Retail Leads Commercial Real Estate Sector in the City
St. Petersburg was the “breakthrough of the year” on the world’s commercial real estate market last year, as the investment volume here increased almost 10 times and reached $2.1 billion, according to Global Capital Flows research published by Jones Lang LaSalle. As a result, St. Petersburg, which had never been ranked among the top 100 cities in terms of real estate investment volume, entered the list in 34th position.
The office sector continues to be favored by investors: 46 percent of all commercial real estate transactions in the world last year involved office real estate, according to Global Capital Flows data. In St. Petersburg, however, the office segment accounted for just 6 percent of transactions on the commercial real estate market, according to Colliers International data.
Last year saw growth in rental rates and a decrease in the volume of empty premises on the office real estate market. While demand for large office blocks remains, the number of available options decreased. By the end of the year, the total stock of office premises in high quality class A and B business centers amounted to slightly more than 2.2 million square meters, 210,000 of which were completed in 2011, according to research conducted by Maris, part of the CBRE affiliate network.
The geographical distribution of office buildings in the city’s districts is uneven. The largest numbers of offices are located in the Tsentralny (Central) (18 percent) and Petrogradsky (14 percent) districts, say experts from Maris. Transactions in class A offices took place mainly in the Central district, where most offices of that category are located, while among tenants of class B office premises, the most popular parts of town are the Moskovsky, Central and Vyborgsky districts.
“The Central and Petrogradsky districts are favored by tenants in terms of the number of requests and volume of transactions,” said Natalya Kireyeva, senior analyst in the consulting and valuation department at Maris. “But high office rental rates and a shortage of vacant space in the center makes potential tenants search for offices in other districts.”
The Dawn of Pulkovo
The Pulkovo area, which was once considered hopelessly unattractive, is now becoming a business district. Two business centers — Jupiter and Airport — were built here in 2011, the Zeppelin business center is due to open this year and one more office building will be constructed by 2014, according to data from Knight Frank St. Petersburg.
Potential tenants primarily show interest in small premises below 100 square meters at a rate of less than 1,000 rubles ($33) per square meter per month, including 18-percent VAT.The most transactions involve class B offices, according to research conducted by Maris.
Average rental rates for A-class offices are from 1,350 to 1,600 rubles ($45 to $54) per square meter per month, and 900 to 1,200 rubles ($30 to $40) for B-class, according to the same data.
This year, six new A-class business centers and 12 new B-class ones are due to open, according to Maris. Almost half of these premises are located in the Moskovsky district.
“This volume of new office developments will be enough to meet the requirements of tenants while retaining demand at the level seen at the end of 2011,” said Kireyeva.
“In the event of increased demand from tenants, a deficit of office space could occur and would lead to an increase of rental rates above the inflation rate.”
“The decrease in the volume of vacant premises will be slow, as the new supply volume is large and time is needed for its realization,” said Veronika Lezhneva, head of the research department at Jones Lang LaSalle in St. Petersburg. “The high volume of empty premises keeps rental rates from growing. We expect them to grow by 5 to 7 percent and higher on the most in-demand projects.”
Maris analysts predict that demand in 2012 will be oriented toward small offices, from 100 to 200 square meters, in existing business centers. Tenants prefer ready equipped premises, mostly class B, located within walking distance of the metro and with parking and convenient access by car.
Retail Patterns
The most dynamic sector of the St. Petersburg real estate sector is retail, which accounts for 70 percent of the total investment volume, according to Colliers International research.
“The retail real estate market is more favorable compared to other segments,” said Nikolai Pashkov, general director of Knight Frank St. Petersburg.
“Both demand and supply are active. Morgan Stanley Real Estate Fund’s purchase of Galeria mall could become the biggest transaction on the commercial real estate market of St. Petersburg and even Russia. It proves that in spite of the worries of international investors concerning Russian projects and real estate assets, a quality and attractive investment project can be interesting to large foreign investors.”
Knight Frank St. Petersburg estimated the value of the deal at $1.1 billion.
A distinct pattern of shopping areas has gradually formed in the city, including the boutique street Bolshaya Konyushennaya Ulitsa, the fashion hub Bolshoi Prospekt on the Petrograd Side, the restaurant street Ulitsa Rubinshteina, shoe-store streets Vladimirsky Prospekt and Zagorodny Prospekt and the jewelry street Mikhailovskya Ulitsa. Sadovaya Ulitsa has historically been popular as a medium and lower price shopping zone. The city’s chief retail corridor remains its main thoroughfare, Nevsky Prospekt, although its importance declined significantly with the opening in 2010 of the Galeria and Stockmann Nevsky Center malls. With the opening this year of a luxury shopping complex on Bolshaya Konuyshennaya Ulitsa, the image of the upscale shopping street will be moved from Nevsky Prospekt, analysts say.
