Open space office layout is extremely popular in the West, and in Moscow business are also leaving behind the office-corridor format. Although the St. Petersburg commercial real estate market ranks second next only to the capital, St. Petersburg’s office segment is in no hurry to embrace open space layout. Overall, this is a result of the specific architectural and historical status of the city.
Open space layout implies office premises without walls, occasionally having movable partitions. According to some data, around 90% of class A space and more than 80% of class B space in Moscow is completed in the open space style, and this format is both productive and convenient. Western companies in Russia are cultivating open space layout, as this style chimes with their democratic corporate principles; however, open-floor layout is less popular in the land of Russia.
Research shows that the office real estate segment in St. Petersburg lags behind Moscow by several years, to say nothing of other cities in the Northwest Region. Taking into consideration the dearth of high-end premises, today’s office space market is a seller’s market; therefore, a developer knows that irrespective of the layout pattern, there will always be tenants contending for space. So, a lessor respects his client based on his situation.
Nearly all of the office space delivered to the market in Russia’s northern capital this year is high-end. In the first half of 2007, 13 business centers were completed, and, with the exception of Manufaktura Business Center, all of them are classified as classes A, B+ and B, which clearly demonstrates that the market is moving from quantity to quality. There were 71,000 sqm of office space delivered to the St. Petersburg market in the first half of this year, while the overall supply exceeds 1.6 million sqm.
Colliers International estimated that more than 260,000 sqm of high-end office projects will be delivered to the market by the end of this year, while Becar Commercial Property St. Petersburg sets this figure at up to 350,000 sqm of office space, including class C. However, few developers meet their stated deadlines. This is clear given that facilities announced for opening still have quite a bit of work to go. Therefore, early in 2008 the city will have around 1.5 million sqm of office space.
Another trend on the business real estate market is leased space enlargement. Demand is steadily growing for larger premises. According to Becar, premises in the highest demand are those in 200-300 sqm units, and there are quite a few examples of leasing larger blocks of 1,000-3,000 sqm.
“Most certainly, the demand for office premises larger than 1,000 sqm will increase, and currently, according to our data, this demand accounts for about 10% of the market,” says Elena Afinogenova, director of the office real estate department at Praktis CB. At the same time in other cities of the Northwest Region, the business center market is only starting to form, with Kaliningrad following on the heals of St. Petersburg as the most developed office space market in this region. However, according to data provided by Afinogenova, mainly small premises of 20-50 sqm are in demand.
Value as a Limitation
Corridor layout so far leads the race in St. Petersburg and other cities in the region, and this is certainly a result of domination of reconstructed facilities on the local market.
“Open space layout is considered more effective, and all developers of high-end facilities are striving to meet this standard, and their number keeps growing. However, St. Petersburg is a museum city, and there are numerous architectural monuments, gladdening the eye, but not allowing for full reconstruction,” states Alexei Chizhov, director of the office real estate department at Becar Commercial Property, St. Petersburg.
The reason is that the majority of high-end office projects are reconstructed facilities, predominantly palaces and large private houses protected by the government in the city’s centrally located districts. Moreover, the interior layout of a building is protected by Committee for Government Control, Utilization and Protection of Historical and Cultural Landmarks (KGIOP), meaning that during reconstruction, the builders must not only restore the facade, but also preserve the walls, windows and doorways, stairs etc. Therefore, new commercial real estate projects have the advantage of open layout, while reconstructed buildings have a corridor layout of office space.
The main supply of offices in the region’s cities is geared towards ground floor premises. In addition, small areas are needed; therefore, the same corridor style predominates here as well. All developers are striving to build open space layout facilities, given that this is in great demand on the part of tenants. However, this is not so because corporate management wants its employees to be visible, but, rather, because this allows a tenant to divide the premises according to specific needs.
“An established developer, whether in St. Petersburg or Kaliningrad, takes care of not only himself and the maximum amount of usable space; he also thinks about the needs and comfort of occupants. “By the way, this is also a new trend,” says Yuri Borisov, managing partner at IB Group. “Unequivocally, large commercial structures prefer to place the largest possible number of employees in a set area, so the material advantages of organizing an office as open space are obvious to them.
