Developers are seeking to sell offices rather than rent them out

The high key rate of the Central Bank, growing construction costs and stagnant rental rates are forcing developers to reconsider their office sales model. The share of new space offered for rent in Moscow decreased threefold over the year, to 10%. Now it is more profitable to sell premises in small pieces. This approach, experts warn, could exacerbate the shortage of large areas in business centers.

Of all the office space planned for commissioning in 2024, only 10%, or 64.5 thousand sq. m. m, the developers intend to rent it out, according to a report in Nikoliers. The developers plan to sell another 89% of the space (574 thousand sq. m), the remaining 1% falls on projects implemented for a specific customer. A year ago, 33% (92.9 thousand sq. m) of new office space was sold through rent, 67% (574 thousand sq. m.) were sold. NF Group partner Maria Zimina says that this year 64% of offices will be sold through sale, and by 2027 the figure will reach 76%.

The desire to sell rather than rent is a new trend for commercial real estate developers. In 2014–2021, 8–10% of offices were sold using this scheme, says Ms. Zimina. The financial models of many developers are now aimed at selling: a moderate increase in rental rates with a high key rate of the Central Bank does not allow them to put up objects for rent, explains Kirill Kutyavin, sales director of the Nikoliers office real estate department. Maria Zimina notes that while the average cost of selling offices in Moscow increased by 14% over the past year, the rental rate for class A properties increased by only 2%.

Head of the office space department at IBC Real Estate, Ekaterina Belova, draws attention to the fact that of the total volume of office centers announced for 2024–2028, 15% will be built by housing developers who have not previously engaged in such projects. Director of the CORE.XP market research department Vasily Grigoriev estimates their share at 25%. In Moscow, the interest of non-core players in offices, according to Mr. Kutyavin, was stimulated by the program for creating places of employment. “They sell offices using the same model as apartments,” explains Glincom executive director Ivan Tatarinov. Office projects of non-core developers, according to the director of commercial management at Stone, Christina Nedri, are more susceptible to the influence of external factors: the timing of their commissioning may shift.

Bright Rich Partner | CORFAC International Sigush Baboyan says that many developers are now seeking to sell offices in small lots, relying on private investors who previously invested in housing. This strategy provides developers with a faster return on investment, the expert explains. Ms. Zimina suggests that the activity of private investors also stimulates developers to build more offices.

But the sale of a significant share of offices in small lots to private investors, according to Ms. Belova, could change the structure of the market. “If today a high-quality rental market consists of a dozen large, experienced portfolio owners, then in two to five years it may be represented by multiple small, often new players in this market,” she argues. At the same time, the expert considers the demand for office rental from businesses to be active: “Not all companies can afford or want to own an office.” Nikoliers analysts are already recording a shortage of supply of offices with an area of ​​more than 5 thousand square meters. m. New buildings are entering the market at a high level of implementation. Thus, in business centers preparing for commissioning this year, 55.9% of the space has now been sold or leased, as a result, only 16.3% of the volume is available to potential tenants, analysts calculated.

But developers, according to Ms. Belova, are unlikely to return to the rental model in the short term, seeing problems with profitability due to rising borrowing costs and construction costs. Mr. Tatarinov considers the limited volume of effective demand to be a serious risk. “There are doubts,” he says, “how long the existing demand from private investors for the volume of office real estate that is being built today will last.”

Alexandra Mertsalova