Moscow Business Complex Sees Rebirth



Five years after grinding to a halt during the global economic crisis, the ambitious real-estate development in Moscow is fast becoming a reality. If all goes according to plan, by the end of 2014 the Russian capital will hold claim to four of the five tallest buildings in Europe.

City planners and developers of the reborn business complex, a steel-and-glass contrast to Moscow's mix of mostly low-rise historic architecture and Soviet-era housing blocks, hope 11 projects will be completed by then, with nearly 31 million square feet of commercial, residential and retail space. That would be almost double the size of London's Canary Wharf business district.

Construction at several half-finished buildings began moving forward last year, as developers emerged from the dust of the financial crisis and began focusing on getting their projects done. The most-notable—and delayed—of those is the Federation Tower complex, whose tallest building is expected to top out early next year at 1,181 feet, surpassing its recently completed neighbor, Mercury City Tower, as Europe's tallest building.

The brainchild of developer Sergei Polonsky—who is best known abroad for being punched out on television in 2011 by Alexander Lebedev, the owner of London's Evening Standard and Independent newspapers—the Federation Tower complex has a 62-story skyscraper and one planned for 92 floors. Last April, a fire that could be seen from all over the city tore through the top floors of the unfinished tower.

Towering inferno and long-running ownership struggles aside, about 80% of the space in the two buildings has now been sold, with the primary tenant, VTB Bank, owning more than half the floors in the smaller building, according to a spokeswoman for Federation Tower.

The nearby 1,112-foot Mercury City Tower, built by billionaire tobacco baron Igor Kesaev, had its topping-off in November, eclipsing London's Shard tower in height. "When I first came to New York in 1991 and saw the Chrysler building and the Citibank one, I thought that these kind of skyscrapers should appear in Moscow," Mr. Kesaev said at a November ceremony for the tower. "Now, 20 years later, this dream has come true."

Japan Tobacco International late last year bought five floors in the yet-to-open Mercury City Tower. When the company moves in, it will join IBM Corp., KPMG International, Pfizer Inc., General Motors Co. and VTB Bank, Russia's second-largest financial institution, as major Moscow City tenants.

"It is world-standard office space in a new building in a good location near the center," said a Japan Tobacco spokesman. "We have a long-term strategy here [in Russia] and we need good, permanent office space. This just seemed the right place to be."

A few years ago, Moscow City wasn't any place to be.

The 20-plot development, conceived in 1992, didn't hit its initial stride until 2004, when Moscow's skyscraper-loving Mayor Yuri Luzhkov cut the ribbon on the first tower. Envisioned as the city's answer to Canary Wharf, Mr. Luzhkov promised the planned 46 million-square-foot complex, located a mere 2.5 miles from the Kremlin, would become the "stunningly modern" heart of a new Russia when finished in 2007. Things didn't turn out as planned.

Six years after making the grand pronouncement, Mr. Luzhkov was driven from office after Moscow City got crushed under the weight of the economic crisis. With only three projects finished, his successor, Sergei Sobyanin called the grandiose scheme an "urban planning mistake." Some wondered if the idea was dead.

High oil prices speeded Russia's economic recovery, helping bring the project back to life. Meantime, slow-but-steady transit improvements to the area and policy changes under the new mayor made Moscow City one of the few new developments allowed to continue in the city center, say industry experts. The scope of the project also was reduced: Plans for a 114-story tower and for moving Moscow's City Hall and Parliament to the complex were scrapped.

City officials' estimates for the total cost of the project have ranged between $12 billion and $15 billion, with Russia's three largest banks, Sberbank, VTB and Alfa Bank financing the bulk of it. The first part of the complex to be completed— the three-building Naberezhnaya Tower—cost around $500 million when it was finished in 2007, developers say. The Federation Tower, which will have 500,000 square feet more of rentable space, is expected to cost more than $1 billion.

Brokers now say that after years of finding Moscow City a tough sell, office vacancy rates have dipped to under 15%—in line with the rest of central Moscow—despite unfinished transport connections that complicate reaching the complex. About 15 million square feet of office space currently is available in Moscow City.

"Everyone said no one needed these buildings, but…it has really started to work," said Claudia Chistova of commercial-property consultant CBRE. "International companies really like it, and in the end we think this project will be successful."

Moscow City still has its critics, particularly among workers who complain about the difficulty of getting to their jobs. Despite its relatively central location just northwest of the Kremlin, the only way to get to the complex is either by infrequent metro service on a newly built line, or via narrow off ramps from Moscow's busiest ring road that often are clogged by construction vehicles.

"Traffic is very heavy and there is not enough parking. It's manageable now that there are only a few buildings operating here, but when they all open up next year, it could be a disaster," said Vitaly Mozharowski, a lawyer with Goltsblat BLP, which has headquarters in the development's Capital City Complex, which was built by billionaire Vladislav Doronin, who dates supermodel Naomi Campbell.

Moscow City also is hampered because each plot of the project has been built by a different developer, brokers say. "You have a dozen very good developers working in isolation," said Mark Pollitt, of Cushman & Wakefield. "This leads to a lack of coordination and you have developers competing with the adjacent plot for tenants. The financial model for this has stalled several times."

One tangible effect of the competition for tenants has been that average annual rental rates of between $700 and $800 a square meter (between $65 and $74 a square foot) to are about 20% lower than in the rest of central Moscow, where the average is between $900 and $1,200 a square meter (between $84 and $111 a square foot), Mr. Pollitt said.

Prices also are kept down because of the transport issues. The city has vowed major upgrades to access roads and metro extensions. Additional metro connections are slated to be finished by 2019 with the first to be done at the end of this year. In the past year, service on the existing metro line has become more frequent, and a road connecting the complex to a nearby highway was finished. The widening of several access ramps from the passing ring road also is in the works.

"This is the largest investment project in the city today, covering all aspects of the area, from underground utilities, transport and energy resources," said Svetlana Murdaya of the city's agency for Urban Design Policy and Development. "[Mayor] Sobyanin is committed to getting this done."

By Lucas I.Alpert

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