Cautious Ural developers prefer to build class B offices, since the investment is less risky and the return quicker. Also, given that most expenses go toward acquiring land and registering approvals, developers prefer not to concern themselves with the requirements for class A, preferring to build class B which the market demands. Furthermore, the ambiguity of the classification adds to the confusion. Developers do not consider this a major problem, because, under a bad shortage of offices, the market will absorb anything.
Pig in a Poke
Ural developers prefer to construct class B buildings from the ground up, and it is clear that builders have a better understanding of this class than class A – it is not as risky and pricy. Moreover, according to domestic office realty classification standards, as approved by the Moscow Research Forum, there are strict guidelines for class A pertaining to engineering systems, design features, location, parking and ownership vis-a-vis a class B building. Consequently, the latter is much easier to operate and lease out, and faster to recoup.
“There are stringent requirements for Class A, to which only a few projects correspond,” confirms Andrei Braude, deputy general director at RED. “Also, these requirements must be taken into consideration at the concept design stage, and construction must be strictly monitored to keep the project’s participants on course.”.
According to the experts from the Chelyabinsk-based Energoinvest, developers prefer building class B offices from the ground up to avoid a so-called “pig in a poke”. Class B offices are typically redesigned Soviet premises, and often developers do not own them, given that the transfer of ownership is problematic. In addition, purchasing such buildings is rather risky. “Reconstructing these facilities is expensive, and they are known for low-quality services, lack of infrastructure and adequate power,” notes Energoinvest. So investors prefer not to fix such errors and build anew.
Economy Class
The days of haphazard office classification in the Urals – when you could lease different class premises for the same amount – have passed. Realtors have set a price barrier between class A and B and established a set list of requirements, mostly borrowed from Moscow’s standards and adapted to local realities. However, the difference between class A and B is rather subjective and up to developer.
According to Maxim Andryukhin, director of regional projects at C&W S&R, the standardization of office criteria would render regional markets more transparent and decrease the amount of speculation over the grades.
Investors spend most of their funds on purchasing land. According to Braude, investing in various class buildings does not differ by more than 20% in Yekaterinburg. “The main item is the land and hook-up to the municipal utilities,” confirms Braude. “The differences mainly concern the equipment, fit-out and marketing expenses plus the personnel and a professional MC.”
According to the Energoinvest experts, the range of construction costs for different class offices in Yekaterinburg is 30%-50%.
Thus far the most successful commercial real estate market in the area has emerged in Yekaterinburg. According to C&W S&R, the highest gross lease rates claimed for office space were recorded in class A facilities at $1,365/sqm per year and $550-$650/sqm per year for office space in Class B, while the prices in Chelyabinsk are already considerably lower at $550-$700/sqm per year for class A and $380-$480/sqm per year for class B. The lease rates in Perm fluctuate between $350-$400. According to Gorelov, class A office space in Tyumen leases out for an average of $480/sqm, while class B office space costs around $300/sqm.
According to the experts at Energoinvest, the office real estate market in Yekaterinburg is set, and the difference in lease rates for class A and B is around 85%. Commercial property in Chelyabinsk is actively developing. Just last year, there was a paradoxical situation on this city’s office realty market, when it was possible to lease class A office space in downtown for the same price as standard premises. However, the market is now more differentiated. The office realty markets in Tyumen and Perm are still in embryo.
Time for Perm
The period of January to September 2007 in Perm was an unequivocal time of change for the office market. On the one hand, the conditions vis-a-vis last year have not changed, but, on the other hand, the prices have significantly increased in both the sales and leasing segments. Indeed, according to Perspektiva, since the beginning of the year, the cost of 1 sqm grew by an average of 58.5% to 68,500 rubles. The average lease rate for office premises rose by 15% to 660 rubles/sqm. According to the analysts at Perspektiva, the main reason for the growth of prices in the office real estate segment is the hot residential market. The jump in apartment prices for the fourth quarter of 2006 through the first quarter of 2007 also effected the active growth in the cost of offices, inasmuch as 50% of the office premises on offer are located in residential buildings. According to Perspektiva, at the end of September 2007, office space located in a class A business center costs a buyer an average of 160,000 rubles/sqm, while class B office premises cost 80,500 rubles/sqm. There was also a sharp rise in the cost of class B offices, as the average sales price rose by 60% and lease rates by 23% in this class.
The office market in Perm developed significantly in 2007, as three new class A business centers are expected to be delivered this year. The first one is Slavyansky Plaza developed by Perspektiva, the 4,500-sqm Avant-garde at 101 25th October St., and the 5,500-sqm Parus at 59/1 Ostrovsky St. Also, the Gubernsky office center is expected to open at 58a Lenin St. Overall 50,000 sqm of office premises is slated for delivery late in 2007.
In addition, five existing trade centers are undergoing reconstruction. Several are already operating as new-format commercial facilities - for example, the Almaz r&o center at 37 Kuibyshev St. By the beginning of 2008, reconstruction should be completed on Agat at 21 Turgenev St., and by the end of this year, on Sergo BC at 61 Ordzhonikidze St.
Chelyabinsk Paradox is Temporary
As previously noted, developers prefer class B office buildings, and, ideally, prior to the decision-making, professional companies should conduct a large-scale marketing research. For example, based on research conducted by Energoinvest, the office real estate market in Chelyabinsk can be saturated within a year.
Andryukhin indicates that there is a temporary surplus of class A premises in Chelyabinsk, as a result of several large facilities entering the market, such as Chelyabinsk-City and Aquarium Plaza. “There is a shortage of class B in all of the Urals’ large cities - Yekaterinburg, Chelyabinsk, Tyumen and Perm - where there is only a 1%-4% vacancy rate.”
Irina Trubinova, analytics director at Perm Analytical Center, takes the position of consumers, and, in her opinion, there is not a clear incentive today to choose a facility for lease or purchase in one or the other class, as there is far too few quality office facilities to compare.
Experts forecast active growth on the office realty market in the Urals for another two to three years.