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Office real estate market – results of the 1st quarter of 2011

The office real estate market in 2011 saw positive signs of recovery in the first quarter. The market growth was fueled by increasing demand for office space, due to a rise in venture capital investment and expansion by startups, as well as increasing rents. Vacancy rates decreased, offerings of new construction projects increased, and in some areas, there was even tightness in the supply of office space. Rents continued to rise in the biggest cities, however, rent growth was not universally distributed, with some markets experiencing less rent growth than others. Overall, the first quarter of 2011 has been a positive one for the office real estate market in the U.S., despite some disparities in rent growth.

Recommendation points



Summing up the results of the first quarter of 2011 in the field of office real estate in the capital, it should be noted that the main trends of this market segment in the period under review, according to most experts, are the natural return of potential tenants to the market, as well as the continuing increase in the shortage of quality supply..

Office real estate market
Jacob Lawrence. Cabinet Makers. 1946

The demand for offices in Moscow grew by more than a third over the year

Compared to the same period in 2010, the demand for offices in the capital increased by an average of 30-40%, which is undoubtedly due to the general growth of economic activity in the country and an improvement in the business climate compared to previous years..

There was an increase in office rental activity among foreign companies and large banking operators. It is noteworthy that at the moment potential tenants are already ready to consider offers of office space without finishing. Compared to last year, the metropolitan agencies say the number of rented office space is shell&core (bare walls and ceiling) increased by more than 30%.

According to Maxim Zhulikov, chief specialist of the office real estate department of Penny Lane Realty, in the first three months of this year, the demand for the purchase of a ready-made rental business has noticeably increased on the part of the rentier. He also noted that among potential buyers there are mainly domestic private investors. Foreign investors, even if they are ready to purchase any objects, very often simply do not have time to respond in time to a very rapidly changing market situation.

The consequences of the Moscow authorities’ ban on the construction of office buildings within the Third Transport Ring are increasingly felt..

It should also be noted that in the period from January to March 2011, there was a fairly high and stable demand for the purchase of class A and B offices. As a rule, large companies showed interest in such objects in order to locate their structures here. So, for example, in February there was information that Raifaisen Bank and Rostelecom wanted to buy a business center. Another vivid example is negotiations between representatives of Alfa-Bank and AFI-Development on the purchase of the Aquamarine business center..

Another trend in the first quarter of this year is that the consequences of the Moscow authorities’ ban on the construction of office buildings within the third transport ring are increasingly felt. Capital developers, looking for new construction sites, have begun to show an active interest in the former industrial zones in the city center.


Wassily Kandinsky. Moscow 1.1916

Redevelopment will subsequently enable construction companies to profitably sell these objects. For example, Sminex continues to actively develop this market segment. Very soon, completely renewed areas of the former Salut plant will enter the capital market. Recently, information also appeared about the acquisition by the same construction company of the former industrial zone, located at Prospect Mira, 102.

We also note that the highest demand in the first quarter of 2011 was observed for office space in business centers located in the central administrative district of Moscow. The increase in demand for class A and B + offices is confirmed by the fact that, according to the results of the first three months of this year, the occupancy rate of business centers in category A is from 90% to 95%, in category B + – from 80% to 90% … As an example of demanded business centers, one can cite: BC “Orlikov”, BC “Noah’s Ark”, BC “Usadba”, BC “Alexander House”.

Office supply has not yet returned to pre-crisis levels

In the first quarter of this year, several new proposals entered the market in the office real estate segment. First of all, the increase in the offered space was due to the facilities that were built back in 2010. Thus, the volume of new supply of office premises in the first three months of 2011 increased by more than 200 thousand sq. M..

However, if we compare the supply with the pre-crisis level, we should note the extremely low activity of Moscow developers. Basically, this year, work will be carried out to complete construction work at the facilities, which began in 2008-2010. Modern metropolitan developers have begun to approach very seriously the prospects and potential risks of new projects, especially in the commercial real estate segment. For example, some business centers under construction, which were still at an early stage of construction, were redeveloped and apartments were built in their place. Thus, the total area of ​​projects that will now become residential real estate due to redevelopment is about 1 million square meters. m.