“Open space layout allows for maneuvering, as any office configuration can be planned with the assistance of modern office partitions. Open space is an integral feature of a high-end business complex, so it lowers the risk of suffering a financial setback. The premises are leased out together with public spaces, and therefore the entire building space is used” explains Afinogenova. For example, the business centers on the Moika River embankment, 67-69, such as White Nights, Apollo, Northern Capital and Navigator, have relatively open space layout while Ruric business complexes represent classic open space layout. The Senator chain is noted for large, spacious premises with minimal finishing, so the space can be divided by means of partitions. Regent Hall was also completed with a corridor, whence the doors lead into spacious office premises of 300-500 sqm on a 1,500-sqm floor.
Vadim Demeshenkov, director of the office real estate division at Best Commercial Real Estate, talks about the advantages of hybrid space layout for leasing out the premises: “In the Benua Business Center, each floor covers 2,000 sqm, half of which is divided into 50 sqm units, while the other half is open space, which can be set up as desired.”
Often consultants themselves prefer to divide the space to get an idea of building’s capabilities, where it is possible to lease out premises by large blocks and where small units would be preferable.
“In a corridor system, the loss of usable space could be greater because of separate blocks and logistics within the building; however, the loss is allowed for in the project,” says Demeshenkov. “Overall, it does not really matter how the space is organized, as maintenance, security and cleaning departments do not really care. They only care about the number of tenants – the more there are, the more difficult their jobs are. However, there are very often less tenants in an open space format.”
Growth Possibilities
Many successful companies occupying premises in modern business centers increase the number of their employees with time. As a result, those tenants need larger office space, if they want to avoid relocation.
“This is a matter of management rather than construction, and the vacancy rate in all business centers now is low, at 2%-3%. Nevertheless, large companies, foreign ones in the first place, plan their growth two-three years ahead of time, and they try to take care of this matter in advance. Indeed, Canon noted in their lease contract for premises in St. Petersburg that they would like the lessor to make a commitment to increase their office space with time. The company initially leased one block, but now it occupies 65% more space,” says Afinogenova.
“No-one will specially build extra space. In the West, owners and operators of class A buildings raise the lease rates and maintain a relatively low occupancy rate of around 75%. Thus, the owner gains the same profit as if the building were 100% occupied, and he maintains room for maneuvering and can provide a respective tenant with additional space upon request,” says Chizhov. “We do not use this approach here, as the occupancy rates at business centers are kept at a maximum. However, the following variant is possible: an operator intentionally signs contracts with smaller tenants for a short term. If a large tenant wants extra space, he is granted this privilege at the expense of smaller tenants; this is a sort of reserved space.”
It is more difficult to alter the lay-out in facilities with the corridor system, given that the layout must be changed, partitions removed and walls refurbished. So, the building’s owner does not really want to change the interior to this extent, given these changes would require amendments and approval for the new design. Typically, tenants are required to return the premises to their original layout in the event the contract is annulled. It is also not necessary to wait for vacated premises, as the vacant premises that are available could end up being in another part of the building, which would not be convenient for a respective company.
Although the corridor layout of offices is inferior to an open space layout, specialists today forecast success to both. The development of any market depends on demand. High-end offices will retain their open space layout, and a differentiation will emerge on the market, as new class A projects are mainly geared toward large companies, which are new-comers in the city. These tenants will typically occupy larger premises, and often with an open space layout. A good illustration is the Region Group that requested 3,000 sqm in the Farvater business center, being a relevant example.
“In the future, all the tenants in our region will prefer an open space layout in new projects. Partly because they would like to see more space, sky and light in view of our severe northern climate,” confirms Oleg Boishenko, vice president of the commercial real estate RBI holding.
However, the corridor style will also remain in the city, and this is a solid niche. Indeed, at BC Russkie Samotsvety most contracts are signed for an average office block of 36 sqm, and rooms of 17-70 sqm enjoy the highest demand. This does not even have anything to do with the specifics of the local mentality of not wishing to work in full view of one’s colleagues. Indeed, this is because all reconstructed facilities of any historic or architectural value in St. Petersburg will have limitations, meaning that the corridor style will predominate in those business centers.
The overall opinion of specialists is that both layout styles will exist in harmony in St. Petersburg and continue to develop. The trends for the office market in other cities of the region will come to light as the real estate market develops in each respective city. Unlike the northern capital, there are more vacant plots here and very few specially protected buildings. Hence the wide opportunities for developers to create any projects. However given the immaturity of the peripheral market, it is too early now to talk about any planning solutions or prevalent trends.