Commercial Real Estate

Murmansk’s commercial real estate market has just begun to take off, as over the past few years, local businesspeople have been the main players on the market. Moreover, although national and foreign investors are showing an interest in and coming to the city, this activity has thus far been limited to retail.

A City on the Hillocks
As a city, Murmansk is relatively young, and in ten years will celebrate its one hundredth anniversary. The city was established in connection with the creation of a seaport on the Kola Peninsula and the construction of the Murmansk railroad.

On polar nights the sun does not rise above the horizon for 44 days here; and vice versa, polar days continue for 61 straight days. Given the dusk and white nights, these periods are significantly longer.

Murmansk’s commercial real estate market is poorly developed. “In Soviet times, Murmansk was a city of fishermen and builders,” says Valentin Pyshkin, co-founder of Murmansk Real Estate Concern. “Today construction has practically ceased, and the infrastructure – RCC and brick yards – no longer operates. However, some life has been noticed recently on this market. Indeed, the first nonprefabricated residential building is under construction .”

Moreover, market players note that over the past two years, retail real estate has been developing at a fast pace. Indeed, all of the large shopping centers have been built in this time, for example, Ramenka’s Ramstore; however, a dearth of quality retailers, forming the general level of retail in the city, is one of the main problems of Murmansk’s retail sector today. Market specialists note that, perhaps, this is because of the high lease rates, which are $480-$600/sqm per year.

“The city center was built mostly in the 1950s and is characterized by extremely tight construction,” explains Oleg Timofeev, manager for commercial real estate operations at RA Rielt. “In addition, the central area of the city is very compact. Even the main street, Lenin Prospekt, is only partially interesting for street retail - from Detsky Mir to the Hotel Arctic. Accordingly, owing to the shortage of land for new construction in the center, the first floors of residential buildings are especially popular among businessmen.”

The sale price for these former apartments could reach $4,000/sqm. “Lenin prospekt and Samoilov St. are in the highest demand in central Murmansk,” notes Vladimir Pavlyuk, manager for commercial real estate operations at RA New Address. “Lease rates for these premises run from $420 to $1,000/sqm for stores and up to $500/sqm for offices.”

Since mid-July of last year, there has been a noticeable jump in the prices for residential premises, as literally for two summer months, prices rose twofold. This is even more surprising, given that the summer months in northern cities are considered the “dead season” in terms of business activity. Indeed, up to 70% of the population goes to rest in warm climates. However, prices for commercial space remained practically at the same level, and once there was even a time when commercial space cost less than residential space. The situation has started to stabilize today, and prices for commercial space have picked up. However, one can still find a building in a good location selling for $800/sqm.

The market for land in Murmansk is practically nonexistent or in the very beginning stages of development. One of the main problems of the local commercial real estate market is the acquisition of land plots, as, indeed, all plots are sold through intermediaries. First the plots are sold to people with definite connections in the administrative structures. Market players note that acquiring a plot in the central area from a first person is practically impossible. Moreover, there are not any set prices for land, given that a system of comparative sales is lacking. Plots are obtained in backroom deals, as the participants try not to advertise their terms and conditions and financial parameters. Therefore, realtors are hard pressed to quote a price for land in the city; however, for example, a 7,000-sqm plot in the Lenin district is valued at $1 million.

Lately, many Moscow and St. Petersburg clients have started to enter the Murmansk commercial real estate with the goal of buying real estate facilities, notes Raisa Studneva, director of the commercial real estate department at Eurostyle. Indeed, virtually everyone wants to acquire premises in the Oktyabrsky region (central Murmansk). Furthermore, buildings being sold on the secondhand market are seeing their value fluctuate from $270 to $3,000/sqm.

