St. Petersburg’s Retail Scene

The financial crisis had already touched all segments of St. Petersburg’s commercial real estate market by the first quarter of 2009. Demand has significantly dropped, rental rates are gradually falling and the amount of space up for let is also decreasing. There have been practically no investment deals on the market, as investors are waiting for further price drops. Naturally, what is increasing are capitalization and vacancy rates.

Supply

The supply of retail space in the first quarter of this year increased by 87,000 square meters with the opening of three new shopping centers, see Table 1. Two of these shopping centers were opened in the Primorsky district of St. Petersburg, which is one of the leading areas in the city in terms of retail space.

The provision of retail centers differs widely throughout the city, with the residents of the Moskovsky district enjoying the greatest ratio of retail space per head, at 1,415 square meters per 1,000 people. The Primorsky district is not far behind, with 1,179 square meters per 1,000 people. As a result, zones saturated in retail space have arisen in these districts. In the Primorsky district this is concentrated around the Pionerskaya and Komendantsky Prospekt metro stations, while in the Moskovsky district this has happened around the Pulkovo area.

Vasilyevsky Island continues to demonstrate great potential for the further development of new retail projects, as do the Petrograd Side and the city’s center – both areas with the lowest provision of retail space in St. Petersburg. However, the lack of free plots for development and the high cost of land in these districts hamper developers’ plans to exploit this potential.

As a result of new development, supply in the first quarter of 2009 rose by three percent in comparison to the overall volume of retail space at the end of 2008. The most optimistic scenario will see retail space increasing by a further seven percent by the end of 2009, which is considerably less than in previous years. The cause lies primarily in the saturation of the market coupled with the financial downturn, which the recent wave of construction freezes and postponements of completion dates demonstrates.

St. Petersburg’s retail market offers little beyond the basic retail formats, such as retail and entertainment centers, shopping centers, retail and office complexes and hypermarkets. Retail and entertainment centers account for the largest share of the market, 37 percent, and hypermarkets follow with a 29 percent share. Consequently, standard formats have saturated the market, which as before is lacking in quality modern concepts.

St. Petersburg’s real estate market currently has no properties of either the lifestyle center or outlet center format. Lifestyle centers, targeted at those with above average earnings, are predominantly entertainment rather than retail based, with anchor tenants including cinemas, children’s play centers, night clubs, health centers, libraries and sports complexes. These centers have a pay-back period of around 1.5 to 2 years longer than standard format retail centers.
Outlet centers, conversely, are almost solely retail real estate, with most of the space occupied by one high quality brand. Agat Group Inc., which is developing a network of family-orientated entertainment parks under the brand Babylon, has also announced plans to develop Nevsky Kolizei, an outlet center in Bugry just outside the city. However, construction work on this project is currently frozen.

Demand

The level of vacant space in retail centers that are already open in the first quarter of 2009 has not significantly changed since 2008. But new properties are experiencing difficulties with establishing their occupancy rates during construction, despite the reduction in square meters expected to be delivered this year compared to the same period in previous years.

In the first quarter of the year the occupancy rate of centers still under construction in St. Petersburg stood at around 5 to 10 percent, while in 2008 this figure was 50 percent. Following completion, a property’s occupancy levels depend on the conditions and rental rates they offer. At the moment the level is around 70 to 80 percent in the city’s leading retails centers.

The amount of vacant space in street retail has significantly increased as large international operators are transferring their stores to shopping complexes with the aim of minimizing rental costs.
Commercial conditions

MebelWood, with it anchor tenant a furniture center, added 21,000 square meters of space to St. Petersburg’s retail stock. Both market saturation and the high levels of competition are having an influence on rental rates. Retail operators are taking much more care in their choice of center and are now able to negotiate more advantageous financial conditions for their rent. The spread of rental rates for retail space is now highly diverse, depending on factors such as the tenant’s profile, the retail sphere they operate in and the level of fit-out work as well as the usual size, location and floor of the space.

Since the end of 2008 demand for retail space has fallen significantly and in order to hold onto their tenants, landlords have begun to lower their rents. The fall in St. Petersburg currently stands between 30 and 50 percent but the changes are all individual.

There are examples of tenants paying a percent of their turnover on top of their utilities and maintenance payments. This being said, a further significant review of rental rates in the city is unlikely. All those tenants who have held discussions with their landlords have either agreed on a discount for a specific period or have moved out.
Retail centers are being forced to find a compromise so as not to raise their vacancy levels. Consequently, first-quarter results show that rental rates in St. Petersburg are between $25 and $80 per square meter per month. All this depends on the complex as well as the size and location of the space. In 2008 the range in the northern capital was between $45 and $150 per square meter per month.

Changes in the dollar rates has led to more than 80 percent of retail complexes denominating their rates in conditional units.

Sales prices are equally dependent on location and the conditions of the sale. Smaller units in retail centers, up to 500 square meters, are rarely sold and are usually a sign that a complex is untenable and lacks a general concept. The cost of a square meter is between $2,000 and $4,000.

Larger units, of between 1,500 and 5,000 square meters, are usually bought by operators of grocery or building material supermarkets and hypermarkets, clothing department stores and domestic appliances and electronics retailers. It is important to bear in mind that the number of proprietors in a center affects any sales valuation of the property.

Current trends in retail real estate

• A decrease in development activity: in the majority of multifunctional projects under construction the retail component plays a supporting role
• The tendency to develop networked retail centers is continuing
• Specialized properties is the most actively growing segment in St. Petersburg’s retail real estate market
• A decrease in occupancy rates
• A decrease in rental rates in shopping centers, particularly significant in street retail.