In movie land, fraudsters always manage to rent a plush office on Wall Street for their machinations. In real life, however, Western business center owners are very careful about whom they rent their precious square meters to. This particularly applies to anchor tenants who can decide the fate of an entire complex. In Russia anchors can even affect the status and capitalization rate of a project. At the same there is no unified standard for selecting and working with anchor tenants. Some building owners are willing to offer serious incentives to the right kind of firm while others rent out areas randomly – seemingly unaware of the potential risks.

On each continent there are specific requirements relating to anchor tenants. The Russian market is at something of a crossroads, but market experts comment that in temperament our situation is closer to the Asian model. “It is hard to make comparisons with the Western market because the structure of office real estate is different. While here office areas are in the center, in the West they are focused in the outskirts and small offices with only2-3 tenants are not unusual. In those kinds of situations there are no anchor tenants. Russian office centers are closer in concept to their Asian counterparts,” says Dmitry Ryzhakov, development director at Step by Step. He goes on to add that in Asia anchor tenants are not just large tenants but tenants who operate all aspects of their business in one building. In Asia a single building can function as an office and production plant. Accordingly, an ideal situation is one in which one business center houses both senior management and the production department. “Throughout the world, business reputation is important. This means that any anchor tenant must be well regarded,” says Mr Ryzhakov.

In Russia an anchor tenant is regarded as any company willing to rent a substantial area - usually more than 30% of the total area. “Currently the main factor is the amount of space to be rented. A role is played by a tenant’s brand, but essentially if a tenant is larger it is more likely to become the anchor tenant, even beating a world-renowned company brand. It is understood that every building has its potential market but to restrict yourself makes no sense,” says Anastasia Khomenchuk, head of the office premises department at DTZ.

A more progressive approach is to select an anchor tenant which will enhance the status of a particularly project and create a proper concept. “An anchor is not just the tenant which rents the largest area. It is also a well-known firm with an excellent reputation. The presence of a pool of prestigious tenants increases the market value of real estate and speeds up the filling of vacant areas,” says Elena Tkach, marketing specialist at Sawatzky Property Management.

High–Profile Tenants

Tenants can not only improve a project’s image; they can even impact its capitalization rate. “A strong anchor makes a big difference to potential investors. Capitalization rates depend upon the terms of rental agreements and tenant composition. If a building is only rented to low-profile Russian companies then it will be of less interest to a Western investment fund than if it was populated by well-known foreign firms,” says Elena Alpatova, deputy director of the office real estate department at Cushman & Wakefield Stiles & Riabokobylko.

The presence of a strong anchor automatically increases the level of trust in the developer. “In our understanding, an anchor tenant is first and foremost a large tenant, often with its own real estate department and always a very professional client. If this type of firm is interested in a project then it is essentially a type of recognition for the work of the developer,” says Mat Neilson, head of the leasing department at the Khimky business park.

When it comes to large-scale risky projects the appearance of an anchor is often an excellent starting point for the selection of tenants. “A strong anchor tenant can significantly increase a project’s attractiveness. For example, before the start of construction of the Krylatskye Holmy business park, an agreement was reached with Microsoft - which intended to rent a large area. From then onwards the landlord noticed the effect the anchor tenant can have. Trust in the project increased and other tenants appeared, including: Intel, Huawei, Johnson & Johnson, Dupont, Colgate-Palmolive and British American Tabacco. In the end there was a waiting list of potential tenants,” says Ms Alpatova. The appearance of an anchor was also a critical moment for the Bashnya na Naberezhnei (Embankment Tower) project. “The landlords regarded a large tenant with a world-famous name as a guarantee of success for the entire project. An anchor increases the confidence of other potential tenants in a building’s status. When we began

working on the Bashnya na Naberezhnei project it was very important to get the first large tenant. Many regarded the Mosvka-City project as very delayed and few believed that it would come to fruition and that a metro station would be built alongside other infrastructure. However when IBM arrived people really changed their minds and it was the starting point for the selection of excellent tenants,” says Elena Denisova, deputy director of the property owner services department at Jones Lang LaSalle.

Ms Tkach believes that in order to create the right kind of atmosphere, you need to take into account a range of factors. For example, companies should be similar in terms of their financial status and image. However large companies should not be put side by side. “The right tenant composition will ensure the right market profile, the prestige, and the financial results,” says Ms Tkach.

In the Russian market examples of themed office centers are rare. Currently office centers are positioned as being open to all types of tenants regardless of their industry. “We have positioned our project as a universal business park suitable for companies working in a range of different industries. Also, all our tenants, both large and small receive the same range of services,” says Mat Neilson commenting on IKEA’s policy.

Even with a more haphazard approach to selecting tenants, a good selection of service companies and business partners can evolve around an anchor tenant. The influence of an anchor tenant can even extend to an entire region. “Many companies try to be located closer to their business partners and service providers. For example, the fact that Gazprom and Sberbank are located in southwestern Moscow means that many other firms try and find offices in this region,” says Ms Alpatova. A similar view is also held by Ms Denisova, “Large companies with international standards attract other companies including their service providers. If there is a large business center with several large tenants then a number of service-based companies will naturally follow them,” she adds. Also companies located in the same business center can end up entering into business partnerships. For example the Toko Tower office center housed both Rurgaz and Ferbundsneftgaz. The companies began to work so closely together that when Rurgaz moved into a new building, Ferbundsneftgaz moved with it.

