Boiling market: who is inflating the bubble in the Moscow office segment

Maria Neretina Forbes Editorial

Copy link

Photo by Getty Images More and more transactions in the office market are taking place in the format of sales rather than leases, and the buyers are both end users, that is, companies that need premises directly for work, and investors who expect to receive rental income. All this is happening against the backdrop of rising costs that have affected all segments of commercial real estate, which will equally hit both end users and rentiers. But it will be more difficult for the latter if they fail to find a tenant

Small office blocks in business center buildings under construction have become popular among investors in 2023. As of November 2023, the share of purchase and sale in the total structure of transactions with Moscow offices was 22% – at that time this was a record, market participants told Forbes. At that time, market participants associated the surge of interest in purchasing office units with the desire of numerous investors to invest in a small lot at the construction stage and then rent it out.

Already at the inception of this trend, in the spring of 2023, Forbes’ interlocutors expressed fears that it could lead the market to degradation. A year later, concerns have become more specific: market participants admit that not all investors will be able to find tenants for their space, and sales of small lots will lead to a shortage of supply for large office blocks. In addition, in the long term, Forbes' interlocutors even see the specter of a bubble in the office market.

Telegram channel Forbes.Russia Channel about business, finance, economics and lifestyle Subscribe

Investors in offices not only did not stop, but also increased their activity in the first quarter of 2024. According to CORE.XP data reviewed by Forbes, in the first three months the demand volume was about 500,000 sq. m. m, while the share of purchase and sale transactions increased, according to preliminary estimates by CORE.XP, from 21% to 28% year-on-year, reaching record levels for the first quarter – 130,000-140,000 sq. m. m. IBC Real Estate estimated the volume of office sales in the first quarter at 728,000 sq. m. m, 76% of which were for sale.

What's going on? Forbes' interlocutors say that the whole point is the desire of end users to own an office, as well as the continued interest of investors. “According to our information, about 50% are purchased for themselves, about 50% for investment,” notes Remain CEO Dmitry Klapsha. Most Forbes interlocutors agree with this assessment. Thus, the situation has not changed since November 2023.

Material on the topic

New buildings 2.0

Market participants have repeatedly noted that investors in small office blocks came to this market from the segment of new buildings, therefore, in a sense, they were able to transform the solid and conservative office market, turning it into some kind of hot segment of residential new buildings. For starters, these investors taught developers a bad lesson: for many years, one of the most important trends in housing was the gradual reduction in the average size of apartments. The same thing happened in the office market. “The average block for sale in large business centers today is 150-250 sq. m. m,” notes the director of strategy at Pridex Spaces | Multispace Elizaveta Golysheva.

A fair portion of transactions occur at the construction stage, and we are talking specifically about small lots. “If we look at the number of transactions in 2023, then projects under construction have an advantage (118 versus 73 for ready-made ones), however, if we look at the area, the superiority is with ready-made ones: 195,762 sq. m. were purchased in objects under construction. m, while in ready-made ones – 354,565 sq. m. m, almost twice as much,” says Remain CEO Dmitry Klapsha.

“In the volume of purchase and sale transactions concluded in 2023, 278,000 sq. m or 62% are sales in office buildings under construction and future ones, 172,000 sq. m or 38% – in existing business centers,” calculated Ekaterina Belova, head of the office space department at IBC Real Estate. This year this trend has only intensified. “According to preliminary data from the company CORE.XP, in the first quarter of 2024, the prevailing part of transactions for the acquisition of offices (84%) fell on class A objects under construction, while about 16% of transactions were concluded in existing objects,” calculated the director, head of the department investment brokerage CORE.XP Alexander Pyatin. “At the same time, 91% of transactions in existing facilities were for class B offices.”

“According to preliminary data, the volume of purchase and sale transactions from January to March 2024 in objects of classes A and B is 44,000 sq. m. m, and the ratio of sales in buildings under construction and existing ones is 50/50,” says Natalya Nikitina, international partner, head of the Commonwealth Partnership office real estate department. — The vast majority of space sold in the first quarter of 2024 in objects under construction is in class A.”

The demand for small-cut sales is actively supported by developers. “The trend for office subdivision is also supported by developers: with such an implementation strategy, the economics of the project become more attractive, while the construction and sale of volumes entirely increases the financial burden on the developer due to project financing at a high key rate,” explains the director of commercial management STONE office developer Kristina Nedrya. The desire of developers to support the trend of selling offices by cut is also confirmed by the conclusions of IBC Real Estate analysts, which Forbes reviewed: out of 2.7 million sq. m of office real estate currently under construction in Moscow, 90% (2.4 million sq. m.) are intended for sale, including 0.9 million sq. m. m – for sale in blocks.