The most attractive parts of Nevsky Prospekt are the sunny, even numbered side and the stretch from the Griboyedov Canal to Ploshchad Vosstaniya, as this is where the greatest number of retail and food outlets are located. The number of stores in the top price segment on Nevsky has decreased since the onset of the economic crisis.
“The biggest demand among street retail tenants is for premises measuring 150 to 200 square meters,” said Kireyeva. “The main demand on Nevsky Prospekt comes firstly from visitors, young people and office workers from the business centers situated in the Central district.
“The rental rates in the high street retail segment remain at the level of European cities. Nevsky Prospekt is comparable with the main shopping streets of Rome, Munich, Madrid and Barcelona in terms of their maximum rental prices,” she added.
Continuing Crisis
Although in most European cities the rental rates have returned to pre-crisis levels, St. Petersburg, where rates fell by almost 50 percent, will reach former figures only by the end of this year, experts believe. By the end of 2011, the rental rates on Nevsky Prospekt varied from 3,000 to 8,000 rubles ($100 to $268) per square meter per month, according to Maris experts.
“The forecast for street retail is stable high demand for retail premises that will lead to steady further growth of rental prices,” said Kireyeva. “On average growth will not exceed 7 to 10 percent per year; the premises in greatest demand may rise in price by up to 20 percent per year,” she said.
Currently, about 25 projects representing 650,000 square meters for rent are planned to be opened between 2012 and 2014, according to Colliers International experts. These are both new projects and revived ones that were frozen as a result of the financial situation.
One new market trend has been to revise the concept of shopping complexes. Among the city’s districts, residential areas are home to the most shopping centers. The biggest retail hubs are the Primorsky and Vyborzhsky districts in the north and the Moskovsky district in the south. On average, the occupancy rate of shopping centers is 93 to 95 percent, according to an overview by Maris.
“The lack of growth in turnover and uncertainty of the economic situation is forcing retailers to reconsider their development plans,” said Lezhneva.
“Therefore, in 2012 there will be a limited number of new brands on the market. Accordingly, competition between operators who are already present on the market will increase, and this will push up rental rates. We expect rental rates to increase by 5 to 10 percent during this year.”
Warehouse Deficit
The least active sector of St. Petersburg commercial real estate is the warehouse segment. Last year, only one warehouse terminal was opened. As during the past few years since the onset of the financial crisis, developers did not start building new objects and froze those already under construction, meaning only a bare minimum volume of premises was launched on the market. In the absence of new offers yet faced with high demand, the market saw a lack of available premises in quality warehouse complexes. According to Knight Frank St. Petersburg data, by the end of 2011, only 36,000 square meters were available to rent — that is, 3.8 percent of all warehouse premises. The market also suffers from a shortage of single blocks of 5,000 square meters and more.
Developers didn’t react rapidly to the market situation, according to analysts, so the launch of most objects planned for 2011 was postponed to 2012. Before the crisis, the volume of quality warehouse projects under construction or planned amounted to about 2 million square meters. At present, that figure is just over 500,000 square meters, according to Maris experts.
“The main market trend is the high occupancy of existing warehouse objects — more than 95 percent,” said Mikhail Tunin, head of the commercial real estate department at Knight Frank St. Petersburg.
“This leads to a deficit of supply, and as a result, to the growth of rental rates for high quality facilities. Another trend is demand for buying warehouse premises,” he added.
Both the supply deficit on the market and the resulting growth in rental rates have led to another market trend: Renting out warehouse facilities that are still under construction. Tenants do this partly because they are unable to find appropriate premises in existing warehouse complexes, and partly to save money by renting out space before rates are increased further. Currently, tenants pay $100 to $118 per square meter per year for class A and $105 to $110 for class B warehouse space, according to Knight Frank St. Petersburg data.
“In 2012, vacancies will continue to decline because of the limited number of projects scheduled for launch,” said Lezhneva. “Rental rates will continue to grow by 5 to 10 percent per year. There may be a shortage of space in class A space, as only two warehouse projects of this category are planned to be commissioned, and occupancy in them is already close to 50 percent,” she added.
In 2011, the most active tenants on the St. Petersburg warehouse market were manufacturing companies and retailers.