Commercial Real Estate

The capital of Karelia, Petrozavodsk, is not only of interest to tourists today, with their boats, fishing poles and cameras. Indeed, the flagmen of commercial real estate, retailers, have begun active development in the city. However, although the municipal authorities welcome investors with open arms, according to market-specialist estimates, the city’s attractiveness is decreasing because of a shortage of prepared land plots for commercial construction, lack of utilities as well as an undeveloped transport infrastructure.

Profitable Standing
The most surprising factor for the city is that drivers here adhere to the traffic laws, with cars stopping to allow pedestrians to cross roads at intersection. Pedestrians, in turn, do not sprint across the road at any location, but, rather, they cross at properly demarcated areas and only when they have the green light. In fact, fines are readily handed out for violating the traffic laws.
Petrozavodsk was founded in 1703, when, upon the initiative of Peter the Great, a group of Olonets factories (Petrovsky, Povenetsky, Alekseevsky and Konchezersky) was built in Karelia, and the factories played and important role in the Great Northern War from 1700-1721 by supplying the Russian army and navy with cannons, fire arms and other weapons. The Petrovsky factory gave birth to the eponymous settlement, which further developed into Petrozavodsk.
“Our city is located on the embankment of the Onezhsky Lake and, via a system of canals, has access to the Baltic, Bearing, Caspian and Black seas, respectively,” says Vladimir Maslyakov, head of the city council. “The distances to Moscow (1,091 km); St. Petersburg (412 km); and the European Union (350 km to Finland) are relatively short, thus also attracting investors to Petrozavodsk.”
The capital of Karelia stretches along the lip of the Onezhsky Lake for about 21.7 km and occupies and area of 113 km2. The population of the city exceeds 282,000 people, which is 35.3% of the entire republic, although there are actually more than 300,000 people living here.
The authorities in Karelia believe that Petrozavodsk is the major investment area in the republic. As Blackwood notes, the city offers significant resources for development, but does not use them effectively. The city’s investment attractiveness is decreasing because of a shortage of prepared land plots for commercial construction, lack of utilities as well as underdeveloped transport infrastructure. However, as these problems are resolved, interest in the region will increase.

The Retailers Are Coming
The retail real estate market in Petrozavodsk is at the early stages of development. “The city began to attract investment from national companies in 2006, with the first one being the 1,200-sqm Kay computer center,” says Alexei Bobrov, director of development and construction at Lenta. “There is a large-scale Sigma hypermarket and a Mega Cash & Carry, owned by St. Petersburg-based Nakhodka. There are not any international or national players yet in the city.”
Among the largest retail chains in the city are Ariana supermarkets, the self-service Borodinsky chain of stores, the Lotos chain of supermarkets, the IP Bagirov grocery stores, the Letbytkhim chain of household cleaning items, the Foto Mir chain of photography stores, as well as the Tornado chain of stores. Typically, the first national retailers to develop a city have been electronics and household appliances retailers, such as Eldorado and Expert, as well as cellular phone operators, such as Evroset, Svyaznoi and Dixis.
According to Blackwood, the entrance of Moscow investors and their participation in updating the city’s infrastructure, the expansion of large retail chains from other regions as well as a shortage of quality retail premises are among the trends on Petrozavodsk’s retail real estate market today.
For every citizen today in the city, there are 470 sqm of retail space. Even though there is much talk of saturation with retail space in the city, this is a mistaken impression. “I would not agree with this widespread belief that the city is saturated with retail space,” says Maslyakov. “Based on Finland’s experience, we know that several large shopping centers can operate successfully in a small city with 30,000 residents.”
Local developers have also announced that they are ready to operate in large formats. Lotos retail holding opened the 9,500-sqm Sigma hypermarket in 2004, offering in excess of 20,000 brand names. “The huge yellow and gray building, spacious parking and a wide variety of goods and services match the standards of retail hypermarkets in Moscow and St. Petersburg,” say the owners. The holding has planned to open another hypermarket in this brand, but the process has been halted as of today by the municipal authorities as a result of the shopping complex slated to be built on the city’s main cross-country skiing trails.
In the meantime, national retailers have begun to expand in Petrozavodsk. In June of this year, Telemax electronics and appliances supermarket opened in the same building in which Kay computer center is accommodated.
A 9,000-sqm Lenta hypermarket is under construction in the city center. “As with most Lenta hypermarkets, the building is a single story,” states Bobrov. “There is a 500-vehicle parking lot located right in front of the retail complex, which is particularly important in this city, where the number of cars per capita exceeds even St. Petersburg.” The store offers more than 13,000 brand names, and there will be 26 check-out lanes.
As in other Lenta complexes, there will be small tenants located in the check-out area, from drug stores to telecommunications operators, dry cleaners and others. Lease rates will range from $460 to $1,380/sqm per year, depending on the premises and type of business. According to Bobrov, Lenta does not have any competition in the city, yet: “Although Sigma is very similar visually, we have different formats.”
In addition, in June of this year, construction began on a 40,000-sqm social and retail center at Lenin Prospect. The center will include a shopping mall, a food court, a multiplex, a children’s playroom, a panoramic elevator and other features. Douglas Consulting is investing $50 million, while construction is slated for completion in two years.
Tashir this year will begin construction on a 45,000-sqm shopping center in the city. Incidentally, retailers are not allowed in the city so simply, as the municipal authorities typically burden them with a number of obstacles to overcome first. For example, Tashir, by the end of this year, will finance the installation of modern playground facilities at 30 kindergartens.
The city center features a street retail zone, with cafes, clothing stores, appliances shops, shoe stores and cell phone operators. However, there is a tangible shortage of fast food proprietors, and the only eatery, Chainaya Lozhka of St, Petersburg, was opened at the initiative of the mayor.
The main streets with robust street retail are Lenin Prospect, Kirov Square, Kirov St., Nevsky Prospect and streets adjacent to Lenin Prospect. As noted by Lyudmila Nikolaevna, director of AN Detskaya Liniya, lease rates here range from $370 to $920/sqm per year. The selling price of first-floor apartments converted to non-residential stock is $2,000/sqm. In the bedroom communities, such as Drevlyanka and Klyukevaya, the base rate is $180-$280/sqm per year.

