The worst is over for Moscow’s office market as occupancy rates get back to normal says JLL, although the pace of constructing new offices has fallen precipitously.

In the first half of the year, a mere 21,143 sq m of new offices were completed, less than 5% of the expected completions for the whole year, leaving the bulk of the planned work stacked up for the second half of the year. Most of the new space due to appear is projects in Moscow City: IQ-Quarter, Federation Tower East and OKO (Phase II), says JJL.

The Moscow office market saw no completions at all in the second quarter and projects in progress have been repeatedly delayed. By the end of this year a fresh 542,000 sq m of new offices was supposed to be completed, according to JJL.

 

Moscow office completions

Source: JLL

The total volume of transacted space was 283,477 sq m in April-June 2017 (10% lower y/y) and 450,480 sq m in January-June (a 22% lower y/y). However, the take-up expected by the end of 2017 (1.1m sq m) will be roughly the same as last year, says JJL.

 

Moscow office take-up volume

Source: JLL

“The Moscow office market is gradually shifting towards normal activity, with prevalence new leases and relocations. The pickup in transacted space after a drop in Q1 2017 as well as the restoration of new leases and relocations indicate the beginning of a Moscow office market recovery,” says Elizaveta Golysheva, National Director, Head of Office Agency, JLL, Russia & CIS. “Thus, the share of renewals and renegotiations continues to decline, reaching 19% in H1 2017 versus 49% in 2016 and 64% in 2015.”

 

Moscow office take-up structure

Source: JLL

Geographically, a large share of transactions has been signed in decentralised locations outside the Third Transport Ring (36%), while the centre of the city accounted for 18% of take-up in the first half of 2017.

In the demand structure the most active business sectors in the first half of 2017 included: banking & finance (40%), business services (23%) and manufacturing (18%).

 

Moscow office demand by major business sectors

Source: JLL

In April-June, the overall vacancy rate remained roughly unchanged and decreased by 0.1 ppt to 15%.

“Tenants favour moving to business centres of higher quality: significant decrease in vacancy was relevant for Class A and Class B+ objects,” adds Golysheva. “Class А vacancy rate declined to 16.8%, Class B+ to 15.6% (compared to 17.5% and 16.3% in Q1 2017 respectively). The vacancy rate in Class B- grew from 10.8% to 12.5%.” Asking rental rates remained stable in Q2 2017.”

In the prime segment, asking rents were $600–750 sq m/year (RUB 35,000 – 44,000). Class A asking rents are $400–670 sq m/year (24,000 – 40,000 RUB). Class B+ asking rents are RUB 12,000–25,000 sq m/year. In the Moscow City commercial district, asking rents were $360–750 sq m/year (RUB 21,000 – 44,000).