DEVELOPMENT OF COMMERCIAL REAL ESTATE MARKET IN ST. PETERSBURG

DEVELOPMENT OF COMMERCIAL REAL ESTATE MARKET IN ST. PETERSBURG

Daniil Ufimtsev

Master degree student, St. Petersburg State University of Economics,

Russia, St. Petersburg

ABSTRACT

This article is devoted to the study of the commercial real estate market of St. Petersburg in the period from the nineties of the twentieth century to 2022. Within the framework of the work, the main trends in the development of this market in these periods and sources of further growth were identified.

Keywords: real estate market, St. Petersburg, development, investment.

St. Petersburg is a city of federal status, the administrative centre of the Northwest Federal District. It is the second largest city in Russia and an important cultural and historical centre. Between 2015 and 2022, St. Petersburg was chosen to host such high-profile events as Confederations Cup in 2017, FIFA World Football Cup in 2018 and UEFA European Championship in 2020. Moreover, one of the country’s main business events, St. Petersburg International Economic Forum, has been held in the city since 1997. Obviously, these factors have influenced the development of the real estate market in the region. In view of the above, the study of the development of St. Petersburg commercial real estate market becomes particularly relevant.

Because of its island location, different parts of the city can be classified according to the nature of the area use:

1. Areas with well-developed infrastructure: with residential development, office and administrative buildings;
2. Areas with restricted access because of the presence of industrial facilities;
3. Historical and green areas.

According to its type, property has traditionally been divided into residential, commercial and industrial. Commercial properties include retail facilities, hotels, entertainment centres, garages and offices. Moreover, this category sometimes includes objects that contribute to deriving profit in business processes: logistics and warehouse complexes, industrial parks and industrial facilities.

The real estate market in Russia was developing quite dynamically as early as at the end of the nineteenth and beginning of the twentieth centuries: property accounting and valuation technologies were introduced; a number of issues of legislative regulation of the given sector were raised.

The USSR had no real estate market as there was no private ownership of land. The 1922 Civil Code of the RSFSR abolished the division of property into movable and immovable.

In the modern history of the Russian Federation, the concept of “real estate” was introduced into economic and legal field by Article Four of the “Fundamentals of the Civil Legislation of the USSR and the Republics” No. 2211-1 of May 31, 1991 in connection with the establishment of private land ownership [6]. This term was confirmed in Article 1 of the Presidential Decree No. 1767 of 27.10.1993 “On the Regulation of Land Relations and Development of the Agrarian Reform in Russia” and finally was enshrined in Article 130 of the Civil Code of the Russian Federation [5].

In this context, it is fair to state that the history of formation of the modern commercial real estate market in Russia dates back to the early 1990s. In the summer of 1991, the first privatisation acts appeared, and the real estate turned to the market turnover. Since 2010, one can talk about stabilisation of this market. Real estate was transformed to the category of financial assets; the concept of “real estate transactions” emerged as a specific type of economic activity.

Having dwelled upon the specific features of emergence and operation of the commercial property market in contemporary Russia, it is proper to turn to the consideration of regional peculiarities on the example of St. Petersburg. The commercial real estate market of St. Petersburg includes the following segments:

1. office properties;
2. commercial properties;
3. industrial and warehousing properties;
4. hotel properties.

The convergence of the primary and secondary non-residential markets was a consequence of the realisation of the Law of St. Petersburg No. 149-51 as of 18 September 1997 “On the Procedure for Fixing the Rent for Non-residential Premises Owned by St. Petersburg” which entered into effect on 1 January 1998 [4]. The rent for non-residential premises was established on the basis of the market value of particular objects. By the middle of 1999, about 20,000 non-residential properties of the city were rented out with a total area of over 500,000 square metres.

Three factors underpinned the formation of St. Petersburg commercial real estate market in 1990-2000:

1. small-scale privatisation and corporatisation of state-owned enterprises, which subsequently formed the basis for the emergence of the private sector of the non-residential real estate market;
2. conversion of residential housing into non-residential premises;
3. construction of new facilities on vacant lands.

The demand for renting commercial real estate in the first half of that period was growing due to the increasing number of business entities and expansion of foreign companies into the Russian market.