 All Will Soon Be “OK”
Retail space in Murmansk today is offered in two forms: Soviet shops and department stores or shopping centers recently built by local developers. According to Anna Orlova, senior manager at Kolsky Dom, old-style retail outlets, such as Dom Torgovli at 75 Prospect Lenina and Volna Department Store on Vorovsky St. are still in operation although there are modern shopping centers today. This is most likely because of people shopping there due to force of habit.
The newly-built retail centers, such as Rus shopping center on Knilovich St., Pioneer shopping center, Hermes on Bauman St., Amethyst (undergoing reconstruction), Detsky Mir, Central Market on Karl Marx St. and Fuji are worth noting. However, these shopping centers were built by local developers and their formats conform to old domestic formats. Market specialists note the exodus of retail from subground and semisubground floors, where cafes are located now, as one of the market trends.
The Euroros chain of grocery stores is the main local player, as, indeed, around 13 stores are in operation today under this brand name in Murmansk. At one time the chain’s owners tried to sell it for $80 million; however, local market players believe that this was most likely an attempt by the owners to appraise the value of their business. Moreover, recently Technoshock, Eldorado, Expert and Mir household appliances and electronics retailers have come to Murmansk in addition to DIXIS, Everoset, and Svyaznoi cellular phone and services retailers. Ramstore, however, was the very first chain to come to Murmansk, having built a shopping center on the outskirts .
Just recently in the Oktyabrsky administrative district, in quarter 112, at 5 Schmidt St., construction has begun on the Okay mixed-use. The developer, DorindaMurmansk, had actually attempted to begin work on the plot back in the autumn of 2005; however, the company ran into protests on the part of the local residents, who were against the construction of a hypermarket on the grounds that it would violate environmental standards. Furthermore, these actions were stirred up by local retailers who viewed the arrival of national chains as a threat to their businesses.
Lenin prospekt and Samoilov St. are located in the center of the city and are known as the shopping “thoroughfares” of Murmansk. The cost of buying an apartment in this area on the first floor of a residential building to set up a store varies from $1,500 to $2,000/sqm, without refurbishing and removal from status as a residency. Stores on these streets sell from $3,000/sqm.
Lease rates in the city fluctuate from $480-$600/sqm per year; however, there are prices which are much higher, for example, Ramstore shopping center, which is up to $1,370/sqm per year. Local retailers note that the tenants of shopping premises do not feel very confident; therefore, businessmen are trying to buy their own space. Short-term lease contracts (11 months), instability on the market and the threat of owners suddenly raising lease rates is the reason for these fears on the part of tenants.

Cursory Office

Hotel rooms leased out as offices have comprised the main office space in Murmansk since the mid 1990s. Indeed, the Hotel Meridian is positioned as a business hotel. Moreover, the Arctic (lower floors let) and Moryak hotels also fill the role of business centers. A 20-sqm room is leased starting from $230/sqm per year. Furthermore, premises in former R&D institutes and organizations are leased out as offices. These buildings include Arktikmorneftegazrazvedka, now an administrative building on Sofia Perovskaya St., Arktimurmanskzhilstroi, an administrative building of the Fishermen’s Port, and others. Lease rates here are $240-$300/sqm per year, and for this money, a tenant gets premises in a corridor system, cursory repairs, a telephone line and most of the time a decent Internet connection.

Recently, a business center opened at 94 Lenin Prospect, with the owner of the three-story Stalinesque doing some work on the building up to the fourth floor and leasing out the premises from 200 sqm at $460-$550 /sqm per year.

Also recently, the request for small office premises, from 30 sqm, has risen. Meanwhile, tenants require a telephone line, Internet and fire alarms. They do not always demand repairs, as the tenant is prepared to do this on its own.

Moreover, there is a noticeable demand for large office premises, from 500 sqm, with the appropriate infrastructure; however, these companies are in the minority, being mostly banks.

Lease rates for office premises in Murmansk are from $230 to $1,150/sqm per year.

State of Permanent Repair

There are 22 hotels available in Murmansk, basically old-type structures, and they are in a constant state of repair, with some of the rooms being leased out while others being refurbished. Housekeeping also has the same attitude. There are three main hotels in Murmansk.

The 16-story Arctic is the highest building in Murmansk, the city’s business card, inasmuch as the climatic conditions bar the construction of high-rise buildings. A year ago, the hotel was privatized, and in May 2006, it was reregistered as a new enterprise, Hotel Arctic. The founders were the Murmansk administration and Eurasia: Hotels and Resorts. At this time, a reconstruction design is being developed, and there are plans to spend $1 million on repairs. A standard single room here today costs 1,590 rubles per night.

The three-star Meridian is located opposite the Hotel Arctic and is positioned as a business hotel. A standard single room can be taken on the eighth floor for 1,900 rubles per night. The eight-­story Hotel Russland Polar Day on Polar Day St. offers accommodation in a standard single room for 1,300 rubles per night.

For Storage

Murmansk’s warehouse sector offers premises of Soviet vintage, such as former premises for storing vegetables, raw materials storage areas, as well as production premises.

According to Denis Liory, a commercial real estate specialist at City Center Real Estate, today, especially with Moscow players who are entering the market, the demand for warehouse premises has substantially risen. However, large players, particularly retailers, prefer to build their own warehouses rather than search for ready-made ones, as the supply on the market does not suit them for a variety of reasons. Indeed, there is a tangible dearth of warehouse premises of 500-1,000 sqm.

Lease rates for space in unheated warehouses start at $30 to $150/sqm per year, and up to $320/sqm per year for heated space.

Market players attribute the relatively weak development of the commercial real estate market in Murmansk to the immaturity of business in Russia as whole, the specifics of the city’s territorial layout and the climatic conditions. Nevertheless, over the past year or two, activity on the market here has grown substantially and large Russian and foreign investors have taken a keen interest in the city.