EPAM Leaves the Whole Business Center in Minsk

What is happening with the office market in Belarus?

Last week it became known that EPAM was leaving the Krasavik business center, which the company has leased completely. In this regard, we decided to find out if the departure of IT specialists (and not only) from offices is massive. Andrei Aleshkin, a partner, executive director of the Belarusian representative office of the international consulting company NAI Global, told tut.by how the commercial real estate market is feeling now.

Office space is divided into the following classes: A, B1, B2, C, and D. But since the last two classes are located mainly in old buildings and do not meet modern requirements, we will consider only the first three.

According to Andrei Aleshkin, there are now about one million square meters of office spaces of A, B1, and B2 classes in Minsk. Plus, in 2021, it is planned to introduce about a hundred thousand more "squares" of such objects.

- Thus, in terms of saturation and the total number of office spaces, we are already approaching the average indicators of neighboring countries. Minsk with the current supply of 0.5 square meters per inhabitant is slightly inferior to Kyiv and St. Petersburg, where there are 0.7 "square meters" per inhabitant. At the same time, we are still significantly losing to Riga, Vilnius, