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Moscow office market saw a decrease in Class A vacancy rate by the end of 2015

Moscow, 01 February, 2016 – According to JLL analysts, about 257,000 sq m of new office space entered the market over Q4 2015 which was 30% less the amount delivered over the same period last year. The total amount of new supply over 2015 was close to 700,000 sq m which was two times less than the amount of new space delivered in 2014.

Nearly half of new supply of office premises in 2015 was in Class A or 327,315 sq m in absolute terms. At the same time, there was only one Class A object commissioned in Q4 – Atlantic BC (31,000 sq m – office area).

The total supply of office space reached 17.7m sq m by the end of the 2015, representing a 4% YoY increase. Another 700,000 sq m of new office space is likely to be commissioned in 2016 including 300,000 sq m in Class A which is comparable with the result of 2015. “Nonetheless, ongoing economic uncertainty is forcing many developers to adjust their construction plans by putting on hold projects in the early stage of construction and postponing planned projects, therefore we wouldn’t exclude that the actual amount of new supply in 2016 will be even less.” – Alexander Churikov, Head of Office, Occupier & Industrial Research, JLL, Russia & CIS, said. – “Taking into account the sluggish construction activity, we will likely see a sharp drop in the amount of new speculative supply over 2017-2018.”

Amongst the largest upcoming projects for 2016 are IQ-quarter and Federation Tower - East in Moscow City, Neopoli Business Quarter outside MKAD and Oasis BC in Central Business District.

After the fall in Q1 on the back of rouble devaluation, the demand for new office space recovered over the next quarters. The volumes of office take up in Moscow in Q4 was 252,000 sq m, which was comparable with the level seen a year ago while the amount of space absorbed from the market for the whole year was approx. 1m sq m representing only marginal, 3% drop YoY.

In terms of demand for new office space, the main drivers were manufacturing companies (incl. FMCG and pharmacy sectors) which accounted for about a third of all lease transactions and purchases of office space while public administration sector accounted for about 18% share in the total amount of transactions. Russian companies prevailed with a 70% share in total amount of transactions.

Due to the fall in rental levels, occupier activity remained strong in 2015 with renegotiation and renewals deals comprising more than 63% of all deals compared to 40% in 2014. By the end of 2015 total vacancy decreased by 1 p.p. to 16% from 17% seen in Q3. The significant decline was recorded in Class A – from 27.4% in Q3 (28% in Q4 2014) to 23.1% by the end of the year. In classes B+ and B-, contrary, the share of vacant space increased to 16% and 11% respectively.

“Compression of vacancy rates in the Moscow market in late 2015 became possible thanks to several large transactions with the expansion of occupied space as well as absorption of available premises in Moscow City.” – Elizaveta Golysheva, National Director, Head of Office Agency, JLL, Russia & CIS commented. – “As a result, the overall vacancy in Moscow City decreased to 16.7% by the end of Q4 from 31% in Q3 while in Class A the vacancy rate decreased from to 17% from 34%. Due to the fall in rental costs, tenants preferred affordable high quality office space – 75% all lease and purchase transactions in Class A in 2015 took place in recently commissioned office buildings.”

The level of asking rents for premium offices stood at the range of 600-800 USD/sq m/year in Q4 while Class A asking rents were in the range of 400–600 USD/sq m/year. In Moscow City, the rents in Class A were in the range of 360-600 USD/sq m/year. As a result of the high volatility in the exchange rate, the rental market in Class B became almost 100% rouble-denominated. By the end of the year, Class B+ asking rents amounted to 14,000–22,000 USD/sq m/year. The outcome of the actual level of rents depends on numerous factors such as level of vacancy in a particular building as well as the financial position of both tenant and landlord.