OFFICE MARKET REPORT Moscow

RESEARCH 2018 OFFICE MARKET REPORT Moscow HIGHLIGHTS The volume of new delivery of office centers As of 2018, the vacancy rate reached 12.5% The average weighted asking rent rates amounted to 125,000 sq m in 2018, which in Class A offices and 9.3% in Class B offices, increased by 10% to 25,204 rub./sq m/year in is the market low for the past 10 years. which amounted to 1.66 million sq m in total. Class A and by 5.6% to 14,867 rub./sq m/year in Class B, over 2018. OFFICE MARKET REPORT. MOSCOW Office market report Moscow Key indicators. Dynamics* Konstantin Losiukov 2018 2017 Director Office Department Knight Frank Total stock, thousand sq m 16,388 16,263 " The quality offices market had quite including, thousand sq m Class А 4,226 4,149 a calm and predictable year in 2018. Class В 12,162 12,114 Similar to 2017, the correlation of Deliveries 2018, thousand sq m 125 408 new delivery and net take-up was the key driver of all the changes including, thousand sq m Class А 77 258 the market indicators were going Class В 48 150 through. Basically, it was the low Net take-up 2018, thousand sq m 604 657 new delivery volumes that set the pace of declining vacancy rates Class А 12.5 17.1 Vacancy rate, % and growing rent rates, while the Class В 9.3 11.5 demand remained strong. Non-profit 5 organizations played a noticeably Average weighted asking rental rate**, Class А 25,204 22,923 smaller role in terms of demand than RUB/sq m/year Class В 14,867 5 14,074 they did a year ago. On the contrary, Class А 6,800 5 6,490 the TMT sector companies once again OPEX rate range, RUB/sq m/year confirmed their steady growth and Class В 4,580 5 4,080 need for new absorption. In general, Average weighted asking sale price, Class А 234,290 it is safe to say that the market RUB/sq m has become completely stable and Class В 150,440 is unlikely to show any significant * Compared to Q4 2017 changes soon." ** Excluding operational expenses, utility bills and VAT (18%). OPEX rate does not consider change related to property tax rate increase Source: Knight Frank Research, 2019 Class A and B new delivery volume dynamics 1,600 Class А 1,400 Class В 1,200 1,000 800 600 400 200 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F Source: Knight Frank Research, 2019 2 2018 RESEARCH Supply Key office projects delivered in 2018 As of 2018, the total stock of quality office premises of Moscow amounted to 16.4 million sq m, 25.7% of which refer to D m i t Class A and 74.3% to Class B. r y o A v w s H o e 2018 recorded the lowest new delivery e y o H w k w s H figures for quality office spaces since 2009. Leningradskoe Hwy v e y e y i o f A sk u v As of 2018, 125,000 sq m were delivered to t a l l s A ro the market, which is 3.3 times lower than a Y last year’s figure. Most of the properties with the cumulative area exceeding Vol oko lam 100,000 sq m that had been announced to sk oe Hw be delivered in 2018 were never delivered, y Hwy ye sko lkov with their deliveries being rescheduled Arena ar ase cho 2 S for 2019. 24 686 m Lsa oon 2 22 000 m2TR After 2014, a lot of developers preferred 7 155 m y Rublevskoe Hwy Hw projects with a small office component tov zias emyanoy a Entu often redesigning the announced office 5 817 m2 spaces into apartments. But 2018 has seen y the projects with an office component y Hw vski tuzo R amounting to 100,000 sq m in area, for Ku Ry TR az ans kiy instance Grand Tower Business Center in Hwy Volgo Moscow City business district. grads kiy H ar Leen ase wy Against the backdrop of strong demand, 7 300 m2 Amaeya 27 090 m2 the low delivery volume of quality offices y w t S H y a had a positive effect on declining vacancy i y sk a n in z rate. It went down by 4.6 percentage n u Le y K o aary 76 a s f 2 sh points for Class A properties throughout o 8 450 m ir r sk P oy y e Moscow as compared to Q4 2017 all the H w w y H way to 12.5% or 0.53 million sq m. And e y o . k it decreased by 2.2 percentage points w s H v ye a o h to 9.3% or 1.13 million sq m for Class sk s in r M La-5 a V B offices. 