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Russia’s Regional Office Market Lags Moscow Significantly

The majority of office supply in cities with a population over 1m comprises low quality stock

Moscow, 25 November 2013 – Jones Lang LaSalle provides a comparative analysis of office space supply in Millionniki cities in Russian regions. According to Jones Lang LaSalle research, markets of cities like Omsk, Ufa and Chelyabinsk on average lag the Moscow market by a factor of 20 in terms of existing supply.

“Usually demand and supply in the office real estate segment depends on the pace of economic development of the city, which in its turn affects the scale of a company’s presence in the market. Undoubtedly Moscow is a leader and the largest office market in Russia – current quality stock per 1 citizen is almost 1.3 sq m. However, there is a huge gap between the Moscow market and other cities. The cities with the closest office spaces provision to Moscow are St. Petersburg (almost 3 times behind Moscow), Yekaterinburg (3.5 times) and Novosibirsk (4.5 times),” - Olesya Dzuba, Deputy Head of Research of Jones Lang LaSalle, Russia and CIS says.

According to Jones Lang LaSalle, there is less than 0.5 sq m of office area per capita in St. Petersburg, 0.4 sq m in Yekaterinburg and 0.3 sq m in Novosibirsk. In less developed markets such as Omsk, Ufa and Chelyabinsk, this indicator is 20 times lower on average compared to Moscow. This considerable gap may be explained by the fact that the majority of office stock in these cities comprises premises on the ground floors of residential buildings, in academic institutes and in old administrative buildings, which cannot be considered as quality spaces. The majority of offices there are of Class C and D, according to the classification used in Moscow. As a result, Omsk has only 0.06 sq m of quality office space per capita and Chelyabinsk has only 0.1 sq m per capita.

Office stock in Millionniki cities, sq m per capita
Office stock in Millionniki cities, sq m per capita_25112013.png
Source: Jones Lang LaSalle

The demand for quality office space depends on the level of presence of large Russian and foreign companies in the city, as well as on their potential interest in the market in the future. Large business has entered the most economically developed and stable regions, resulting in massive office construction, and is already widely represented there. At the same time we can see that there is a shortage of modern high quality office buildings in such economically developed cities as Ufa, Chelyabinsk, Omsk and Kazan.
Attractiveness of Russian cities for office development
Attractiveness of Russian cities for office development_25112013.png
Source: Jones Lang LaSalle, The Ministry of Regional Development
According to Jones Lang LaSalle, the volume of quality office space in Millioniki cities could increase by more than 20% by the end of 2014 and reach 3m sq m. Yekaterinburg is the most rapidly growing regional market, it accounts for a quarter of the planned new construction, or 130,000 sq m.
Current stock and pipeline (by end-2014) in Millionniki cities
Current stock and pipeline (by end-2014) in Millionniki cities_25112013.png
Source: Jones Lang LaSalle
Tim Millard, Head of Advisory Group, Jones Lang LaSalle, Russia and CIS, comments: “Although there is continuous development of regional markets with new office buildings, which have larger spaces and higher quality than pre-crisis projects, there are still not enough services provided to owners and tenants. Consequently, we can see that the quality supply on the Russian regional markets does not meet the demand; moreover, in some cities the market is not expected to come into balance even after the delivery of currently under construction projects. This fact should be recognized by developers as a potential of these cities to implement office projects.”
Demand for high quality office space in regional cities mainly comes from international businesses and large scale Russian companies. At the same time, despite the large size of the companies and the volume of transactions in Moscow, the scale of demand is much lower in comparison with Russian capital. The majority of tenants prefer to lease offices 10 times smaller than in Moscow.
Tim Millard notes: “Shortage of Class A spaces principally affects international corporates willing to expand to Russian regions. Being guided by experience in matured western markets, they usually expect high levels of building management, modern amenities, accessible location, developed infrastructure and good reputation of the owner. At the same time, there are not many tenants of this scale in regions and the demand is mainly represented by Russian companies. In this regard, the need for high-quality Class A buildings in the regional cities is limited by large federal players. It should also be noted that the technical parameters of Class A business centers in regional cities do not always match Moscow parameters, and often it is not needed at the regional markets. Thus, business centers of Class B+ and B- by Moscow standards will be in the demand at regional markets.”
A small amount of vacant office space makes the construction of new business centres potentially profitable for developers. At the same time, it is crucial to choose the right place for the construction. Developers should focus on central locations and estimate the demand of potential tenants in advance and their expected level of rental rates. In addition, it is necessary to take into account the fact that large Russian corporations prefer to construct high quality buildings for their own use in some cities, thus reducing the demand for speculative office space.
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 242 million square meters and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management.
In Russia and CIS Jones Lang LaSalle have offices in Moscow, St. Petersburg, Kiev and Aktau. Jones Lang LaSalle, Russia was voted Consultant of the Year in 2004, 2006, 2007, 2008, 2009, 2010, 2011, 2012 and 2013 at the Commercial Real Estate Awards, Moscow and Consultant of the Year at the Commercial Real Estate Awards 2009, St. Petersburg. For further information, please visit