Reconstruction of Moscow’s city centre is hurting retailers but vacancy rates seem to have passed bottom, according to real estate consultant JJL.

The vacancy rate in main Moscow high street corridors reached 8.8% in the second quarter of this year, up by 0.4ppt from the previous quarter but down by 4.2ppt from the same period a year earlier. 

“A correction of the main street retail market indicators was expected,” Oksana Kopylova, Head of Retail and Warehouse Research, JLL, Russia & CIS, said in a press release. “The decline in customer visits was primarily observed in the city centre, as the store and café access was partially restricted by the street reconstruction works.

This is the second summer of major city beautification works undertaken by the Moscow City government, much to the chagrin of Muscovites.

The sections of the Garden Ring, the circular ring road avenue around central Moscow, that are under reconstruction showed a rise in the vacancy rate. This was partially compensated by the decline of this indicator on the western section of the corridor (from Zubovsky Boulevard to Mayakovskaya metro station) which had been renovated last summer, says JJL.

JJL expects a rise of the average occupancy to resume in the second half of this year as the renovation process is gradually completed. “In the second quarter, the lowest vacancy rate was observed on Pokrovka (1.7%), B.Dmitrovka (2.2%) and Myasnitskaya (4.5%) streets. The occupancy on many central streets remained unchanged, which limited the overall vacancy,” JJL said in a report.

The lowest occupancy was observed on Petrovka Street, the Garden Ring and 1^st Tverskaya-Yamskaya Street – all prime locations in the centre – with vacancy rates rising by 3 ppt to 11.8%, by 1.6 ppt to 12.9%, and by 1 ppt to 9.8%, respectively. Access to premises on these streets was partially blocked due to the reconstruction. 

On the demand side, restaurants and cafés traditionally remained the leaders on the central corridors, with a 45% share of all leasing requests, according to JJL. Supermarkets climbed to the second place, with their share rising from 14% in the first quarter to 17% in the second. Other segments posted lower tenant activity.

 

The best sign that the nadir in Moscow’s real estate market has passed is the resumption of growth in rental rates. Rental rates increased on the main tourist street of Old Arbat (from RUB110,000 per sq m per year in the first quarter of 2017 to RUB115,000 in the second). At the same time, the new round of renovation lowered rental rates on 1^st Tverskaya-Yamskaya street from RUB95,000 to RUB70,000, and Petrovka street from RUB150,000 to RUB130,000.

As a result, Nikolskaya Street joined the list of top-3 most expensive corridors, according to JJL. Being a good alternative central location, Nikolskaya Street showed a positive occupancy dynamics, with a decline of vacancy by 1.8 ppt to 5.4% in the second quarter. “Rental growth is observed on renovated streets, extending the trend of the previous quarters,” JJL said in a press release.

“The overall market recovery is supported by rising operator activity on several central corridors. Expected further demand improvement makes recent rental drops on some streets is a temporary correction, likely to be reversed in the near future,” JJL’s Natalia Ozernaya, Deputy Head of Street Retail in Moscow, notes, adding expect rental recovery by the end of 2017.