Overview of Moscow MixedUses
The juxtaposition of several functions within one property is a developer’s way to diversify risks and lengthen a property’s life cycle. However, the failure of one of these components may jeopardize the entire complex. Granted multiple uses are a timesaving alternative for the consumer, who may shop near the office or work at the place of residence. Given the unbearable traffic jams in Moscow today, this layout provides a priceless advantage. But what if the agitated crowds of shoppers hassle sedate office employees or hotel guests? What if the visitors get lost and make their way to areas of restricted access?
General Situation
Mixeduse complexes can hardly be qualified as a separate segment of the commercial real estate market, as properties falling under this category may widely vary depending on their constituent functions. Additionally, every mixeduse comprises retail, office, industrial and hospitality functions, which are traditional segments of the commercial real estate market, and hence their spaces are included by analysts in the aggregate statistics for each segment. Furthermore, the market lacks a ubiquitous idea of the mixeduse makeup; experts differ as to how many functions a project should comprise and what should be the share of each in the total space.
As defined by the Urban Land Institute, a multipleuse complex is to comprise at least three incomeproducing components, each generating an independent demand. Such properties are rarely found in the Russian reality, as in projects with three major uses, two often serve as an infrastructural supplement to the main function. For example, the retail function, occupying an insignificant share of the total space and meant for office employees only, cannot serve as a “magnet” for outsiders.
Therefore, Russian analysts grade the projects with two or more functions, each generating autonomous demand, with mixeduses. As noted by GVA Sawyer, whenever two different functions are represented in a multipleuse property, one of them is defined as dominant and the other one as auxiliary (for example, officeshopping, shoppingoffice or officehotel centers). For a property to be characterized as a fullfledged multifunctional facility, the auxiliary function is to account for at least 10% of the total floor area; otherwise, nonspecialized areas can be defined as attendant infrastructure. In the opinion of Knight Frank’s experts, the mixeduse format implies that over 20% of the total space will be distinct from the dominant function in terms of operational purpose. They underscore at Colliers International that the components must be complementary down to physical and functional integration of the project constituents, including the arrangement of continuous pedestrian links. “It is these very pedestrian links providing for a synergy effect that distinguish a mixeduse from a multiuse property,” point out the company’s analysts.
This is not to say that the projects with several functions were so greatly demanded by the market. Developers just seek different ways to maximize the property yield, as high land prices render lowrise developments unprofitable. Therefore, it is wiser to erect a multistory facility, in which the lower floors are occupied by retailers, while the upper floors, where shoppers generally fail to reach, are dedicated to offices or accommodation.
Supply
Each real estate project requiring sizeable investments calls for an individual approach and solution. This fully applies to mixeduses; hence the impossibility to define a ubiquitous mix of functions for Moscow. “There is no point in talking abstractedly of the most fortunate blend of different functional uses within one complex,” representatives at Hotel Tekhnologii told CRE. “The only benchmark is the results of a research known in expert community as Making the Best Use of Land. Only a grounded research based on the market analysis would reveal an optimal mix of functions for any given plot.”
GVA Sawyer estimates the existing Moscow market of mixeduses at 500,000 sqm and opines that this figure will keep growing. As estimated by Knight Frank’s analysts, the retailoffice and officehotel modifications and, to a lesser degree, retailexhibition complexes are currently being developed. Another popular breed is technoparks, where office, industrial, retail, exhibition and hospitality functions are combined.
Most common mix on the Moscow market is the marriage of retail and office functions within one project. Demand for the retail function is high both in the downtown with its heavy traffic flows and in the outskirts, while the office function provides for the occupancy of upper floors, especially since shopping space is known to be unprofitable higher than the fourth level above grade. Expanding the retail function beyond the common infrastructure needed by an office building may enhance the business center’s attractiveness in the eyes of tenants, provided that the retail operators are competently selected and pooled.
In view of quality hotel shortage, an increasing number of mixeduses include the hospitality function. Notwithstanding the lower yield, an upscale hotel improves the entire project’s image, given that the hotel construction is often one of the developer’s investment commitments. As noted by Hotel Tekhnologii, there are very few examples of operating mixeduses with a hotel function. Among the projects under construction, the following large properties are worthy of note:
- a project developed by Mirax Group in the Moscow City, where offices, apartments and a fivestar 220suite Hyatt Regency Hotel will function under the same roof, is a classical mixeduse example;
- a mixeduse developed at the site of former Moskva Hotel will comprise the 210suite fivestardeluxe Four Seasons Hotel, apartments and probably the Moscow’s biggest complex of conference premises;
- a mixeduse in place of Minsk Hotel at 22 Tverskaya Street, where a 210room Intercontinentalclass hotel will be combined with a shopping center and office premises.
Market experts underline that the compatibility of constituent functions is crucial to the mixeduse success. For example, Class A office premises are to adjoin the uppersegment retail and an upscale hotel. Otherwise, the constituent functions can hardly be complementary because of their different target audiences.
