Q1 results: offices froze in waiting

Offer

According to Maris analysts, as at the end of Q3 2021 total rentable area of Class A and B office centers in St Petersburg made up 3.89 mln sqm. Among them: class A business centers made up 1.26 million sqm (33%), class В – 2.6 mln sqm (67%).

By the end of 2022, developers have announced the commissioning of about 171 thousand square meters of speculative office real estate (leasable area).  37% of speculative projects planned for commissioning this year have been frozen/suspended indefinitely as of the end of Q1 2022. 58% of speculative business centers declared for commissioning in 2022 belongs to class A.

Big projects, planned, to be commissioned 2022

Source: Maris

Demand

The gross volume of rental transactions in class A and B business centers in Q1 2022 amounted to 68,000 sqm and exceeded the indicator of  Q1 2021 by 65%. Relative to Q4 2021 indicator the demand rate for office space has reduced by 5%. By the way, main decrease of demand was in class B office centers (–11,7%) segment, class А business centers on contrary have increased by 31.6%.

The industry structure of demand for office space in Q1 2022  was uncharacteristic for the last two years. The leading positions in the volume of demand were taken by oil and gas sector and trade companies. Compared to the indicator of the same period in 2021 demand from the trade sector increased in 2.5 times compared to the same period in 2021. The oil and gas sector rented twice as much office space as a year earlier, the share in the gross volume of transactions was 21%.

IT sector reduced the volume of office space absorption at the beginning of 2022, and by the end of Q1, its share in gross demand was 12%, compared to 16% last year (in absolute terms, the reduction was 26%). During first 3 quarters of 2022, the market saw an increase in the number of transactions with office premises with an area of more than 1,000 sqm.

Vacant

As of the end of March 2022, 240,000 sqm are available in St. Petersburg, or 6.2% of the gross supply volume. According to the results of Q1 2022, the vacancy rate in the market increased (+0.5 p. p.) in relation to the same indicator at the end of 2021.

The vacancy rate in office centers remain stable compared to the end of 2021 and amounted to 4.8% (+0.1 p.p.). An increase in the volume of vacant space was noticed in class B office centers and by the end of Q1 the vacancy rate reached 6.9% of the gross supply volume (+0.7 p.p. to Q4 2021).

Takeover

The negative net absorption indicator of office space in the market was a natural result of the high-quality office space release and a record low increase in speculative supply in the analyzed period. The last time this indicator went into negative territory was in H2 2020 – at the very beginning of the COVID-19 pandemic.

Rental rates

In Q1 2022, the requested rental rates demonstrated stability relative to the final indicators of 2021.

The average rental rates at the end of March in class A office centers amounted to 2,150 RUB per sqm per month, inclusive of VAT and operating expenses. The average rental rates in class B amounted to 1,380 Rubles per sqm per month, inclusive of VAT and operating expenses. Against the same indicator at the end of 2021, the requested rental rates in class A business centers increased by +0.5%, in class B office centers – decreased by -0.7%.

Development forecast

Only due to the influence of the geopolitical situation in the region, according to optimistic estimates, about 70-150 ths sqm of office space will be released on the market by the end of the year. So, the vacancy rate in the market will increase to 10% of the gross market volume, which in principle is not a critical value for the St. Petersburg office market.

Further development of events will depend on many factors: method and the period of resolution of geopolitical conflicts, speed of economic recovery, landlords' policies regarding the settlement of disputes with current tenants. All of the above factors have a significant and multidirectional impact in the market. So, in the current conditions, it is not possible to more accurately simulate the scenarios of the behavior of market indicators in the medium term under the uncertainty of a multifactor model with so many unknown parameters.