It’s All About Location

1999 > Russia

The three rules of real estate: location, location, location!

In America you have certain sections of the city designated for certain activities,
ie: a shopping district, a residential zone, the factory area, but not here.
In Russia, there will be a factory, apartment building, and a market
right next to each other. There isn’t any urban planning as we know it in
the west.

The lack of planning is very evident in the location of business. Imagine
opening a restaurant in the basement behind a building on a side street in
America. I know of two such restaurants in Moscow, and there are probably
more, but I can’t find them. My work is not located near a metro, and
not many offices are, but you grab space wherever you can get it.

system works like this: You ask the Mayor, Yuri Lukov for space and
he assigns it to you based on your bribe, influence, and reputation.
Since the city government owns all the land, you can only lease the
actual building, the government has amazing power. If he doesn’t like
you, your new business is located outside the Ring Line, in an underground
passage way.

I feel sorry for whoever works here, in the ugliest building in Moscow.

Lukov is trying to get people to move from the center of Moscow, out to the
suburbs, so he can remont the buildings for offices or Westerners, but with
only an exchange of space, and no cash reimbursement for the difference in
value, there are few takers right now. Strangely enough, there are large
tracts of open land in the middle of the city, not parks, but vacant lots.
Builders will not start construction unless a tenant pre-pays for the
entire building, a hurdle few jump.

Of course the three rules of real estate, location, location, location, still
apply in Moscow, that’s why I want to live at Kiti-Gourd metro stop, walking
distance to work, but still a joe-cool area.

Moscow Times, 9 January, 1999

Rules of the Game Rewritten for New A Class Office Space

By Andrew McChesney

Oh what a difference a year makes.

Prices on freshly built class A office space were leaping last January as
businesses seeking to capitalize on Russia’s economic boom snapped up every
square meter. Developers, seemingly unable to keep up with demand, summoned
teams of architects to draw up new visions of grandeur.

Fast-forward to 1999. Rents have plunged some 30 percent. Thousands of square
meters of first-generation space lie empty. Building plans have been tossed
in the trash. “The market has made a 180 degree flip-flop,” Hines-real estate
adviser Brad Nass said. The Texas native isn’t just whistling “Dixie.” He,
along with all real estate agents, has seen the number of deals drop like
a rock since Russia sank into economic turmoil.

Many Western companies, faced with the option of either downsizing, pulling
out or folding, dumped prime office space at any price. The result: Rents
have plummeted from about $750 to as low as $500 per square meter for class
A shell and core space. Those rents aren’t final either; every price is

All this is to the advantage of tenants. The tables have turned on the landlords
who just months ago had tenants at their mercy. Now the tenants make the
rules. “It certainly is a tenant’s market now,” Nass said. “Tenants can dictate
the terms.” And dictating they are, If a developer cannot satisfactorily
tailor leasing terms, the tenant finds another who can.

In a bid to win tenants over, owners of spanking-new office space are taking
steps that were unheard of before in Moscow. They are not only slashing rents
and giving rental holidays but many are also fitting out the space. “You
have to be creative, throw in some amenities” if you hope to rent space,
said Yury Yudakov, real estate adviser at the Western Group.

New space is still going slowly because of competition from subleased space.
“First-generation space is not going like last January because there is a
lot of second-generation space on the market available at very good terms,”
Yudakov said. Experts estimate there is currently some 60,000 square meters
of first-generation space available, compared to less than 20,000 square
meters early last year. Furthermore, Noble Gibbons property advisers project
that about 40,000 square meters of top-quality subleased space will be up
for grabs during the first quarter of 1999 – an indication that almost every
major Moscow business center is now offering space.

While real estate consultants acknowledge that the crisis is playing a large
role in the changing property market, they added that prices would have dropped
anyway because tenants were already fed up with what they saw as an overvalued
market. “In the class A market we were already seeing a slowdown in January
of last year,” Nass said. “A lot of people were going for the $600 range-”

He and other experts said, though, that the light is finally at the end of
the tunnel. Prices, in free fall since August, are stabilizing. “I don’t
see that prices will come down further, even if some tenants have this
expectation,” said Olga Ladorenko, property consultant with DTZ Debenham

“Prices cannot fall any further because then it wouldn’t be beneficial for
owners to rent space,” Yudakov added. “I think prices will stay at these
rates until, first the economy is improved and, second, until the demand
is met and the supply is again short.