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Public sector leaves the centre of the Russian capital

• CBRE analyzed public sector companies’ activity in the Moscow office market.
• State companies and organizations became the leading sector in office demand structure in 2015-2016
• Government sector transacted 52% more new office deals in 2015-2016 compared to the previous crisis of 2008-2009

Moscow

According to CBRE, the global property advisor, public sector share in the total take-up went up to the record 36% in the end of 2016. According to CBRE forecasts, the companies of public sector will target business centres outside CBD of Moscow for relocation in the nearest future.

Public sector purchased and leased 1.82 mn sq m of office space during the last decade, from 2007 to 2016. The activity of such companies has increased during the crisis period of 2008-2009, in 2011 (due to a major transaction of Rostelecom that leased 48,100 sq m in Comcity businss park) and in the last two years with the worsening economic situation in the country.

State companies and companies with state participation preferred to lease Class B premises (74% of leased space in 2007-2016). Purchased premises distribution by class was more variable from year to year, though Class A has the share of 62% in the total purchased premises for the period of 2007-2016.

State structures purchased 75% of sold premises (including the transfer of ownership in the repayment of financial liabilities) for the period 2015-2016 and become the major buyer of office real estate in Moscow market.

Historically, offices of government departments and agencies were concentrated in the CBD as this is a prestigious location that meets both the requirements of good transport accessibility and a high level of infrastructure. However, in 2015-2016 Moscow City business centres attracted public sector interest, when 277,500 sq m of office space were taken up. The largest transactions were acquisition of Evolution Tower by Transneft, purchase of 55,000 sq m in OKO BC by Government of Moscow, and transfer of ownership of Eurasia Tower to VTB.

Geographical structure of public sector take-up

Source: CBRE Research 2017

Government agencies’ and organizations’ activity may affect the main indicators and the overall situation in the market. Thus, the demand for large offices reduces the amount of available supply of large premises, thereby decreasing vacancy. The bright example is the change of vacancy in Moscow City over the past two years, which has declined to 16% in the end of 2016 from 42.4% in the end of 2014. 

According to CBRE forecasts, in 2017 the public sector will continue to show active interest in Moscow office real estate, using remaining attractive terms of lease and purchase. The ambitious Rostech-City project on the territory of the Tushino airfield, Rostech-City, where the state corporation plans to consolidate its offices is оne of the examples that stimulates development activity.

Elena Denisova, Senior Director, Head of Offices, CBRE, Russia, comments: 

“Public sector organizations will vacate office premises in CBD, by relocating to more quality buildings. There are almost no new offices under construction in the centre of the city, and the current supply of large blocks (over 10 thousand sq m) of Class A in CBD is singular. Taking into account the large premises required for public sector organizations, they will be considering other office districts outside CBD, like Moscow City, West and South directions of Moscow.”

Olesya Dzuba, Director, Head of Research, CBRE, Russia, said: 

“Public sector organization, like any other companies, seek to obtain the most convenient and beneficial solution for their employees. However, such structures often have heterogeneous, established over many years, and large-scale real estate portfolios, which can include buildings in ownership, as well as multiple lease agreements. In this case, difficulties arise in effective management of the property portfolio. The process of optimizing office space is often complicated by the bureaucratic mechanisms within structures that slow down the decision-making process.”