During the same period, St. Petersburg real estate market became a subject of statutory regulation. At the end of 1994, St. Petersburg real estate management programme was developed. It was based on the need to establish a stable regulatory framework in the real property market, to secure attractive conditions for the investors and to realise the inevitability of forming a unified information system. The financial crisis of 1998-1999 led to a drastic decrease in effective demand for real estate. The inertia specific of the non-residential premises stock resulted in decline of market prices.

In 1990-1995 the activity on the warehousing market was minor. The demand was mainly focused on small spaces. By 1995, the demand for medium-size warehousing premises was observed: three to four hundred square metres with due equipment. By 1999-2000, business started showing interest in lease of large facilities. The quality-related requirements became more stringent: availability of heating, ramp, security, high ceilings, access way for Euro trailers.

The retail sector suffered least of all during the crisis of the nineties of the twentieth century, since shops in a highly urbanised country are the only way to meet people’s basic needs for food and clothing. The demand for rent of retail premises was consistently high during that period and was ahead of the demand for other types of commercial properties.

The office property market in St. Petersburg has a relatively recent history. It was formed in the nineties of the twentieth century. The first foreign companies entering the Russian market were interested in office space of a fairly high level. The structure of St. Petersburg office space market can be classified into four broad segments:

1. Shared apartments vacant after resettlement, or other premises in residential buildings, fitted or rebuilt for offices;
2. Space in administrative and production buildings of functioning enterprises, scientific research centres and design bureaus;
3. Premises owned by municipalities;
4. New buildings constructed specially for office centres.

The first decade of the twenty-first century was characterised by active development of the commercial real estate market, especially in the retail sector. That period was marked in general by intensified investment activity in the country. It is also worth noting that the global financial crisis of 2008 radically changed the situation in the commercial real estate market. The retail turnover declined, the retailers faced financial difficulties, the product range shrank, with the resulting shortage of retail space. Some retail facilities were closed.

The reduced demand in the office property segment caused oversaturation of the market with modern office space, as well as downturn in business activity, aggravated by the financial crisis. Many companies changed their development plan, scaled back their workforce and the rented premises.

The downturn in the production and warehousing sector caused contraction of trade and market oversaturation with high-quality warehouses. Many warehouse construction projects were put on hold. A number of owners and tenants abandoned the formerly occupied space. Often, the demand was reshaped to seek for smaller storehouses.

The second decade of the twenty-first century was relatively quiet for the commercial property market. The moderate growth in buyer demand continued throughout the period, with the sellers’ supply offsetting the situation in the sector. The cases of imbalance in the commercial real estate market were insignificant in terms of time and were quickly rectified. Due to the quite high volatility of the rouble within the decade, the investment projects in the sector realised on the basis of foreign capital were extended in timing.

In 2020, the lessors faced a dramatic drop in demand, particularly as concerned retail trade. The main reasons, caused by the pandemic, were: people’s stay-at-home restrictions, legislative restrictions aimed to prevent the spread of coronavirus infection, a drop in purchasing power. Against the background of uncertainty and restrictive measures, the retail property segment proved to be primarily at risk. Office real estate was also on the decline in connection with the decision of some companies to transfer their employees to distant work mode. The warehousing segment retained its strong position: the related demand was quite strong owing to food retailers, online trade in non-food items and the need to expand logistics hubs.

In the conditions of the former lockdown as well as geopolitical tension, the situation in St. Petersburg commercial property market in 2022-2023 is characterised by the following factors:

1. St. Petersburg office property market shows an imbalance in supply and demand at the beginning of 2023. There is a shortage of available space. One can observe a growing interest in co-working. This segment suffered less than others during the pandemic. The demand continues to grow, but very slowly. Back in 2020, quite a large number of business centres were planned for construction, but this construction was suspended due to numerous logistical, organisational and technical problems relating to the coronavirus infection spread, and as of 2023, many projects are still in the development status.

2. The retail property segment shows stagnation. Because of the development of online shopping, the retailers are shifting to an electronic format and do not need to rent space in shopping centres. In the future, this will affect the amount of vacant space considerably. The greatest risk for retail real estate is, as before, the decline in people’s income.

3. A new phase of growth is expected in warehousing real estate. Due to the development of online sales, as well as the geopolitical tension factors, warehouses are becoming increasingly popular. High-quality warehousing and industrial space is the most promising sector of the real estate market today.

To summarise the above, it should be noted that businesses in the modern conditions need to change the way they operate in commercial real estate; they should show due flexibility to order to minimise the risks arising at the level of a single business entity or conditioned by the global changes sweeping across the global community.

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