16 800 м2 on ar 2 310 m2 A Objects opened in 2018: . Hw oye Class A vsk Kiye Class B Source: Knight Frank Research, 2019 The net take-up and vacancy rate dynamics Class А Class В % 00 0 24.4% 2 00 20.7% 20 17.1% 00 16.5% 15.4% 1 12.5% 11.5% 200 10.5% 9.3% 8.5% 10 100 5 0 0 2015 2016 2017 2018 2019F 2015 2016 2017 2018 2019F Source: Knight Frank Research, 2019 3 OFFICE MARKET REPORT. MOSCOW Moscow submarket data. Vacancy rate Class А Class B 18 28 – 5% 9% 22 21 1 7% 4% 5% 0 4% 1 8 1 8 10 9% 1 11 11 4% 6% 63% 11 1 10 8 6% – 8 12 – 1 8 43% 8 Source: Knight Frank Research, 2019 In 2018, the most striking changes of Because of the transactions with north of the Garden Ring (the vacancy Class A vacancy rates among all Moscow Alekseyevskaya Bashnya, Savyolovskiy rate in Class A offices is 5%, in Class business districts took place as follows: City, and Faktoriya business centers, B offices – 4%). Thus, when seeing the the vacancy rate in the north of Moscow backlog of demand along with the lack of Due to a sizeable transaction with Arbat between the Third Transportation supply, multiple experienced developers 1 Business Center, about 18,500 sq m Ring and the Moscow Ring Road were inspired to search for new sites of office premises went off the market decreased by six percentage points to for constructing offices in most popular in the west part of the Garden Ring. 35,000 sq m or 5.6%. locations. The vacancy rate in this location is currently 2.8% or 2,500 sq m. Several transactions with Krasnoselskiy About 450,000 sq m are expected to Business Center and Lefort Business be delivered in 2019, about half or Thanks to the transactions with Lotos Center in the east of Moscow in 230,000 sq m of which are Class A offices. Business Center and ICube Business between the Third Transportation Ring Around 220,000 sq m of Class B offices Center, the vacancy rate in the and the Moscow Ring Road lead to the are planned to be delivered over the same southwest of Moscow between the Third vacancy rate in Class B offices declining period. Thus, the growth of new quality Transportation Ring and the Moscow by nine percentage points to 11.2% offices construction in 2019 is forecast to Ring Road went down by 20 percentage or 22,600 sq m. exceed the figures of 2018 by 3.5 times. points to 9,300 sq m or 7.3%. As a result of a largescale transaction Despite the delivery of about 27,000 sq m with ‘Efremova, 10’ Business Center of quality offices in Almatea Business in the west of the Garden Ring in Demand Center in 2018, the vacancy rate in Khamovniki district, the vacancy rate the western part of Moscow around As of 2018, the cumulative trading volume in the location dropped by seven the Moscow Ring Road declined by amounted to 787,000 sq m. The total net percentage points to 4% or 9,900 sq m. 10 percentage points to 7.2% or take-up of Class A and B offices declined 18,200 sq m over a year due to the As of 2018, some business districts of insignificantly as compared to 2017 and sale of Pallau RB Business Center and a Moscow experienced a lack of quality amounted to 604,000 sq m. number of smaller transactions. office premises. This can be attributed The Telecom/Media/Technology compa- to such locations as Paveletsky business The most significant changes of vacancy nies were leading the way by the volume of district (the vacancy rate in Class A is 6%, rate in Class B offices throughout Moscow transactions in 2018. Their share amounted in Class B – 1%), and the district in the over 2018 were reported as follows: to 19% of all transactions. Manufacturers 4 2018 RESEARCH are as well engaged into the deals with office property of Moscow, with their share Distribution of leased office space by sector of all transactions amounting to 13%. Co-workings are becoming a new tenant type that is winning ground and has already 7% Manufacturing closed an array of sizeable rent deals. There 5% 1 have been several major office rent deals 7% in 2018.

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