Commercial and office real estate in Russia: how the market has transformed

In 2023, the Russian economy demonstrated recovery growth. The GDP growth rate amounted to 3.6%, exceeding the forecast of the Ministry of Economic Development of the Russian Federation. At the same time, this indicator was the highest over the last decade, except for the pandemic year of 2021. The key driver of growth was the activation of demand: according to Rosstat, retail trade turnover increased by 6.4%, and wholesale trade turnover - by 10.9%. Such dynamics had a positive impact on the commercial real estate market.

According to IBC Real Estate, the volume of investment transactions in the Russian real estate market in 2023 amounted to 833 billion rubles, which is 68% more than a year earlier. Such growth has become the maximum since 2016, when the increase in the volume of transactions amounted to 93%.

The realization of delayed demand after 2022 against the background of soft monetary policy in the first half of 2023 supported the demand for large commercial properties. Also, active real estate sales are due to the withdrawal of foreign players from the market. About 30% of the investment volume was formed by transactions with foreign owners.

Fig. 1. Dynamics of the volume of investment transactions in the Russian real estate market in 2015-2023.

Retail real estate

IBC Real Estate experts note that in 2023, the largest volume of investments fell on transactions with retail real estate. Sales volumes exceeded 325 billion rubles, which is 39% of the total volume of investments.

The largest deals in this segment:

Swedish Ingka Centres sold 14 Mega shopping and entertainment malls with a total area of 2.3 million square meters. Gazprombank Group became the new owner.

American developer Hines sold Metropolis shopping and entertainment center with the area of 205 thousand sq. m. to Balchug Capital investment fund.

Retail real estate was characterized by an increase in transactions in Russian regions (excluding Moscow and St. Petersburg). High profitability of retail real estate is attractive for investors, but limited supply in the capital makes them look for properties in other cities. According to Nikoliers' estimates, the volume of sales in the regions in 2023 exceeded this indicator cumulatively for the period from 2020 to 2022.

Fig. 2. Structure of investment volume by types of real estate in Russia in 2023.

Moscow demonstrated the worst indicators for the last 20 years in terms of commissioning of new commercial real estate. The market was replenished only by 50.7 thousand sq. m. due to 4 new shopping centers: “Mitino Park” (27 thousand sq. m., developer - SIS Development), “Siesta” (14 thousand sq. m., developer - GC “A101”), “Kuvshinka” (5.3 thousand sq. m., developer - “Mosinzhproekt”), “Mesto Vstrechi Zvezdny” (6.3 thousand sq. m., developer - ADG group).

According to the results of the first half of 2024, the leaders in terms of retail space availability were Yekaterinburg (846 sq. m/person), Krasnodar (785 sq. m/person) and Samara (720 sq. m/person). In 2025, this indicator is expected to increase significantly in Ekaterinburg due to the completion of the construction of a super-regional format shopping and entertainment center “Zolotoy”.

Fig. 3. Commissioning of retail space in Russia in the period from 2021 to 2024 (6 months)

Office real estate

The share of office real estate transactions in 2023 amounted to 16%. The growth of the key rate in the second half of the year limited investors' opportunities to invest in capital-intensive industries. As a result, sales of office real estate purchased for own needs, including for further leasing, increased. This segment began to be considered as an opportunity to save money in the period of growing inflation.

According to the West Wind Group development company, investors are most interested in class B+ offices with an optimal ratio of rental prices and availability of location without loss of presentability. According to IBC Real Estate estimates, the vacancy rate in offices of this class at the end of 2023 amounted to 5.7%, while the average vacancy rate in the segment amounted to 8%.

Key deals in office real estate:

Moscow City Hall closed a deal to buy a 47,000-square-meter block of the iCity office complex (Time Tower) under construction. It became the largest deal in the office market for the last six years.
Gals Group completed the sale of Tower A of SkyLight business center with the area of 30 thousand sq. m.
Balchug Capital Fund acquired Pulkovo Sky business center with the area of 76 thousand sq. m. near Pulkovo Airport in St. Petersburg from Finnish companies EKE and Vicus.

According to IBC Real Estate research, 22% of foreign companies decided to terminate their lease agreements and more than half of them finally left Russia by the end of 2023. As a result, 134 thousand square meters of space was released on the market. 11% of international tenants remain present on the Russian market, but optimized their rental costs by reducing office space and giving up some of the space.

These spaces were quickly leased by domestic companies. The high demand for the offices of the departed foreign companies was due to the possibility of their immediate use by new tenants. For example, Apple premises in Romanov Dvor business center were leased by Wildberries marketplace, Microsoft offices in Krylatskie Holmy business center were leased by Renaissance Insurance, and Google premises in Balchug business center were leased by Promsvyazbank.

According to Nikoliers' estimates, the high demand for office real estate in 2023 led to a 4% increase in the weighted average rental rate in Moscow compared to the previous year. In the Class B segment, the growth of rates amounted to 2%, while in the Class A segment there was a 2% decrease.

Fig. 4. Rental rates for office real estate in Moscow in 2021-2023, RUB/sq. m/year

According to Nikoliers data, in 2023 the commissioning of new office real estate amounted to 280 thousand sq. m. in Moscow and 113 thousand sq. m. in St. Petersburg. At the same time, the consulting company notes that new construction objects enter the market with a high degree of occupancy. Thus, in 6 BCs commissioned in Q4 2023 (“Nagatino Island”, “Orbital”, “Geolog”, Lucky, D-Stantsiya, “Bolshaya Tulskaya 19”) only 11 thousand sq. m. were vacant at the moment of commissioning. In office centers with construction completion date in 2026 68% of space has already been sold out.