The shrinking transaction area and the growing demand for the purchase of such lots have done the same thing to the office market that previously happened to new buildings: they inflated prices. “The weighted average asking price for the sale of office space at the beginning of 2024 was 382,500 rubles per square meter (including VAT, if applicable), over the year the figure increased by 4.3%,” calculated NF Group partner Maria Zimina. “The asking price for class A offices increased by 6.1% over the year and at the beginning of 2024 is 398,652 rubles per square meter, class B offices increased in price by 10.5% over the year, to 303,410 rubles per square meter.”

Other experts record even more significant dynamics. “In Moscow, sales prices in the office real estate segment increased by 30%,” says director of the capital markets and investment department of Bright Rich | CORFAC International Alexey Fedorov.

According to Pyatin from CORE.XP, over the past year the average sales price of offices in new construction projects increased by 30% and reached 411,000 rubles per square meter (including VAT), while at the same time, the average cost of existing offices increased by 6% up to 394,000 rubles per square meter (including VAT). “If we compare the change in value depending on the class of office properties, the sales price of high-quality Class A offices under construction increased by about one and a half times over the year (plus 44%) and reached 493,000 rubles per square meter (including VAT) by the first quarter of 2024. — Pyatin clarifies. — For class B offices under construction, the increase was 30% – up to 326,000 rubles. In existing offices, price dynamics are much more moderate: in class A the increase is 5% year-on-year (up to 517,000 rubles per square meter with VAT), in class B – 7% year-on-year (320,000 rubles per square meter with VAT).” . Thus, two more trends from new residential buildings have migrated to the office market: the rapid rise in prices for objects under construction and the growing gap in cost between the primary and secondary markets.

Related material

Suitcase without handle

One of the problems of the commercial real estate market last year was a significant increase in the costs of maintaining facilities, as Forbes previously wrote about. Surveyed market participants noted a significant increase in a number of items, from 8% to 38%. At the moment, most of the office buildings in which investors bought small blocks have not been put into operation, so rising costs have not yet become a problem for them, but may become in the future, Forbes interlocutors say.

One of the most significant expense items is taxes. “The amount of operating expenses is in the range of 9,000-10,000 rubles per square meter per year, and 50-60% of this amount goes to cover property taxes, the rest is the cost of operation,” explains the head of the office space department at IBC Real Estate Ekaterina Belova. Pyatin from CORE.XP believes that the share of taxes can reach up to 45% in some cases. “Property tax is calculated based on the cadastral value of the property,” he reminds. “And although the applicable rate remains unchanged, the cadastral value is revised by the cadastral chamber every two to three years, usually upward.”

The last state cadastral valuation (GKO) of real estate took place in Moscow in the fall of 2023. According to its results, the cost of office real estate was reduced by 5%, Consul Group analysts calculated at the request of Forbes. However, this does not mean a general decline across the entire market.

According to the estimates of most companies operating in the commercial real estate market, the total office area in Moscow at the end of 2023 was close to 20 million square meters. m: IBC Real Estate estimates it at 20.2 million sq. m. m, NF Group – 18.3 million sq. m. At the same time, Consul Group experts calculated that Rosreestr’s estimate is much higher: as of the end of 2023, in “old” Moscow alone there were 5,975 office real estate properties with a total area of 38.1 million square meters. m, and this sample only includes objects with an area of over 1000 sq. m. m. There is no contradiction here: consultants consider only objects not lower than class B, and Rosreestr considers all that are classified as offices, including low-quality ones. Therefore, when it comes to the total cadastral value of offices, it really decreases.

“During the entire period of the GKO, there has been a consistent decrease in the average unit cadastral value,” says the Consul Group study. — This trend may not correspond to the dynamics of the value of a particular object, but reflects the overall approach of the State Defense Committee to offices, including through the introduction of an explication coefficient in 2018 (implies an assessment of the cadastral value depending on the purpose of the premises. — Forbes)”. As an example, Consul Group analysts analyzed the results of state bonds for office real estate located within the old borders of Moscow and having an area of over 1000 square meters. m. With a constant number and total area of such objects (a total of 5975 objects with an area of 38.1 million sq. m), their total cadastral value in 2021 was 3.88 trillion rubles, and in 2023 – 3.7 trillion rubles.&nbsp ;

However, current investors buying space in office buildings will most likely receive the maximum tax burden, which will not decrease for quite some time. “Class A business centers will definitely not be adjusted downwards,” says Sergei Pivovarchik, managing partner of Consul Group. — And the more offers in ad aggregators there are for the sale of class A offices at a rate of 500,000 per sq. m. m, and class B at 350,000 per sq. m, the faster the cadastral value per meter will creep up. In our analytics, we looked at the dynamics of valuation over 10 years. During which no one divided into classes A, B and C. Neither public nor private appraisers classified office properties; the average value of the offer prices for office properties is taken and the average value is derived taking into account various coefficients, including by location.”< /span>

As an example, Pivovarchik cites the cadastral value of recently commissioned offices: for AFI Square, the cadastral value per square meter is 135,000 rubles, for Stone Towers – 137,000 rubles, for Lucky – 112,000, while the average specific cadastral value of Moscow offices after The 2023 GKO was 97,000 rubles per square meter. According to Consul Group, the share of property tax payments in the total rental revenue of office buildings averages 7-11%, provided that efficient activities are carried out.

