Commercial Sector Sees Boom

By Olga Kalashnikova

The St. Petersburg Times

Published: June 22, 2012 (Issue # 1714)

KNIGHT FRANK An artist’s impression of the Renaissance Pravda business center due to be built on Khersonskaya Ulitsa in the city center.

The general volume of investment in commercial real estate in Russia will total $6.5 billion in 2012, according to a forecast from Jones Lang LaSalle commercial real estate company. The majority of investments in the first quarter of 2012 were split between the office and retail sectors at 40 and 34 percent respectively.

Developers have increased their activity this year on the St. Petersburg office real estate market. There were 650,000 square meters of office real estate under construction at the beginning of the year compared to 800,000 square meters at the beginning of the summer, according to data from Maris real estate company. Developers claim these spaces will be ready by the end of 2014, but in practice, deadlines are almost always postponed by a year. With this in mind, approximately 800,000 square meters of business center space will be opening at the end of 2015. Fifty-nine percent of this space will be class A premises and the rest will be class B, according to Maris research. Developers have announced that 190,000 square meters of commercial business space will be launched by the end of 2012.

“The contemporary office market is represented by small restored buildings with fewer than 10,000 to 15,000 square meters,” said Natalya Kireyeva, a senior analyst at Maris’ consulting and valuation department.

“Large office sites are still a rare thing and are under construction. Small office spaces under 100 square meters are always in demand and have made up 68 percent of all rental requests in 2012.”

The most in-demand areas and those with the most potential are the Moskovsky, Tsentralny and Petrogradsky districts. The less popular districts — Krasnoselsky and Kalininsky — are located further from the city center. Interest in Vasilyevsky Island has decreased due to inconvenient public transport links to the island.

The average rental rate per square meter of class A office space per month is between 1,400 and 1,700 rubles ($43-$52). The price for class B space is between 900 and 1,200 rubles ($27-$37), according to Maris data.

Both retail turnover and individual income continued to grow in the second quarter of this year. More than 60 percent of all retail space announced for this year has been occupied by two new projects: Rio and Piterland retail and entertainment complexes, according to Jones Lang LaSalle. Previously, these centers were only in partial operation, with only the water park at Piterland and an O’Key supermarket in Rio open. The emergence of these two large complexes won’t lead to serious changes in the market, experts believe.

“The new complexes opened at different ends of the city, so they will serve different areas,” said Igor Kokorev, project manager of Knight Frank St. Petersburg’s strategic consulting department. “The market is fairly big, so these openings won’t increase it significantly. Large sites don’t come up in the city often and launching just one or two won’t lead to a serious redistribution of the market,” he added.

Piterland, located in the Primorsky district, is notable for its large scale and water park. Rio is part of the Frunzensky district market, which is an area with relatively few shopping centers. Analysts believe the scale of Rio will attract customers from the neighboring Moskovsky and Nevsky districts.

“There will be competition for Rio,” said Kokorev.

“Two big complexes are going to be launched in the near future and will be situated in the same building as the planned [Bukharestsky and Mezhdunarodny] metro stations. The latter will have more customers due to people who live within a 10- to 15-minute walk, while Rio is far from residential buildings.”

The most active retail operators expanding and looking for new spaces are cafes and restaurants. According to Knight Frank research, the most popular area among food establishments was the street retail sector. Many other operators however, find street retail unappealing and tend to choose shopping centers, which they consider to have more potential. This trend can be seen on Nevsky Prospekt with the openings of Stockmann Nevsky Center and Galeria shopping centers.

The most popular areas for retail construction projects remain the Primorsky, Vyborgsky and Moskovsky districts, according to Colliers International, a commercial real estate firm.

“The market still has a lack of new brands expanding their operations to St. Petersburg,” said Veronika Lezhneva, head of research in St. Petersburg at Jones Lang LaSalle Russia & CIS. “In fact, most retail complexes are very alike in their structure of food and fashion tenants, which limits the originality and attractiveness of the projects.

“A great location and unique original tenants who attract customers play a significant role in making the project successful,” she added.

The market continues to develop among retailers who already operate in the city, causing the number of empty premises in upscale shopping centers to decrease at the beginning of this year.

“In 2013 we expect a further decrease in vacant premises, in spite of the high volume of new project launches,” said Lezhneva.

This year both Russian and foreign FMCG operators announced they would start work on new projects.

“We see that there is a high level of interest from retail operators and developers to expand and grow in St. Petersburg,” said Tamara Popova, head of the real estate research department at Knight Frank St. Petersburg.

“Active development, however, is restrained by the limited number of land plots suitable for the realization of retail projects.”