Commercial Real Estate

The main sectors of the Perm real estate market have entered the stage of robust development. The Perm Territory boasts developed industries and large-scale export-oriented concenrs, which, coupled with high purchasing power of the local population, makes it a very attractive region for various commercial developments.

Today few land plots are attractive in terms of commercial real estate, and it is problematic to get land plots for construction in the city center, given that this involves negotiating with several owners uninterested in selling their plots, as said plots continue to increase in value. Accordingly, owners in Perm do not want to develop these plots or their infrastructure, so land in the center is only used as capital. Investors are not very much interested in suburban properties because of poor infrastructure and long distance from the center. Most centrally located plots are owned by local companies; however, recently Moscow companies have begun to buy up land in the center of Perm. Experts believe that the land potential in Perm has not fully revealed and that deals with land plots are occasional rather than regular, and this is because of the definite complications in the turnover of land at the legislative level. In addition, there are very few quality land plots which currently do not have problems with constitutive documents and are in close proximity to utilities and telecoms. Accordingly, it is difficult to talk about a land market in Perm, as prices are bargained during negotiations and at tenders, where the city administration is selling land plots.

Meanwhile, new companies are coming to the region, while small- and medium-sized businesses require more office and retail space. The booming retail in Perm, according to experts, will boost the development of warehouse real estate within the next couple of years. However, the almost complete lack of tourism in the region for the past few years has resulted in the hotel industry’s stagnation in Perm, though this situation has changed of late.

There is no division in Perm between residential and commercial real estate zones, as the city has been developed in a mixed style, with retail premises prevailing among the commercial properties. Most offices are located on the first floors of residential buildings or production premises, and it is common for practically all office facilities in the city center to lack parking spaces. According to experts, the city center will change in the future, and there will be restaurants, boutiques and small grocery stores within walking distance.

According to Ivan Stepanov, deputy director of the retail chain development department at NormaN-Vivat, the future of office real estate is in the areas located outside the city center, given the constant increase in the traffic flow and jams.

Sales Outpace Leases

Experts also note that a new impetus for buying commercial real estate in Perm has appeared. Indeed, it is becoming prestigious to own offices or retail premises, thereby increasing an owner’s status. So the number of deals with commercial real estate is increasing rather quickly.

According to Alexei Ananyev, commercial director at Respect real estate agency, the pace of selling price growth for office and retail real estate in Perm significantly outstrips the increase in lease rates. Consequently, this has led in the past year-and-a-half to the recoupment period increasing from 5-6 years to 10-12 years; thus interest on the part of investors in commercial real estate is gradually waning. Given that lease prices are slower to grow, companies leasing premises may compose business plans for a longer term. At the same time, the acquisition of land plots and other types of real estate is risky and investors are not always clear at the initial stages of a project how much said facility may cost upon completion.

The average purchase cost of office real estate in Perm, according to the Perm Analytical Center (PAC), for May 2007 was 48,300 rubles/sqm in the center, 43,500 rubles/sqm in districts close to the city center and 33,700 rubles/sqm on the outskirts. The average lease rates for office real estate in the city is $300/sqm per year, $225/sqm per year in areas close to the city center and $160/sqm per year on the city’s outlying areas.

According to PAC’s calculations, more than 400,000 sqm of office space will be delivered to the market by 2009-10 versus no more than 60,000-70,000 sqm completed during 2003-06. According to PAC’s estimates, given the current situation and the prospects of the region’s economy, the appearance of a significant amount of office premises will very likely lead to gradual market saturation.

Saying “A” but Thinking “B”

Experts believe that there is not a single classification system for commercial real estate buildings. Every developer completing a project decides on his own taxonomy. The experts at Respect RE agency confirm that the Moscow criteria for classifying buildings is not appropriate for Perm, given that completely different approaches to defining commercial real estate are used here. Therefore, the city should have its own criteria for classifying office facilities, the experts confirm.

Currently, class C office premises dominate on the market, which are in fact the converted residential space. Class B offices are considerably less prominent, while class A buildings are limited to the 4,795-sqm Parus, the 8,213-sqm Slavyanskaya Plaza (Perspektiva), as well as the currently-under-construction 4,500-sqm Avant-garde.

The city’s largest local commercial real estate developers are Saturn-R, Stroiindustria, Kamskaya Dolina, RIAL and Trest No. 14. There are also some large national players in the city, such as Renova, Africa Israel Investment and PIK Group.

Moscow companies significantly outstrip local developers in terms of financial resources. The construction technologies and speed of completing facilities are also higher; therefore, the developers from these cities and foreign developers will dominate on the local Perm market in the future.

Retail is Booming in Bedroom Communities

The retail RE market in Perm is rather developed and nearing saturation. Indeed, according to PAC, currently eight large retail centers are operating in the city, namely: TsUM, Iceberg, Almaz, Coliseum, Seven Fridays, Vivat hypermarket, the first phase of the Semya hypermarket and Stolitsa, with the overall area of the objects totaling 186,000 sqm.

Also according to PAC’s data, the average space selling price is 67,200 rubles/sqm in the city center, 45,800 rubles in areas near the city center and 33,200 rubles in the city’s outlying areas. The average lease rate is $650/sqm per year in center, $360/sqm per year in the areas near the center and $200/sqm per year in the suburbs.

The two leading companies on Perm’s retail real estate market are NormaN-Vivat and EKS. In addition, there are a number of operators working in the city, from Dobrynya (a local chain) to Pyaterochka. In the near future, two large SCs are slated for delivery: the 70,000-sqm second phase of Semya hypermarket developed by EKS and the 32,000-sqm KUM SC developed by RIAL. Furthermore, a number of local shopping centers will be delivered to the market in the near future, such as Sibirsky, Kit and Park Avenue. Among the national shopping centers in Perm are the 12,000-sqm Metro Cash & Carry and the 32,000-sqm Stolitsa developed by Moscow-based DVI Group.

The most prospective and undervalued region in Perm for developing office and retail real estate is the Kirovsky district.

Warehouse Market Still in the Bud

The warehouse secondary market has a significant volume of premises; however, there is clearly not enough demand among local consumers for high-end warehouse developments. Demand is partially met by small local projects and companies’ building their own storage facilities.

At this time, the warehouse real estate market is one of the least prospective segments for developers. However, in the next three to four year, it may switch to a faster gear as a result of booming retail. Quality retail premises today are practically non-existent in Perm.

According to data provided by PAC, the average sale cost of warehouse space is 18,300 rubles/sqm in the center, 13,400 rubles/sqm in the near-center areas and 7,600 rubles/sqm in the outlying areas. The lease rates on warehouse premises are $185/sqm per year down to $64/sqm per year.

The Logistics Center is Perm’s planned major project in the warehouse segment, and Yekaterinburg-based Spectrum is currently conducting research on completing this facility. The May Group has recently announced construction on a class A warehouse terminal on Geroev Khasana St.