Laszlo Moholy Nagy. Construction. 1923

The formation of this trend, first of all, was influenced by the cancellation of the construction of some large well-known projects, as well as the implementation of the revision of approvals and permits that were previously issued by the former metropolitan administration. At the moment, it is officially known about the cancellation of the construction of commercial real estate, the total area of ​​which is almost 900 thousand square meters. m.

If we consider the supply of offices in the secondary market, then many experts note a return to the model of “virtual” sales typical of the pre-crisis period. Sellers offer their assets for sale only to find out how much their properties have risen in value. It should also be noted that the prices of offers compared to last year have increased by more than 30%, however, all transactions with commercial real estate are now carried out within the framework of the market. In general, the number of office objects actually offered for sale has sharply decreased compared to 2008-2010..

One of the most interesting and promising new projects that entered the market in early 2011 is the Barclay Plaza business center. This is a modern business complex of B + class. The total area of ​​the facility is about 47 thousand square meters. It has a well-developed infrastructure (reception, restaurant, separate dining room for employees, shopping gallery, fitness center and swimming pool), as well as easy access to all major transport lines.

Prices for the purchase and rent of offices have increased slightly

Compared to the same period in 2010, rental rates and sales prices for office real estate in Moscow increased by 15-20%, depending on the location and class of the object. If we take the rise in prices for office real estate in the period from January to March 2011, then it was about 2-3%, depending on the objects.

The rise in prices occurred for several reasons. On the one hand, prices were influenced by forecasts of a significant reduction in the construction of new commercial real estate and a very slow pace of launching previously announced properties on the market. On the other hand, a decrease in the share of vacant high-quality office space with full finishing.

A noticeable increase in prices was also facilitated by the growth in the purchasing power of private investors..

Average rental rates for class A metropolitan offices in Q1 ranged from $ 700 to $ 1100 per square meter, for class B + and B offices – from $ 300 to $ 950 per square meter. It should also be noted that the level of prices for retail space in the center of Moscow is naturally somewhat higher and ranges from $ 1000 to $ 4000 per square meter. According to the results of the 1st quarter of 2011, the most expensive Moscow streets included: Tverskaya, Pyatnitskaya, Stoleshnikov Lane, Petrovskie Linii, Kamergerskiy Lane, Bolshaya Dmitrovka, Kuznetsky Most, Bolshaya Ordynka, Ostozhenka, Tretyakovsky Proezd.

Summing up the overall results of the 1st quarter of 2011, it can be argued that in the near future the commercial real estate market, including the office market in Moscow, will expect another increase in rental rates and prices. In addition, it can be assumed that the growth of demand activity in this sector will continue. At the same time, the most popular and promising offices will probably remain class A and B +. It can also be said that the clear tendency of an increase in the deficit of such office space on the market that has emerged in the first quarter will continue until the end of this year. A year ago, in the category of offices in class A and B + business centers, up to 10 suitable offers could be freely found on the market. At the moment, the number of offices offered in this segment has decreased to 1-2.

Despite the markedly increased market activity in the 1st quarter of this year, according to experts, the Moscow office real estate market will most likely return to pre-crisis indicators only by 2012-2013.

In the second quarter of this year, many experts predict a slight increase in rental rates at the level of 2-3%, which will primarily be due to the seasonal increase in demand and the desire of potential buyers and tenants to complete all transactions before the start of the summer holidays. Also, experts predict that during 2011 the high-quality supply of office space will decrease at a high rate, and by the end of the year the capital will face a severe shortage of facilities in this market segment..

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Comments: 1
  1. Isabella Walsh

    What were the key findings and trends in the office real estate market during the first quarter of 2011?

    Reply
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