demands distribution.

 Area, m2

2015

2014

2013

2012

10-20

26,2%

27,5%

25,4%

27,5%

20-30

19,2%

22,7%

20,8%

19,2%

30-50

21,8%

19,6%

20,4%

16,7%

50-80

13,1%

10,1%

13,1%

13,3%

100-150

14,0%

14,6%

11,8%

14,0%

400-600

2,6%

2,8%

1,8%

2,2%

600-1000

1,5%

1,0%

1,1%

1,0%

>1000

1,5%

1,7%

5,6%

5,9%

  Source: «Eco-office» Ltd.

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