Central location inside the Garden Ring has until recent been one of the most important conditions of mixeduse successful operation. However, the decentralization that is going on in all market segments apparently applies to multifunctional centers as well. The main reasons are terrible traffic jams in Moscow downtown and development land shortage. While the central location is still an important advantage for upscale hotels, its benefit for retail and office functions are no longer obvious. Hence the increasing number of mixeduse projects beyond the Third Ring Road, such as the mixeduse developed by Tashir Group on Dmitrovskoe motorway or the retailoffice complex Metropolis constructed by Capital Partners in Moscow northern suburbs.
Cushman & Wakefield Stiles & Riabokobylko’s analysts believe that the peripheral location is most favorable for mixeduse properties because it is easier to arrange human flows inside a complex and to provide it with advanced infrastructure and convenient driveways on sparsely developed plots. According to Capital Partners, delivering the Metropolis construction project on Leningradskoe shosse, functions must be divided by means of separate entrances to avoid the intermingling of shoppers with office employees. This can be provided only on a fairsize plot, which can hardly be found in the downtown.
The arrangement of motor and human flows inside a complex is an important challenge to be addressed at the design stage. In the opinion of Jones Lang LaSalle’s experts, an optimal solution would be standalone buildings for each function in order to steer crowds and to simplify property management, as different management companies are often hired for different project functions. If functions cannot be separated for some reason, it is necessary to design separate entrance groups for office personnel, shoppers and hotel guests, minding the overlapping demand. For instance, office employees should have access to the shopping center’s food court through supplementary entrance groups.
Demand
The main advantage of a mixeduse property for tenants is the indoor interplay among different functions, which draws more visitors to restaurants and stores and makes the accommodation more attractive for guests. With a competent layout and professional management, users have a fair chance to benefit from the functions and services that are not commonly brought together within one space.
However it is not functionality in and by itself that attracts tenants, as location, the tenant pool, technological functions, etc. are as important factors of success for a mixeduse as they are for singlefunction properties. Therefore the demand for space within each particular mixeduse function depends on the general situation in a given commercial real estate market segment.
Talking of mixeduse attractiveness for investors, it’s hard to discern any direct relation of the property yield to the number of functions. Like a singlefunction property, a mixeduse can be both successful and unsuccessful from the financial standpoint. Yet, at Colliers International, experts believe that a multifunctional project opens greater opportunities to attain the best results, and the developer’s goal is to make the best use of these opportunities. “The mixeduse success is always something more than the success of the sum of its constituent parts while the failure of one function may adversely affect the whole complex,” note the company’s experts. “In other words, greater opportunities entail higher risks.”
The CityHotel specialists point to the fact that the availability of several functions in one project may generate income at different project development stages. Retail premises traditionally recoup sooner than other functions, being the main source of revenue at the early stages; then comes the turn of a business center and after the payback period for the hospitality function expires (79 years), a hotel will bring the highest return.
Rent
As was already mentioned, extra functions can be looked upon as either an advantage or disadvantage by tenants. Accordingly, the base rent can be either higher or lower in a mixeduse depending on its location, pooling of tenants, promotion on the market and other conditions. Under the shortage of quality supply, rental rates and selling prices grow almost in all segments of the commercial real estate market, whereas no direct relation can be observed between the rent and the number of functions. Therefore, the rental rates for office occupiers and retail operators as well as hotel room prices fall within the ranges typical of each respective market segment.
In regards to construction costs, Jones Lang LaSalle’s experts argue that they may rise because of project complexity. The need to divide human flows may call for the inclusion of additional entrance groups and separate elevators for the office function, apartments and other components, which would push up the price of construction. GVA Sawyer notes that the hospitality function will call for greater initial outlay, and so hotelretail or officehotel mixeduses will be more expensive than officeretail or retailoffice multifunctional complexes.
Trends
- Growing business activity boosts the demand for conference halls and exhibition venues; their amalgamation with hospitality and office functions is getting increasingly popular;
- Hotelretail complexes are sprawling out in Moscow; the combination is felicitous on account of the high demand for shopping space inside the hotel. This format is also spurred by the municipal program On Urgent Measures to Encourage Hospitality Industry in Moscow;
- The longawaited stabilization of office rental rates is an additional incentive for developers to include more functions in their BC projects;
- The trend to develop multifunctional complexes with apartments is gathering momentum;
- As in all other commercial real estate segments, the growing scale of mixeduses under design or construction can be observed;
- Apart from downtown multifunctional properties, which often prove to be redevelopment endeavors, construction on mixeduses beyond the Third Ring is in full swing;
Projection
Multifunctional centers will continue their march on Moscow expanses. As certain segments of real estate market approach the point of saturation, and tenants and consumers are privileged with an ever widening choice, their interests will most likely be drifting towards standalone properties. On the other hand, the availability of several functions within a single complex will allow the landlord to survive the slump in one of the segments and stake on other functional constituents for the time being. On the whole, the expert forecasts for mixeduses are similar to those for singlefunction properties: as the market is getting more mature, only fortunately located and competently delivered projects with deliberate concepts will stand the ever toughening competition, while complexes of poorer quality will see the flight of tenants and the drop in rental rates.