The three tallest skyscrapers in Europe have all opened since 2013 on a riverfront site 2.5 miles west of the Kremlin. All that new glass-sheathed space hit the market just as the Russian economy tanked and vacancies for premium offices in the district soared to more than 40 percent. Today, with a recession stretching into its sixth quarter and office vacancies across the city stuck at 20 percent, the local government has a simple message for the builders still working at the site: Keep going.
The mayor’s office is pushing developers to complete the skyline of Moscow City—a district similar to Paris’s La Défense or London’s Canary Wharf—in time for the 2018 FIFA World Cup, when foreign tourists are expected to pour in for the world’s most-watched sporting event. The 374-meter (1,227 feet) Federation Tower, Europe’s tallest building, will open by yearend. And two more skyscrapers in Europe’s top 10 are expected to go up by the first kickoff. “The government hates that construction has dragged on for so long,” says Yulia Nikulicheva, head of strategic consulting at real estate brokerage JLL in Moscow. “Moscow City was always about prestige.”
Like his communist-era predecessors, Russian President Vladimir Putin has a penchant for the grandiose, backing initiatives such as the $50 billion Sochi Olympics and a 12-mile bridge dubbed “the project of the century” to link Russia with the Crimean peninsula annexed from Ukraine. Moscow City, conceived by former mayor Yuri Luzhkov as a global financial center, will eventually have office space for 150,000 workers and about 300,000 square meters (3.2 million square feet) of apartments. The final price could reach $13 billion, according to brokerage CBRE.
Moscow authorities say they haven’t pressured builders and that decisions regarding construction are being driven by developers. “The city has only created the foundations for investors to finish their work,” says Sergei Kuznetsov, the capital’s chief architect. “It’s an iconic site, and we need to finish it, so that it contributes to the city rather than continues as a problem.”
Imagined as a glittering business district that would rival the City in London or Downtown Manhattan, Moscow City faced setbacks from the start. Construction delays shot holes in the original timetable for a 2007 completion before the 2008 financial crisis made matters worse. The idea appeared buried for good in 2014, when Russia was slapped with sanctions for annexing Crimea and oil prices collapsed, undermining the backbone of the Kremlin’s resource-based economy. It was hoped that foreign banks would want to anchor Moscow City. But Deutsche Bank, Royal Bank of Scotland, and Barclays are all making cuts in Russia. “Wherever possible, developers switched to apartments or downsized the projects,” says Konstantin Losiukov, a director at brokerage Knight Frank in Moscow. “But anyone who started building before the recession was already committed.”
Now state-owned companies and government agencies occupy almost half the available office space in Moscow City. Oil pipeline monopoly Transneft last year purchased the 55-story Evolution Tower. And the mayor’s office and Russia’s second-biggest bank, VTB Group, bought buildings that account for a quarter of Moscow City’s floor space, according to Knight Frank. Those deals helped bring down the vacancy spike of two years ago, when tenants were so scarce that a youth hostel took the 43rd floor of the Imperia Tower. Annual rents have plunged to $520 per sq m this year, from $830 in 2014, according to Knight Frank. Still, vacancies in Moscow City won’t fall below 10 percent before the end of the decade, JLL estimates. Eight percent is considered a healthy balance between supply and demand.
Renaissance Development, whose Neva Towers will be the final pieces of Moscow City when completed in 2019, has scaled back its vision as it attempts to adjust to the new Russian reality. The site was originally planned for a signature Norman Foster building taller than New York’s One World Trade Center. But after the company acquired the land in 2013, it drew up a more modest pair of towers. The $1.2 billion project will include 60,000 sq m of office space, about a third of the amount in the original plan, as the crisis spurred Renaissance to shift to more residential use, according to Chief Executive Irfan Kaya. “We took a six-month breather at the end of 2014 to reassess,” he says. “But we never considered pulling the plug. In development, it’s use it or lose it, and that was never an option.”
The bottom line: Even though 20 percent of Moscow office space is vacant, the government is pushing developers to top off new skyscrapers.