Material on the topic < /span>

Who will pay?

Forbes' interlocutors explained that rentiers, as a rule, shift the costs to the tenant, and the end users who bought the office naturally pay for them themselves. It may seem that the situation is more comfortable for investors, but this will only be so if a tenant is found, which some market participants doubt.

“The question arises of how exactly investors will be able to sell these assets in the long term,” says Zimina from NF Group. “There are a number of challenges they may face, including differences in demand for office space rentals, which may impact their profitability. Rental rates can vary significantly depending on location, quality of office space and general economic situation.”

“Of course, for investors the increase in costs will be more sensitive,” adds Fedorov from Bright Rich | CORFAC International. “End users, as a rule, distribute office maintenance costs to their core business and do not pay much attention to them.”

Another important factor is the fact that potential tenants at this stage increasingly prefer to own an office, including the format that is so popular among investors, that is, small blocks.

< p itemprop="articleBody" data-index="36" data-type="paragraph" class="ywx5e Q0w8z" style="text-align:left;">“Due to the shortage of rental options on the market, many clients who had not previously considered the option of purchasing an office began to show flexibility and interest in purchasing office space, most often in buildings under construction,” says international partner, head of the office real estate department of the Commonwealth Partnership Natalya Nikitina. “This trend will continue due to the fact that many of the facilities announced for commissioning will be commissioned already filled, and in combination with extremely limited liquid supply, the demand for premises in facilities under construction will only grow.”

“When we see that renting in the future for 10-12 years is more economically profitable within the framework of the cash flow of owning an object over a 10-12 year horizon, then, of course, everything will go back to renting, but for now this is not the case,” sums up the director of the sales department and Ricci acquisitions | Offices Dmitry Antonov.

Material on the topic

The bubble is in question

A rapid rise in investment interest in almost any product always raises the question of whether this is a bubble. Forbes' interlocutors cited completely different signs of the “bubbling” state of the office market, with some of them indicating the presence of a bubble, while others did not.

“There is a fairly simple metric – the ratio of the rental rate and the sales price of offices in a particular location, says Fedorov from Bright Rich | CORFAC International. “If a square meter costs more than the rent for it over 10 years, then the price is overheated.” According to Nikoliers, the weighted average rental rate for class A office at the beginning of 2024 was 26,193 rubles per square meter per year, the weighted average sales price ranged from 389,000 to 630,000 rubles per square meter, which significantly exceeds the ten-year rental rate (261 930 rubles).

“It is important to maintain a balance when there is a bias in one direction – and now this side with a share of about 90% of the market is the sale of offices in blocks – this is bad for the industry,” adds Golysheva from Pridex Spaces | Multispace. “From our point of view, when boThe majority of office real estate is sold long before commissioning at inflated prices, this is one of the signs of market overheating,” Klapsha from Remain offers his version.

However, opponents of the idea of a bubble or overheating in the office market make other arguments. “Low values of capitalization rates could indicate overheating of the market, but at the moment they remain close to average historical levels, for offices in the first quarter of 2024 – 10-11%,” Pyatin from CORE.XP gives his argument.

“There are currently no signs of a bubble in the office sector, as demand for high-quality office space continues to outstrip supply, both for sale and for rent,” says Zimina of NF Group. — The increased interest of investors concerns only the type of office supply, namely small office blocks. The appearance of a large amount of such supply on the market is a really interesting trend, but in the future it may become a real challenge for the market, since the big question is whether this entire volume will be absorbed.”

“No, this is not a bubble,” insists Antonov of Ricci | Offices. — From 2014 to 2023, we had minimal commissioning volumes, on average no more than 300,000 square meters per year. Of course, there was a washout of supply, and today we have a certain deficit, and due to this, prices, sales, and rates are rising.”

Material on the topic

Maria Neretina

Forbes editorial staff

#commercial real estate #class A offices #office #investments #tax Forbes newsletter The most important things about finance, investments, business and technology Subscribe Copy link Share Add to favorites Materials read by Marusya – voice assistant from VK Listen Mode for the visually impaired