The take up off new office space in Moscow nearly doubled (up 89%) in the first quarter of this year as Russia’s real estate market comes back to life on the back of the ongoing economic recovery, according to a report compiled by real estate consultant JLL.

Some 312,000 square metres (sqm) of new space was taken up by clients in the first three months of this year – the highest volume since 2013, JLL said.

Trading companies surpassed the traditional leaders — banks and finance companies – in terms of the kind of client taking new offices space, and accounted for just over a quarter (28%) of the deals. In second place were manufacturing companies, with 20%.

Among the largest deals in the first quarter of 2018 were X5 Retail Group’s purchase of the Oasis Business Centre (9,700 sqm), Stroytransgaz in Vereiskaya Plaza BC (8,800 sqm), Skylight BC (4,500 sqm), and Mistral in Poklonka Place BC (3,700 sqm).

“The declining vacancy [rates] and an expected start of rental growth this year support interest in relocations. The second quarter has already started with the largest deals of the year such as oil distribution company Transneft Technology’s lease in the VEB Arena. If you include transactions that are still at the negotiation stage, we expect the overall 2018 take-up at about 1.4m sqm,” said Elizaveta Golysheva, head of office agency, JLL, Russia & CIS.

Russia’s economy is growing again, albeit at a very modest pace of 1.5%-1.8% but at a corporate level the best companies are doing very well as the process of consolidation continues, caused by tightening demand that favours large companies. And as the big companies grow their demand for new space is also growing.

Vacancy rates falling

The vacancy rate in Moscow continued to decline, reaching 13.1% at the end of the first quarter, down 0.7 pp q/q and 2 pp y/y, reports JLL.  

“Low completions and rising demand stimulate the vacancy rate reduction in all quality office segments except Class B-, where the vacancy rate has increased by 0.1 pp q/q and by 1.5 pp y/y to 12.3%,” says JLL.

In Class A the vacancy rate has dropped to 14% (by 2.4 pp q/q and 3.6 pp y/y). In Class B+ the vacancy has reached the market average, 13.1% (down by 0.4 pp q/q and 3.2 pp y/y).

The most activity has been seen in the capital’s most prestigious suburb of Moscow City, the “Canary Wharf” of Russia. There the vacancy rate declined by 1.1 pp in the first quarter of 2018, which saw the largest annual decreases: the vacancy rate in Moscow City was down 7.5 pp y/y to of 12.9% — its lowest level since 2012 due to the activity of state banks and public authorities. Only two years ago the vacancy rate in Moscow City was so high some landlords were turning their prime office space into backpacker hostels to make a little money.

Completions of new buildings low

Falling vacancy rates have not yet spurred new construction and the falling rates are supported by the low supply of new buildings coming onto the market. Supply of high quality real estate objects coming onto the market in the first quarter was still lagging well behind demand, reports JLL.

Overall completions in the first quarter amounted to a mere 37,000 sqm and no new Class A buildings at all. All of the new office centres coming online were Class B+. Of these only one new business centre was in the central business district with the bulk of the others (nine out of ten) located outside of the third transport ring, many of them clustered around Vnukovo airport and the Park of Legends multifunctional complex or part of the Faces residential complex near the CSKA metro station.

JLL expects another 213,000 sqm to come online in the rest of this year, which would mean the overall supply of new offices will be down 39% in 2018 y/y to a new record low, which will also support prices and drive vacancy rates down even further.

Real estate sector recovering

The trends in Moscow’s office market are mirrored by similar recoveries in other sectors of the real estate business. Russia’s economic recovery is reaching into the regions, where a number of new shopping mall projects have started — mostly in the 11 cities with more than one million inhabitants. Almost half (48%, or 225,000 sqm) of the new shopping mall commissioning is happening in the Russian regions in 2018, real estate consultancy CBRE said.

High end residential property prices have also been climbing as wealthy Russians return home in fear of sanctions or arrest. Wealthy Russians living abroad increased the bids for premium class real estate by 21% in the first quarter of 2018.

At the same time Russians exported just over $1bn to buy real estate abroad in 2017, up a quarter y/y as the middle classes and moderately well off look for a safe haven for their life savings. Germany has been an especially popular destination.

But the most spectacular change has been in the warehousing subsector where sales and rentals of warehouses soared by 300% in the first quarter of this year. In addition to the general economic recovery, warehousing has received an extra boost from the explosive growth of e-commerce in Russia.