Office Space Vacancy is Currently Low but Building Standards Cause Concern

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Denis Chetverikov

About Denis Chetverikov

Denis Chetverikov is Director of Research and Advisory Department, Colliers International, Belarus. He joined the company in 2009. In Colliers International, he participated in more than 60 consultancy projects all over the Belarus. He is responsible for any of the advisory services within all of the commercial real estate sectors: the highest and the best use analysis, feasibility study, property's concept study.

“The low quality of office buildings remains the main problem in the Minsk office market, let alone regional cities. Unfortunately, the growth of supply didn’t lead to a growth of quality.”

Both 2015 and 2016 have reported an increase in the supply of new office space. However, the record of 2014, when 217,000 sq. metres of gross leasable area (GLA) were commissioned, hasn’t been broken. A significant amount of space has entered the market, however: 97.5 thousand sq. metres in 2015 and almost 84 thousand sq. metres in the ten months of 2016. The figures are solid, bearing in mind the fact that the Belarusian economy has been going through a recession in the last two years.

Currently, the stock of available office space stands at 941,000 sq. metres of GLA, which is a significant number, even after the adjustment, because we have relocated several obsolete properties from competitive stock. Several office buildings with total a GLA of 250,000 sq. metres have reached the final stage of construction; they can possibly be commissioned in late 2016 or 2017. These projects are unlikely to escape problems, though. Several projects froze at 85-90 per cent of construction readiness, as the developers lacked the resources to complete them.

However the low quality of office buildings remains the main problem in the Minsk office market, let alone regional cities. Unfortunately, the growth of supply didn’t lead to a growth of quality. If we apply just one of office building classifications used by our offices in Europe, only one business centre in Minsk would be classified as A, though even that would something of an overstatement. The B2 (B-) class offices with 66 per cent (of total GLA) market share prevail on the speculative market.

None of the projects that have been announced will improve the present situation; they all have low quality ratings: B1 (B+) at best, and they are too few. We hope that in the mid term (2018-2019) we will raise the ante with our two big projects, the Gazprom Centre and Shanter Hill. However, these projects are at risk of simplification and a worsening quality in comparison to the announced characteristics, despite being realised by professional sustainable developers.

In 2015, demand wasn’t active even though the rent rates dropped by half, but in 2016 stabilised rent rates led to demand recovery. Moreover, two office buildings were fully occupied by one tenant in 2016 (both properties were new constructions commissioned in 2015 and 2016). This is all the more noteworthy, as in the history of modern commercial real estate in Belarus there was only ever one case, when one company fully occupied a large business centre.

Who are the consumers? Well, for the ones familiar with Belarusian economy drivers, it would not be surprising that the main consumers of real estate are IT companies. In the 2014 review, published on Emerging Europe, we mentioned the IT sector as an extremely successful business segment in Belarus. IT companies are the largest group of tenants for speculative office markets, and in the last two years they have even strengthened their position.

Belarus outperformed the traditional leaders of IT industry, the USA and India, in terms of export of digital services per capita. A new term, “IT-cult”, has emerged in Belarus. For this reason, it is not surprising that its large representatives rented floors and whole business centres or developed their own office projects.

In the first half of 2016, demand on the market stabilised. Currently, it is difficult to meet a company’s demand for a suitable new office with an area of above 1,000 sq. metres. In 2015, there might have been four or five options to choose for such a request, but now there are only one or two. Vacancy has decreased significantly. Manу properties, which had a 30 per cent, or higher, vacancy rate a year ago, have now reached full occupancy. If the office real estate market was characterised as a landlord market at the beginning of 2016, it is now a rather neutral market.

We don’t want to overestimate the market conditions because several office buildings expect tenant turnover; some large companies are planning to vacate their spaces by the end of 2016. So it is possible that several developers will experience a 20-30 per cent vacancy rate again.

It is to be hoped that our competitors, who have frozen construction in its final stages, will not resume the process, and that developers will reduce the vacancy. Otherwise, if 50,000 70,000 sq. metres enters the market within a short time, the vacancy in the market will grow again and developers may start compromising on the rent again.

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The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

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