Given the shortage of classic office supply and due to the low share of vacant space in offices with a close commissioning date, the market is experiencing a growing demand for flexible spaces. At the end of the first half of 2024 159 sites offered almost 400 thousand square meters of co-working and service offices. The vacancy rate in this real estate segment decreased by 9 p. p. relative to the end of 2023 and amounted to 10%.

Hotel real estate

Hotel real estate transactions accounted for 7% of the total volume of investment transactions. However, in absolute values of 2023 this indicator became the maximum for the entire history of observations and is comparable to the aggregate indicator for the last four years. The positive dynamics in the segment is due to the development of domestic tourism. According to Nikoliers' estimates, the largest increase in tourist flow in 2023 compared to the previous year is observed in the Republic of Altai, the Republic of Ingushetia and the Republic of Dagestan.

Key deals in the hotel real estate segment:

The state-owned company Kavkaz.RF sold the Arkhyz ski resort in Karachay-Cherkessia with a total area of 20 hectares to Gornye Verkhiny.

Sistema acquired 10 hotels in four Russian cities with a total area of 4,078 rooms from Norway's Wenaas Hotel Russia AS.

The Government of the Leningrad Region sold Zvezdny Hotel with a total area of 142 rooms to Vershina Specialized Developer.

Table 1. Top 5 Russian regions by the area of the room stock of collective accommodation facilities in 2022-2023, mln sq. m.

According to Rosstat, Moscow and St. Petersburg in 2023 are ahead of the growth rate of new hotel rooms.

Since the beginning of 2022, 29 hotels in the capital have lost their international brand and had to change their names. At the end of 2023, 5 hotels with a total room capacity of 1633 continue to operate under the old name. It is expected that in 2024 the rebranding process will be over and there will be no hotels working under the brands of operators who left the market.

The tourist flow of Moscow in 2023 was a record high and amounted to 24.5 million guests, of which 2.5 million were foreign tourists. In the conditions of high demand for room stock, the Moscow hotel real estate market was replenished with two projects in the year under review: Radisson Blu Leninsky (developer - Spectrum Group, 150 rooms) and Azimut City Hotel Komsiti (developer - PPF Real Estate Russia, 164 rooms). In St. Petersburg 3 hotels were commissioned: Helen (developer - Rusland SP, 108 rooms), Station Premier S12 (developer - Station Hotels, 54 rooms), Boutique 59 (developer - GIS Construction, 27 rooms). The highest growth rates of hotel rooms area were observed in the Republic of Dagestan (+47%), Altai Republic (+34%), Primorsky Krai (+31%).

Fig. 5. Room stock and revenue per room in Moscow and St. Petersburg from 2021 to 2024 (6 months)

Warehouse real estate

In 2023, warehouse real estate accounted for 6% of the total volume of real estate investment transactions in the Russian market. The volume of investments reached RUB 53 bln, with about half of them in the Moscow region. The main challenge for the warehouse complex was the permanent growth of construction costs linked to the growth of rental rates. The greatest demand was observed in the built-to-suit segment, i.e. warehouses built to the specific technical requirements of the customer.

According to NF Research Group, there is a significant shortage of vacant warehouse space in the market, and the decrease in the volume of commissioned space is a consequence of the decline in business activity in the market in 2022. Thus, in the Moscow region, the volume of vacant space reached the minimum value in the history of observations - the share of vacant space at the end of the year amounted to 0.1%. By the end of 2023, the total volume of quality warehouse supply (classes A and B) in Russia will amount to 45.7 million sq. m.

Fig. 6. Dynamics of the share of vacant warehouse space in the Moscow region in 2015-2023.

Key transactions in the warehouse real estate segment:

French logistics operator FM Logistic sold a 120,000 sq m warehouse complex in Dmitrov to investment and development company Central Properties.

PPF Real Estate sold its stake in the 107 thousand square meter warehouse complex Trilogy Park Tomilino.

Orientir development company sold to Central Properties the warehouse complex Ozon Yanino with the area of 105 thousand sq. m.

The main share of demand for warehousing premises is formed by online trade. According to NF Research Group estimates, at the end of 2023 marketplaces occupied 6.2 million square meters of warehouse space, and by the end of 2026 this figure may reach 17 million square meters. The availability of warehouses in different regions of Russia allows retailers to reduce the time of delivery of goods to the end consumer and transportation costs. This is especially important in today's market, where the speed of delivery is a decisive factor in choosing a retailer.

Fig. 7. Indicators of warehouse real estate market development in the Moscow region in 2021-2023.

The largest warehouse complexes commissioned in 2023 were:

“PNK Park MKAD-M4”, 128 thousand sq. m. The developer is PNK Group.

“A2 Obukhovo”, distribution center Ozon, 121 thousand sq. m. Developer - A2 Group.

Vnukovo II” logistics center (5th stage), 114 thousand sq. m. Developer - Logistics Partners.

As of today, the rate of commissioning of warehouse real estate cannot meet the growing needs of customers. This is due to the high key rate and, as a consequence, high costs of servicing loans for development projects. Thus, according to Nikoliers, by the end of 2023, the volume of new construction in the Moscow region amounted to 1.4 million square meters, which is 14% less than the volume built in the previous year. Thus, the total volume of supply in the warehouse real estate market of the Moscow region exceeded the mark of 23 million sq. m.

According to Nikoliers' estimates, at the end of 2024, the maximum value of annual commissioning of warehouse real estate in the history of observation is expected - 6.3 million sq. m., which is largely due to the projected completion of construction of proprietary and BTS-projects of large marketplaces across Russia. These types of construction represent 64% of the announced commissioning volume for the whole of 2024.