The Same Old Selection
“Today we do not have any modern busin ess centers,” says Maslyakov. “However, the situation is changing, albeit slowly. As part of the Onega Palace project, office space is being built on the first four floors of the complex.” Furthermore, another class B business center is being designed; however, this is too little, believes Maslyakov: “The shortage of high-end office premises, in turn, will hinder business also. Today’s companies want to receive comfortable conditions for operating, thus they are ready to pay, but many so far cannot find suitable premises.”
Nevertheless, local retailers believe that the situation with office premises is not all that dire. “I would say that we have enough offices,” says Konstantin Sokolov, deputy general director at Consulting Invest management company. “The matter is with the money which businesses are ready to pay for the required premises.”
The owners of office buildings founded Consulting Invest three years ago to manage their facilities. “We operate several facilities, from business centers to shopping centers and warehouse space – nine in all,” says Sokolov. “However, our portfolio today is filling up with outside facilities.”
This full-fledged regional management company is responsible for selecting tenants, supporting the premises for the tenants, maintaining the building and collecting lease payments, while receiving a set percentage as payment for its services. Their only competition thus far is the local Business Center management company; however, in several years, Sokolov expects very stiff competition in this segment.
The average office selection today in Petrozavodsk includes refurbished premises with or without furniture and Internet as well as cleaning; with a lease rate of $230/sqm year in the bedroom communities and $325-$1,150/sqm per year in the city center (occasionally a tenant must pay an “entrance fee” of around $100).

Stored Away
The warehouse sector comprises facilities built during the Soviet era, in various stages of disrepair and services offered.
“There are not any modern logistics complexes in the city,” notes Maslyakov. “However, demand is picking up in this sector. We have around hundreds on small- and mid-sized wholesalers who use adapted warehouse premises from the Soviet times. Lease rates for these premises are not expensive, but the storage service provided corresponds in kind.”
Large retailers coming to the city are resolving this issue in their own way and are storing goods in their own facilities at their shopping centers, not waiting for a modern logistics complex to fall from the sky. The authorities hope that with the arrival of large chain retailers, the sector will be forced to develop very fast. Lease rates for warehouse space are $23-$140/sqm per year.

Seasonal Guests
Around ten hotels operate in Petrozavodsk today, with the average cost for single room being 1,800 rubles. According to Alexander Dubinin, director of Intourist Hotel Group branch Severnaya, the number of rooms has increased by 30% over the past three years, as new hotels have entered the market. At the same time, the number of Petrozavodsk’s hotels has only increased by 10%-15%. “Karelia is noted for one specific feature – touring seasonality,” explains Dubinin. “Tourists come here to the historical location, but they cannot do that in the winter, because in the summer, they travel here by water. Kizhi, Valaam and Solovky have a set visitation level which will not increase. Therefore, today we are talking about tourist seasonality in Karelia, which is mostly because of tourism in the area being connected with the water, such as fishing, white-water rafting, etc.”
The Severnaya Hotel is located in the very center of the city, and the building is currently leased by Intourist from the local administration. However, the company intends to buy up the entire hotel soon. In fact, the mayor welcomes hotel operators to Petrozavodsk, holding a tender and then selling it. The average occupancy rate is 55%-60% per year in Severnaya Hotel, which is a two-star facility. Severnaya management is not wary of competition coming from the Onega Palace Hotel currently under construction, given that they operate in separate price categories. In addition, upon request of the local administration, there are 40 so-called social rooms with shared amenities on the floor for low-cost business class rooms, where the region’s business managers occasionally stay while on business trips to the city. A room costs 500 rubles a night.
According to Dubinin, there is an overabundance of rooms in the city, especially during the off-season. However, as new projects are delivered to the market, this problem will only increase. Nevertheless, the municipal authorities are certain that the opposite is true, that there are not enough economy hotels, and high-end hotels could stand to increase in number.
In the fourth quarter of 2007, MARR Capital investment company will complete the construction of the afore-mentioned Onega Palace hotel complex in Petrozavodsk. According to Ruslan Safin, general director of MARR Capital, “this region was chosen for investment because the hotel market in Petrozavodsk is far from saturation, and lineup and structure of the rooms are clearly not in line with the dynamically increasing flow of tourists.”
Commercial real estate today in Petrozavodsk has only just begun to develop, and the local authorities welcome outside, friendly investors and players with open arms. However, market specialists note that despite many positive changes and trends, the conditions for a mass influx of investors still have not been created. Commercial real estate in the city will not develop until potential demand for high-quality retail facilities exists.