2019 Moscow real estate market outlook

There are signs of recovery on the Moscow commercial real estate market, selective rental rates growth will spread out everywhere

After long stagnation, the vacancy rates across all Moscow commercial real estate segments have declined to a low level, leading to a start of construction activity, and some submarkets have already recorded smooth rental rates growth. The situation across sectors is uneven and are driven by the peculiarities of each.

With the stable strong office take up and completions last year at a record low there has already been a vacancy rate decline, to 10.3% on average. Some business centres planned for this year could be partially postponed, and the trend for vacancy decline will continue in the near future.

The office submarkets with the most constrained available space in Class A are the Moscow City, the Central Business District (CBD) and the Leningrad Business District (LBD). This has already led to a rental rate growth with Class A rents increasing by 16.4%, 4.4%, and 5.6% respectively. Positive price dynamics has been recorded in well occupied buildings, with good transport accessibility. Taking into account completions in the CBD and Moscow City in the coming one or two years, rental rates will continue increasing in these locations, stirring up the interest of both investors and occupiers.

Key Moscow Class A office market indicators

 Market Vacancy rate, %, 2018 Rental growth, %, 2018 Completions
2018 2019 2020
Moscow City 7.8 (-7.3 ppt) +16.4 0 26,749 70,590
CBD 7.2 (-3.2 ppt) +4.4 0 26,833 38,050
LBD 5.6 (-5.4 ppt) +4.9 24,686 101,089 88,198
Moscow 10.8 (-5.6 ppt) +6.3 77,611 232,410 442,133

Source: JLL

The situation in retail real estate is more diverse, where a lot depends on location and management quality. Despite low completions of just 123 thousand sq m in 2018, the vacancy rate declined only 1 ppt for the year, to 5.2%. Such a low vacancy decline means discrepancy of offered premises and retailer requirements by size, footfall, and/or conversion rates, or conservative development strategies of retailers on the back of moderate consumer demand.

At the same time, there is a systemic vacancy, which is confirmed by low vacancy rate decline in shopping centres opened before 2014 and in 2014-2015, by 0.2 and 1.6 ppt respectively. Only relatively new shopping centres, opened in 2016-2018, have demonstrated more significant vacancy decline, it was down 4.7 ppt in 2018. Despite the 300k sq m of new retail space expected this year, there will not be any increase of vacancy rate. We expect the vacancy rate to remain below 6%, which should be a signal for developing retailers. However, as I mentioned before, when making a decision they think about the location of retail premises and its management.

Warehouses always stand out separately on the commercial real estate market because of the smaller number of professional players and the large size of leased and sold premises. Simply saying, warehouses have their own rules. Short construction cycle and long transaction period always lead to supply-demand imbalance on the warehouse market and the endless search for balance.

Nevertheless, the warehouse vacancy rate is declining since Q1 2017, with some acceleration in 2018. The decline in vacant premises has not led to asking average rental rates growth yet, though there are some complexes where rents have been increased.

The vacancy rate decline is also caused by large volumes of built-to-suit (BTS) construction, 63% of 2018 completions. Generally, the reason of large BTS construction is in the demand-supply mismatch by quality and quantity. The lack of big size premises on the market drives large occupiers to opt for built-to-suit in existing industrial parks and on their own land plots with the help of general contractors.

All these factors activate the market recovery process, leading to construction increase and stably high level of business activity. This, in turn, launches correction of price indicators, thus the base rental rate growth will start increasing in the coming future.

What does this mean?

Market players, including us, have been referring to closing window of opportunities. There is still a small gap, which is going to close soon, from the point of view of availability and rental growth, which has started in office real estate. The commercial real estate market in some locations will move to landlord side. It is selective for now, but its development will not take long.

About the Author

Olesya is a well-known expert in real estate research with solid analytical background and a proven track record of accomplishments. She started her carrier at Renaissance Capital investment bank, where she was involved in Russian macro economy and fixed income market analysis. In 2009, she moved on to JLL where she grew from leading retail and capital markets research teams to the Head of Research position. Olesya also worked as Head of Research at Colliers and CBRE.

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