Commercial Real Estate

The format of super-regional center, covering 100,000 sq.m. is one that many developers of commercial real estate have embraced. Here it is possible to place a large number of various tenants successfully – thus scaring off any potential competition. Yet, especially in regional centers today, there is a situation where, because of a deficiency in town-planning, large projects are declared too often. Very soon this will lead to a surplus in the market with cities with populations of a million or more.

One of the most significant questions that excites investors and developers is that of how to approach saturation of the market. The commercial real estate market is rapidly developing, with new projects announced every week, and businessmen always wish to repeat and realize the most successful projects from the past (especially the popular concept of shopping center) that have already proven their effectiveness with retailers and buyers.

I think that the 100,000-sq.m. shopping center takes as its inspiration the first sensational project Mega. It was the first ambitious project of the company Ikea Mos on the Russian market, and it exploded into the limelight right at the beginning of the shopping center trend in our country.

It showed how popular and profitable such a large-scale project can be. This mega-mall pattern was noted by many developers who began to develop it in the regions, as well as try to find platforms for it in Moscow and St. Petersburg.

Why does this happen? Because this format solves two major business problems: it brings people a huge choice of goods, because, of course, on a 100,000-sq.m. lot you can include practically all of the most interesting international and Russian retailers and, consequently, eliminate any need for the visitor to go anywhere else. Similarly, we should note that visitors go to shopping and recreation centers not only to buy things, but also simply to have a good time, to have lunch or dinner in a restaurant, to see a movie in the theater, etc. For visitors wishing to do such things, the most successful format is the 100,000-sq.m. shopping center. Thus, the 100,000-sq.m. shopping center is the most competitive because it contains everything. And to build a second commercial project in the same trading zone would be senseless, so any competition is quickly and efficiently abolished.

This fashionable trend has led to today’s situation of developers not wanting to build shopping centers in a small format. In many ways, this is a dangerous trend. In practice, in many cities, a dozen large projects are being declared. Everyone understands, of course, that not all of them will be completed. Yet either way, there is a situation in many cities where sites by different developers constructing large shopping centers are revoked – with many of them already under construction.

Undoubtedly, the market in a regional city has a large enough population that it can successfully hold 5-10 large shopping centers and still function quite well. Yet this works only if the formats of these shopping centers are not all 100,000-sq.m. And if in a single city, there are too many large shopping centers, investors may lose everything within a year of a center’s opening. It is impossible for the buyer to pay for everything in an expensive construction. It is game of roulette.

Because of the absence of town-planning in the majority of Russian cities, many participants on the commercial real estate market do not even have a precise idea about where a competitive project can be opened, in what format, etc.

If we speak about shopping centers with areas of 30,000-40,000 sq.m., they are not in direct competition with the 100,000-sq.m. shopping center. There, people come for other reasons and their consumer priorities are quite different. You can always count on a small shopping center to be completely filled. In cases where one city sees 10 large shopping centers opened, 7 out of them will most likely have poor attendance. We can expect much greater risks in cases where the market reaches a certain saturation.

Undoubtedly, it is possible to calculate profitability and attendance by using different formulas and systems of estimation. But basically, for comparison, European key figures can be applied to estimate the rate of sq.m. per 1000 people in Russian cities.

So, in 2007, the estimates per 1000 residents in Russia was 67 sq.m., in Norway 628 sq.m., in Sweden 344 sq.m., Holland 343 sq.m., in Great Britain 238 sq.m., Spain 234 sq.m., Finland 223 sq.m., and France 219 sq.m.

The situation that has developed today is quite unique. In 2009-2010, in the commercial real estate market in many cities, dozens of large format shopping centers will be announced. And there is a critical amount. Also, what happens later is a question of how we advise developers today. The tenants in the majority of these projects are the same. They will have already chosen which project to go with and where their commodity circulation will be. Thus, we rapidly pass from a “development” market to a “retail” market, where the most important word will be whatever is uttered in the end. In Europe, players on the real estate market already play by such rules.

If a retailer has already entered into a project, and it has proven unpopular with city residents, the retailer is compelled to look for a new commercial area with the best site, and the expenses of furnishing the first facility will not be returned. As a rule, when opening a new shop, the most serious investments go straight to repairs and furnishing. For instance, goods can be bought on credit in such cases. Initial investments always aspire to return profit to everyone as soon as possible, and for large brands, investments in furnishing can reach millions of dollars. If the center is empty with no visitors, investments and profits are unlikely to be returned for a very long time.

This situation seems, to me, a bit disturbing; it is not clear why developers don’t want to build small-format shopping centers. With proper planning and positioning, they are just as profitable and valuable for the market as the larger centers. For example, one of the most attractive projects for investors is the Festival shopping center on Michurinsk Prospect in Moscow. It’s leasing area is only 30,000 sq.m. Yet this project is absolutely on the market, and will always have a long waiting list, as well as high rent rates. It is very well located, and the desire of many superb tenants to be situated in the center shows that it is one of the best projects in Moscow. Similarly, if the shopping center already possesses an excellent set of tenants, it also provides high attendance and high sales. The developer of Festival can receive the best offers in the market, aside from the high rent income which the developer is already receiving.

All of that, and Festival is not even located in a high-traffic area in the center of Moscow! The same example can be seen with the regional MEGA CITY projects in Samara.

Conclusion: you don’t need a large center to be popular and successful. The three main ingredients for success are an excellent architectural decision, a convenient site and professionally chosen tenants. And the smaller the area of the center, the most important the third component becomes.

Today it is impossible to forget the significance of finishing materials in most shopping centers – its galleries, public zones, a restaurant court, the horticulture. Certainly the price of construction today is very high, and it almost no longer differs between regions and cities. Developers no longer concentrate on questions of furnishing and architecture. The majority of projects are identical with no distinct personality. Yet, in the future, this trend will affect attendance. We will see that the best shopping centers will be those with something unique to offer, like excellent service or a well-thought out, unique atmosphere that is cozy and comfortable.

Today we can already see investors refusing existing projects that might be worth a great deal of profit but are poorly planned and constructed, consequently demanding even more investments that will only increase in a few years when the project becomes outdated.

So, who takes the bigger risk today – cities with millions or cities with half a million?

Much depends on the population within each city. It is necessary to consider residents’ incomes and to predict their purchases, as well as their cultural preferences. Very often, developers do not carry out deep enough market research to learn that their project will be erected in an open field. This is why many projects function with so many mistakes.

Today, the tendency is such tha from the group of companies investing in commercial real estate, developers who have competitive advantages in negotiations with operators are found, and the market enters this competitive environment. The first sign is developers who are ready to invest their own funds in furnishing a premise for tenants in order to attract the most interesting brands and retailers to the project.

The biggest problem usually stems from a developer buying a large site and wishing to build it up as much as possible. Advisers, having studied the competitive environment, and having considered every possible risk, can give the conservative forecast and recommend to build a smaller project. Yet not all developers are ready to consider the recommendations and they build large-scale projects anyway.

Therefore, I advise commercial real estate developers to think first about a strategy of development and to weigh all components. The rule “the more you build, the more you earn” is not always true in this business. It is still quite possible to earn money on smaller projects with the same success.

It is more important to complete interesting projects with extraordinary concepts. Of course, to preserve this sort of imagination in real estate, ambition and audacity is necessary, along with professional knowledge and an understanding of the principles of the commercial retail imagination. Yet the most important thing of all is creativity – not copying from other projects. No new project can have its own unique identity if this uniqueness is not present at its creation!