Developers are leaving business centers

Declining demand for offices and the desire of large companies to reduce the space occupied in business centers are forcing developers to curtail the implementation of their projects. By the end of 2022, the volume of commissioning of new facilities in Moscow will be two to three times lower than the annual average for all 20 years of the capital’s office market. Experts expect that the negative market conditions for developers will force them to reduce rental rates by 20-30%. They also warn that it will take more than one year for the market to recover.

The volume of commissioning of new offices in Moscow by the end of 2022 will be 240-340 thousand square meters. m, which is two to three times lower than the average annual rate over the past 20 years (758.1 thousand sq. m), according to a study by Asterus. This is almost three times lower than the volume of new space, the introduction of which was previously announced for this year. IBC Real Estate expects a 40% year-on-year reduction in space commissioning to 347,000 sq. m. m.

Kirill Babichenko, director of the CORE.XP office real estate department, recalls that at the beginning of this year, consultants predicted the launch of about 1 million square meters on the market. m of new space. At the end of 2021, Maria Zimina, Director of the Office Real Estate Department at NF Group, assumed that developers would commission 600–620 thousand sq. m. m, but in fact it will turn out no more than 260-270 thousand square meters. m.

Developers are adjusting commissioning volumes amid low demand. According to the head of the OF.ru brokerage department, Viktor Rozenberg, this year the volume of transactions decreased by 50% yoy, and demand – by 40%. Now more and more companies have begun to refuse excess rented space, he adds. In the third quarter of 2022, such transactions account for 41% against 5-10% a year earlier, adds Denis Bobkov, Head of Asterus Analytics.

Such a situation, according to consultants’ forecasts, may lead to an imbalance in the office market, when the volume of leased and vacated space will exceed the volume of already built and rented. For the first time in the history of observations, this happened at the height of the pandemic in 2020, but a year later the situation improved.

Owners of business centers can respond to the negative market conditions by providing tenants with discounts of more than 20%, with rates reviewed in three to five years, Denis Bobkov believes. IPG Managing Partner Ivan Pochinshchikov already knows about examples of dumping when office owners reduce rates for large tenants by up to 30%. But Kirill Babichenko calls significant discounts an exception to the rule.

It is hardly worth waiting for a recovery in demand for offices in the short term due to the difficult situation on the labor market and the withdrawal of large international companies from the Russian market, Mr. Pochinshchikov notes. Most likely, according to his forecasts, in the near future the market will face a decrease in average market rental rates by 10-12%. The vacancy rate will also grow – by 10-12% against 7.7% at the end of 2021, they add to Asterus. Ekaterina Nogay, head of the research and analytics department at IBC Real Estate, suggests that in 2023 office rental rates will reach their bottom, and their growth is possible not earlier than 2024, subject to economic recovery.

The activity of developers, most likely, will also remain low. Ms. Nogai expects that the rate of commissioning of office real estate at the level of 250-350 thousand square meters. m for the market will be characters for a few more years. Denis Bobkov does not rule out that in the coming years, developers will be engaged in the redevelopment of long-built business centers.

Ekaterina Nogai assumes that in the next few years demand in the Moscow office market will be formed by companies with state participation, which will need to expand the space currently occupied. Although Point Estate Sales Director Roman Amelin draws attention to the fact that Asian companies are starting to enter Russia more often. These market participants, the expert concludes, can also create demand in the office market.

Alexandra Mertsalova