Previously the presence of any foreign firm acted as a kind of anchor. “When the market was very undeveloped foreign firms preferred to be close to one another. Nowadays this trend is less apparent. The only exception is Asian firms which have quite specific requirements. For them this factor is more important. Asian business culture is more conservative and being located next to their compatriots plays a bigger role,” comments Jones Lang LaSalle.

Even firms without any specific business relationship with an anchor try and obtain offices near corporate heavyweights in order to bask a little in their reflected glory. “Each market has its own leader and small companies can improve their profile by being located nearby. For example, software manufacturers know that they can improve their image by being located in the same building as Microsoft and SAPR. But there is a catch - not all small companies can afford it. Many small software manufacturers cannot afford to pay high rental rates for class A office areas,” says Mr Ryzhakov. He also points out that you shouldn’t overestimate the influence of anchors. A well established company is unlikely to move offices just to be close to an international brand. “If there is a choice tenants are most likely to choose an office center which fits its business requirements in terms of price, convenience, and parking, and only then do they start paying attention to the fact that it is where BMW is located,” says the expert.

Healthy Competition

Two anchors from the same industry may find it difficult to be located under one roof. After all an office building is not a shopping center in which visitors wander from one store to the next. “There are companies who are not necessarily competitors but are still conflicting organizations, which cannot be located next to one another. This relates in the first part to their respective corporate cultures and business model and there are a number of cautionary tales, for example, about Coca-Cola employees getting fired because they had Pepsi cans,” says Mr Ryzhakov.

Anchors Set the Tone

It is not uncommon for anchor tenants to require changes to projects. For example in order to gain STS as an anchor, the Profiko business center included a special clause regarding an increase to the ceiling height. The Meridian office center included a training center and the developer was willing to meet a number of requirements relating to maximum floor load for Ford.

“The requirements of tenants can vary considerably. Car retailers have specific requirements when it comes to floor loads and ceiling heights. Law firms need private offices rather than just open plan. Banks have very specific requirements when it comes to power supply and telecommunications. Call centers have specific needs when it comes to building service infrastructure,” says Ms Khomenchuk.

There are even examples of agreements being concluded with potential anchors at the design stage. Despite all the associated risks of the Russian market there are a few precedents. “In this business environment it is quite difficult to plan construction deadlines. Tenants can however reach an agreement on the initial design with developers in the knowledge that in two or three years’ time they will be larger and need new premises. However it is possible that after three years the new business center will still not be completed and they are left high and dry. A good example is the Moskva City project in which several buildings are being delayed,” says Mr Ryzhakov.

It goes without saying that anchor tenants receive substantial financial incentives. As well as reduced rental rates they are also offered long-term rental agreements and smaller security deposits. “Owners often carry out surveys among their tenant about the types of services and sometimes even about specific service providers they would like to see in the building. Many companies use corporate banking services and so anchor tenants also ask about which banks will be located in the building. “In the Metropolis center the anchor tenant is Procter & Gamble which has specific infrastructure requirements and we of course strive to meet all their requirements,” says Ms Denisova. Having said that, the needs of anchor tenants are not always met. More and more often developers simply try and comply with general standards. If from the very start the infrastructure component is well thought out then it should suit all requirements. The main thing is providing the necessary minimum. A swimming pool or a car wash may be a plus but it won’t impact the selection of tenants.

The infrastructure developed for an anchor tenant can attract some tenants but put off others. “Spontaneous changes to the range of services are essentially a negative factor. If following the entry of an anchor tenant the basic services relating to say, security are augmented by a state security services then this can attract new clients. But this only applies if the specifics of their work require increased security. At the same time you shouldn’t forget that these types of additional options may not be included in the contract and the tenant can leave and take this additional service with them. However the opportunity to gain an additional benefit even if it is only temporary is always welcome,” says Mr Ryzhakov.

Open Door Policy

In the majority of cases the option of renting several floors is available to virtually any company. Experts comment that brokers sometimes forget about management risks. A good example is the assumption that all foreign firms are reliable, respectable, and credit worthy. “We still regard foreign firms with increased interest and are willing to consider them regardless of their status or long term business plans. However there have been examples of Western firms which initially rented large areas and then reduced their area because business did not go well. There have even been instances of firms which simply left when they got a better offer,” says Mr Ryzhakov. The reason is that often foreign firms’ knowledge about the reality of operating in Russia is based on a few stories about unbelievably high Moscow prices. This makes them willing to accept any offer which meets their requirements regarding infrastructure and security. However once they begin operating here they realize they could be spending less and leave. “An important factor when selecting tenants is long-term reliability and stability, for landlords this can be even more important than the amount of space rented. Short-term high volume is risky,” says Mr Ryzhakov.

Not all owners however believe that the success of their projects depends on the anchor. “I do not believe that an anchor brand is a defining factor for other tenants when selecting office areas. The most important thing is the product on offer. Of course large tenants can attract extra attention to a project but everything depends on the level of service we can provide. The brand is the product which we create and the service we provide,” concludes Mat Neilson.