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The secondary market for office real estate, which was formed as a result of the vacation of premises following the termination of leasing agreements and the increase in sublease offers, could compete with the primary market in 2009 in terms of the aggregate amount of high-quality space available. This was the conclusion that Knight Frank experts reached after analyzing the development prospects for Moscow’s office real estate market.
An additional 100,000 sq. m. of high-quality office space could appear on the market in H1 2009 due to the secondary market. Currently, there are two preconditions for an increase in the supply.
Office space will appear on the market due to the breaking of leasing agreements signed within the past six months. In these cases, the tenants were not able to meet the significant expenses for interior finishing and/or to move to a new office. The main instances of leasing agreement terminations are expected from deals that involve large areas (over 5,000 sq. m.), high rental rates, and/or investment companies and banks.
Moscow’s office real estate market could also expand significantly thanks to spaces now offered for subleasing, as a result of staff layoffs and changes in the development plans of many companies in the capital.
The bulk of sublease offers cover class A business centers, since the main tenants of these premises (including banks, investment and consulting companies) have been severely affected by the crisis. In 2007 financial and consulting companies participated in 28% of the transactions involving class A office space. Today, some of the space leased in 2007 is available on the secondary market (i.e., the premises ready for occupancy located in business centers in operation). A similar situation is observed with deals completed prior to 2007. The premises rented in 2008 have not entered the sublease market yet.
“The substantial economic growth that has been observed in Russia during the past few years has meant, on the one hand, an absence of vacant office spaces (the share of vacant class A sites is 4% of the total). On the other hand, it has forced international and Russian companies to rent their excess office space, which could have been used for employees for a period of 5-7 years considering staff increases. Today, many companies have faced the necessity of cutting expenses and reducing personnel, the result of which has significantly decreased the demand for office space. Companies can no longer occupy larger premises than necessary. The percentage of vacant space has increased in Moscow and is expected to hit 10-15% in H1 and H2 of 2009. This will also happen because of a significant growth in sublease offers. Companies that used to lease extra space in the framework of existing leasing agreements often cannot give up these premises and return them to the owner. Such companies are forced to sublease their extra space in order to at least partially cover expenses. They are not trying to make extra profits now. At this point, tenants often compete with landlords,” says Valentin Stobetsky, the director of the Office Real Estate Department at Knight Frank.
The following office space is currently offered for sublease: Moscow International Business Center Moscow-City (Naberezhnaya Tower, Northern Tower); operating class A premises in other districts (Citydel, Central City tower, Kutuzoff Tower); premises under construction including White Square and operating class B premises (Pokrovsky Dvor, office and shopping center at Zvenigorodskoye shosse).
“It is assumed that the decline in demand for office space on the part of companies representing various sectors is proportional to the decline in employment. As a result, the size of the sublease market might hit 150,000 sq. m. in H1 2009. A substantial growth in sublease offers will heighten competition in the primary and secondary markets. Here potential tenants have the greatest benefit, since they will be able to find convenient spaces which are ready for them to move into at optimal prices,” says the expert.
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