Commercial Real Estate

The Russian market for retail real estate is going through a period of active growth which, by various estimates, will continue from three to seven more years. Already we can speak about major development in several basic areas. The display cases at the well-known local store, “Ye Olde Commercial Real Estate Shoppe,” contain several interesting “products.”

In many cases, developers, naturally focused on repaying their investors, are renting and selling many of their individual projects during the completion of the construction phase. Companies with their sights set on more significant revenues aim toward the creation of networks or chains of retail properties. The tendencies of the last two to three years have demonstrated a dramatic acceleration in network development. But what is a retail network? What are its features? What are its principle strengths and weaknesses?

Networks

The Russian market offers many projects which for this or that reason are considered to be networks. This concerns, first of all, those companies which build many retail centers under one designation but sell various brands of merchandise (Torgovyi Kvartal.) It also includes companies which build independent properties but manage all of them personally (Dominion-M, DVI, ADG.) The third group distinguishes itself by actually selling only one brand of products at all of their outlets (IKEA, Vremya, RIGroup, REGIONS, AIM Property Development.)

When speaking about networks, there are two basic issues to keep in mind. The first is the actual creation of the retail networks. The second is the common features shared by the properties (other than the common owner.) These features may include a single name, a single target audience, a common commercial history, or, in many cases, a single format. The last feature is by no means obligatory. Networks like MEGA are oriented toward a large format strategy, but this principle may actually limit future possibilities for the network’s development. In situations where regional space is dynamically being occupied, it seems more prudent to construct flexible networks based on retail centers of various formats.

Today we can acknowledge that network programs are booming. The time has come for competition in technical competence in the areas of construction, marketing, communication and so on. Development will bring to the public a whole range of existing capitalist mechanisms with a distinctly Russian flavor. A great marketing guru once observed that participants in modern business are either “quick or dead,” and it can be asserted with certainty that the main strength of a network is procedural technical competence and great savings in cost, bringing greater speed to a company’s development – that is, “quicker business.”

 The Assembly Line
The construction of networks of retail centers nominally may be compared with the assembly of an automobile, where the basic design elements are worked out by a highly-qualified engineer before being brought to the assembly line, where everything is put together under the supervision of experts. Under such conditions an automobile becomes the work of a true high-tech specialist, and the basic task is to bring about smooth, uninterrupted, and economically efficient assembly.

Standardized Projects
The “assembly” of retail networks begins with the choice of operation sites – and the more the better. Though the landscape, the size of construction, and the demands of local authorities may vary from lot to lot, there are reasonably only three or four typical, standardized projects. Any unique problems can be solved with certain standard adaptive solutions.
These standardized projects allow not only economy in architectural choices, but more importantly are guaranteed by a ready investment plan and in the end make business more ordered and predictable. Errors arising from poor planning are reduced with every implementation of these projects.

Architectural and Design Solutions
Traditionally, significant time is spent working out architectural and planning solutions. Fortunately, market experience eases all the difficulties encountered when planning for GLA/GBA calculations, for anchor store area allotment, for parking indexes, for the details of this or that operator’s complicated format, for loading dock procedures, or for issues of brand presentation with a high degree of accuracy. The result is that every standardized project has two or three typical planning solutions, and all that’s left is to aptly situate the units on the property.
The process of creating architectural solutions requires the visualization of a brand, and in this case, the designation of a retail property. It is desirable that the designation suggest positive connotations. Indeed, much has been said about the designations of retail centers on the pages of this respected publication. The visualizing of a brand for a network of projects will be accomplished by creating a standard stencil of a facade, the base elements of the internal space, and the system of internal identification. These standard stencils will be adapted to the specific requirements of the final real estate center.

Construction
The most complex stage of implementation of a retail network or as we called it earlier, “assembly” of the facility, is the physical process of construction. The difficulty stems from the choice of a capable contracting organization, something which not every city in the Federation can boast of (Moscow being disqualified in this matter from all boasting.) But in this situation, the choice of a standardized project is very useful, allowing total control over the processes of realization.

Brokerage
The next step on the road to opening a retail center is the attraction of tenants. A network project allows the optimization of all stages of brokerage from the search phase to the signing of contracts.
Beginning the search for tenants, the developer assembles a base of data and research in order to first define who his target tenant may be, to make contact with this tenant, and finally to determine who will be responsible for making the final decisions in the tenant-operator’s organization.
The same can be said for the tenant. The tenant must understand how the developer will construct the facility and with whom he will need to deal personally if they are to complement one another. The manager should not have to call and introduce himself every time there is a problem or a question. Additionally, having a strong relationship, the partners will better understand one another’s perspectives and points of view about professional obligations. This is especially important for the tenant, who must understand which centers the developer has constructed, how they are run, and how they will be advanced in the market.
Mutual understanding must be arrived at before agreeing on the final conditions of the relationship. This is linked to considering several plans at once and weighing their pros and cons and clarifying them for every party in any given project and finally balancing their interests. A large quantity of human resources are conserved and economized thanks to a long-standing relationship between tenants and proprietors and following certain fixed standards at every branch of the retail network.
Besides optimizing resources, the brokerage of a project network has yet one more advantage – the optimization of existing standard retail-entertainment formats and tenant pools. This allows the conservation of formatting plans and solutions to the expectations of any brand.

Management
A property ready for the operation phase requires a management subdivision. The economization of costs will occur specifically within this part of the company.
The formation of the management subdivision takes place in a standardized organizational structure, which generally plays the same role in all branches of the network. The only variation will stem from the number of employees in this or that subdivision – 10 people at a 40,000 sqm retail center, 15 at an 80,000 sqm retail center, and so on. The only question which cannot be solved by standardization is the formation of this team. This process is subjective to a certain degree, and no techniques guarantee the attraction of necessary experts in this or that city.
Once created, the subdivision immediately begins work in the absence of standardized procedures – operation guidelines by which the final business strategies will be created. (As with independently established operators, there is a question of which functions will be solved through mutual cooperation between tenants and which will be outsourced. How will the usual issues of maintenance, product acquisition, and security be solved?) These processes are described and assigned basic techniques and procedures – employees will understand at least who will do what. As a result the adaptation of the team to working conditions becomes significantly faster.
The mechanism of control in this area is balancing the system of indicators and aggregate evaluative criteria for managing the company and distinctly defining the normative designations for each of these criteria.

Working with Tenants
As with all other types of work involving tenants, certain methodological processes and business formulas must be developed for the solving of problems. In this case, however, a main role is played by the more informal business-relationships. The excellent features of mutual cooperation within a network project guarantee that questions will be decided more constructively and clearly on the road to compromise. A decision made by any of the parties involved can positively or negatively affect all the others. Mutual trust and consideration is required on all sides.