Commercial Real Estate

The influence that transportation infrastructure has on the development of the real estate market cannot be doubted, as it is a major factor in market players’ favorite mantra “location, location, location.” The geographical locations of Moscow’s retail centers would have been completely different if it hadn’t been for the MKAD. Likewise, the market of office areas would still be concentrated in the historical center if it hadn’t been for the construction of the Third Transport Rings. Looking ahead, the full reconstruction of Leningradskoe Shosse, one of the city’s core highways, will have a major impact on the development of the commercial real estate market in the northwest of Moscow in the coming years.

During the reconstruction of Leningradskoe Shosse, which the city authorities plan to complete by mid2009, a series of tunnels, overpasses and road junctions are scheduled to be created in order to ease the traffic along the transit artery, which has long been infamous for its bumpertobumper traffic jams. The first phase of reconstruction involves an 800meter long 11lane tunnel (6 lanes outbound, 5 lanes centerbound) between the metro station Dinamo and the intersection with Nesterova Street. The authorities are also planning to create a road junction in the area of Seregina Street to provide an entrance to Kholdynskoe Pole, as well as a doublelevel overpass at the intersection of Leningradskoe Shosse and Volokolamsky Shosse and a road junction at the intersection of Leningradskoe Shosse with Zoe Street, Alexander Kosmodemyanskie Street, Golovinsky Shosse and Festivalnaya Street. In total, nine lanes in the direction of MKAD and eight lanes in the direction of the Kremlin will be expanded along Leningradskoe Shosse. The plan of the city authorities also includes the reconstruction of Pushkin Square, Triumph Square and the square of the Tverskaya Gate, which, in the longrun, will allow traffic to flow without traffic lights from the Kremlin to the MKAD.

What does all this imply for the commercial real estate market?

At the present, several retail centers are located in the Leningradsky area, including Metromarket on Sokol, Aeroport Gallery, RamstorCity, Liga, and of course, Mega Khimki. The total lease space of these premises exceeds 250 thousand sqm (largely thanks to Mega). In addition to the relatively good supply of retail spaces, the area along Leningradsky prospect/shosse is traditionally considered one of the more profitable areas for office projects due to its close proximity to Sheremetievo Airport. Additionally, the northwestern part of Moscow has been considered a prestigious address since Soviet times. As such, it was not by accident that some of the city’s first business centers to be formed outside the Garden Ring were located along Leningradsky as early as the first half of the 1990s. From 19941995, for example, such projects as the Robin of Moscow business center (Leningradsky Prospect, 53), West Bridge (Leningradsky Prospect, 37A), Sokol Place (Chapaevsky Pereulok, 14) and business center Sokol on Brubel Street were realized in the area. For several Western companies, such as the German company Siemens, it is of principle importance to build their office headquarters along Leningradsky Prospect, as the road connects the Kremlin and Sheremetievo Airport. At the current time, the total area of office space in the area (most of which is class B) exceeds 350 thousand sqm, making it a major submarket of Moscow.

The expansion and reconstruction of the prospect, which was announced several years ago, has certainly activated development in the area, as the poor transportation situation was one of the main factors constraining developers earlier on. According to the announced plans, around 500 thousand sqm of new offices, mainly class A, and 300 thousand sqm of retail space will be realized along Leningradsky Prospect, from the Belarusskaya area to MKAD, by 2009. Among the most known projects are the Metropolis retailoffice complex (80 thousand sqm of office space and 80 thousand sqm of retail space) on a plot of 14 hectares near Voikovskaya Street, the Siemens Building (110 thousand sqm of total space at Leningradsky Prospect, 39), and the large­scale reconstructions of the territories belonging to the factories Slava, Izolyator, Yakovleva OKB and MiG. Development also continues along MKAD, including the opening of the first phase of the largescale Khimki business park (20 thousand sqm), which IKEA is building near the Mega retail center. The status of Leningradsky Prospect as a “gateway to Moscow” encourages developers to realize ambitious projects that feature unusual architectural designs, as seen with the MercedesBenz Plaza, which opened in 2004, and the buildings of Siemens and Metropolis, now under construction. The entrance onto the market of the new highquality projects will allow the area to become more attractive among various groups of tenants.

The expansion of Leningradsky also implies that the coverage zone of the existing and planned retail centers in the area will increase, thereby incorporating neighborhoods where mainly people with aboveaverage incomes live (such as residents of Grand Park on Khodynsky Pole). As such, the owners of retail centers have already forecasted a significant increase in the consumer flow following the reconstruction and are using this fact to justify higher rates when signing longterm lease agreements. After relative stability from 20032005, the rent rates in existing retail centers in the area sharply increased by as much as 4045%. For projects that are planned to be completed in the next two years, the growth of rent is expected to be even more dramatic. In many respects, this increase is due to the shortage of offers in this prestigious area, though the expected improvement of access to Leningradsky, which will lead to a rearrangement of the traditional coverage zones in the northwest of Moscow, also plays a significant role. The fourth transport ring, which, according to the plan of the Moscow authorities, ought to intersect with Leningradsky Prospect near the Metropolis center, now under construction on Voikovskaya Street, will make this part of the city even more accessible in the upcoming years.

Besides the obvious advantages for retail centers, the expansion of Leningradsky may cause the number of office tenants in this part of Moscow to increase. It is worth noting that despite the prestige of Leningradsky for residential and retail premises, office tenants in the area have traditionally been limited to manufactures and IT companies (including the FMCG automobile company), as the area developed a “scientific/technological” reputation back in the Soviet era. The area’s legendary problems with traffic jams in the past decade have also made it less attractive to business tenants. However, once the transport problem has been safely resolved and more office space is built, then the attractiveness of the area for other types of tenant, such as legal companies, banks and consulting firms, all of which so far prefer offices in the very center, should sharply increase.