JLL presents research on Russian office market (RU)

Currently, Moscow office take-up is driven by large-scale tenants who are the prime target for developers. At the same time, there is a distinct demand for quality, small-size areas, from different types of tenants. Attracted by the rapid pace of economic development, a growing number of foreign companies are making an introductory entrance into the Russian market. Many of these companies do not need large spaces at this early stage and lease relatively small offices to launch their businesses. In three-five years the need to expand might arise, but there are examples of global majors keeping their presence limited to representative offices.

Small areas for representative offices are also required by large local companies entering Moscow from other Russian regions. Other tenants for this part of the property market are companies that lease a large space for their head office but need small office areas for some specific needs of their businesses (training centres, etc.).

There is one other emerging source of demand for small-scale office premises. A third of employment in Moscow, around two million people, originates from small companies. Their officially reported profits increased by 42% in 2005, illustrating the potential demand growth from them as more of them look for quality office space. Small and medium-size enterprises tend to prefer Class B+ and B- office areas. In Q2 2006 - Q1 2007, the share of leased space less than 250 m² comprised 1% of Class A premises, 11% of Class B+, and 18% of Class B-. The total share of small-size leases in modern office take-up was about 10%.

Demand from all the above tenants is currently underestimated by the majority of developers, who are generally interested in tenants looking to occupy at least 1,000 m² of office space. The most overlooked type of small-size tenant is that which currently occupies Class C buildings (for example, in former Soviet scientific research institutes). Another forced location for these companies is ground floors in residential buildings.

However, the growing operations of such companies are enabling them to afford rents in modern buildings. Yet limited supply is restricting potential upgrades. The biggest shortage is seen in Class A buildings, allowing landlords to raise rents. The market practice of shell & core delivery adds an additional hurdle for small-size tenants. However, despite these complications, tenants are forming queues for smaller properties, especially in the city centre.

Strong demand for small-size areas and the lack of supply in the primary office market have prompted the development of a sublease business in Moscow. There are a number of companies that run a sublease business as their primary activity. Demand from small enterprises is fuelling the growth of companies that lease large spaces and then split them up. For example, Regus's 2,214 m² of leased space in 1998 had expanded to 13,500 m² by September 2006.

Vladimir Pantyushin, Head of Economic and Strategic Research Department, Jones Lang LaSalle, Russia & CIS: "Taking advantage of the situation by paying attention to small-scale tenants is a way for developers to diversify their businesses and to raise earnings. Developers may consider tailoring part of their projects (for example, some floors in an office building) to accommodate smaller tenants". The latter is clearly demonstrated by the success of the sublease business. As small enterprises develop, an increasing number of them will require quality office space. In addition, foreign companies will continue to enter Russia by opening representative offices at the initial stage.

Source: Jons Lang LaSalle

Related News