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Analytics

23.12.2011 Office Property Market in Saint-Petersburg 2011

Trends

Contrary to what many skeptics predicted 2011 showed positive dynamic on the market according to all major indexes (demand and supply balance, rent rates growth, decreasing vacancy rate, expansion of new office premises). Night Sky Realty consultants highlight the following market trends of 2011: - First time after 2 years of crisis and recovery year of 2010 the office premises market demonstrated positive dynamic with gradual rent rates growth now reaching almost a pre-crisis level, increasing demand for high-class offices in business centres of grade A and B/B+ and further expansion of new office space; - Growing amount of transactions due to the requests from companies entering the market rather than those migrating from one business centre to another as it happened in crisis years and recovery period; - Greater number of requests for larger office space from potential lessees resulting in greater amount of deals; - Prevailing requests for high class offices in A, B+ grade business centres rather than low budget grade B and C offices.

Supply

2011 is characterized by further growth of supply on the market of high-quality office space. Rate of opening new business centres in 2011 comparable to 2010 demonstrates a positive market trend and increasing demand for new high-quality offices. In 3rd quarter of 2011 the amount of new business centres put into operation increased 2 times year on year, which is clearly a positive dynamic of supply. Overall 81,5 thousand m2 were put into operation during 3rd quarter 2011: BC “Saint-Petersburg Plaza”, Malookhtinsky prospekt 64 litera Б,В; BC “Senator” (3rd construction stage), 18th line Vasilevsky Island, 29; BC “Scandinavian House”, Revolutcii highway, 69, litera A; BC “Leto”, Sverdlovskaya embankment 44; etc. General amount of supply of high-quality office premises in business centres of A, B/B+ grade at the end of 4th quarter of 2011 amounts to 1620 thousand m2 which is 7% higher than at the end of 2010. In case all of the announced projects are put into operation by the end of 2011 the total area of new offices will amount to 1784 thousand m2 which is 17,5% higher year on year. More than 60% of projects under construction belong to B grade business centres and are situated in Moskovsky district: BC “Airport City”, BC “Megapark”, BC “Okhta House”.

Demand

Recovery and stabilization of office premises market during 2010 formed a solid platform for implementation of deferred demand in 2011 accumulated during crisis period and significantly increased a need for high-quality offices in business centre of A, B/B+ grade. During entire 2011 demand was gradually growing as well as the amount of deals. According to Night Sky Realty specialists in 2011 larger office premises were in demand. Mostly required were offices of 200-500m2 size compared to 2010 when offices of 100-150m2 were highly demanded. Offices in Central and Petrogradsky districts still enjoy high interest from potential tenants. These districts are marked by a shortage of B/B+ business centres situated in close proximity to metro stations. Business centres located in Primorsky district are also rather popular and attract tenants that require easy and fast access to Ring Road. Conveniently located modern offices with thought-out concept have high rates of occupancy. As a whole, occupation of office premises is going at a faster pace than in 2010. As a result of growing demand general level of vacancy in the business centres are decreasing. Offices in business centres of B and B+ grade are being occupied faster than A grade business centres. By the end of 2011 vacancy rate has decreased and amounts now to 15% in A class and 10% in B/B+ class. Developing market caused a growth of demand for high-quality office premises and decreasing of vacancy rate which led to 10% increase of rent rates in A/A+ grade business centres and 5% - in B/B+ grade business centres. Generally the process of rent rates growth is inevitable part of market recovery aiming at pre-crisis level. More intensive growth in A grade business centres compared to B/B+ grade business centres could be explained by the greater margin of price decrease in A class during crisis. On average based on the figures of 4th quarter 2011 rent rates in A/A+ grade business centres amount to 1000-2000 rub/m2/month (including VAT), B/B+ business centres – 800-1400 rub/m2/month (including VAT).

Office Premises Market Forecast for 2012

- Generally the office premises market will continue to demonstrate a positive dynamic in 2012;

- Further expansion of new office space will not be able to fully cover a shortage of supply in A, B/B+ grade business centres accumulated during crisis of 2008-2009 and will fail to satisfy a growing demand for high-quality offices formed by positive market dynamic and partly by deferred demand; - In the 1st quarter of 2012 the rent rates in A, B/B+ grade business centres will remain flat and will gradually rise by 5-10% by the end of the year;

- The fact that Russia is not a member of Euro zone might bring some benefits. In case stabilization of economic situation in Europe is protracted for many European companies Russia may become a quiet harbour for implementation of projects which will positively affect the office premises market, especially in large cities as Saint-Petersburg and Moscow.