According to JLL, office completions in Moscow in Q1 2017 dropped to 21,143 sqm, 63 percent down YoY. The delivery of 63,000 sqm was postponed.
Notwithstanding the delays, the agency’s 2017 completions forecast remains unchanged: the delivery of 542,000 sqm in total is expected until the end of 2017, which will be 71 percent higher than the record low level of 2016. The delivery of 349,000 sqm is expected in the Moscow City submarket (with no completion in 2016), and 65,000 sqm is expected in the Central Business District (CBD), which will be five times higher than in 2016. Among the projects expected in 2017, JLL highlights Federation Tower East (205,000 sqm) and IQ quarter (123,192 sqm) in Moscow City, Oasis BC (29,000 sqm) in the CBD and Fili Grad BC (25,500 sqm) located outside the Third Ring Road.
On the back of low developer activity, the vacancy rate continued to decline, to 15.1 percent in Q1 2017 (the lowest level since Q2 2014) from 15.5 percent in Q4 2016. The Class A vacancy rate shrank by 0.6 ppt and reached 17.5 percent from 18.1 percent in Q4 2016; the Class B+ vacancy rate declined by 1 ppt to 16.3 percent. Conversely, the Class B- vacancy rate increased by 1 ppt QoQ to 10.8 percent.
The Q1 2017, take-up declined 37 percent YoY, to 167,000 sqm. The demand structure has shifted in favour of new transactions, with a 73 percent share (compared to 44 percent in Q1 2016). The average deal size showed divergent trends: for new transaction it dropped to 1,000 sqm from 2,400 sqm in Q1 2016, whereas for renewal/renegotiation transactions it increased to about 3,000 sqm from 2,700 sqm.
According to JLL experts, these trends are the consequence of higher activity of large occupiers in 2012-2014, which are renegotiating the terms of their leasing agreements now. Smaller tenants are active in moving from low-quality offices to quality premises. These occupiers have a variety of options, as the premises of 1,500 sqm and less comprise about 53 percent of the total market supply. The Q1 results should not be taken to imply the lack of activity of large occupiers. Several large transactions are on-going and are likely to be completed this year.
The demand for decentralized quality premises is still significant: 36 percent of the new leases (61,000 sqm) have been signed in Class A objects outside the CBD. The occupier activity in the CBD has also picked up in Q1, to 22,400 sqm compared to 6,900 sqm in Q1 2016.
“Low new completions and stable rental rates attract growing tenant demand for quality premises. This lowers the flexibility of landlords and reduces the gap between asking and closing rental rates,” Elizaveta Golysheva, National Director, Head of Office Agency, JLL, Russia & CIS, said. “Asking rental rates in Q1 remained stable, with buildings offering rouble-denominated leases with CPI annual indexation or fixed RUB indexation as the dominant type.”
At the end of Q1 2017, asking prime rental rates were at USD 600 – 750 /sqm/year (or RUB 33,000 – 42,000 /sqm/year), Class A asking rents were at USD 400 – 670 /sqm/year (RUB 22,000 – 38,000 /sqm/year), and Class B+ at RUB 2,000 – 20,000 /sqm/year. Asking rents in Moscow City were at USD 360 – 750 /sqm/year (or RUB 20,000 – 42,000 /sqm/year). There were individual instances of increases in rental rates in certain locations, although such occurrences remain rare.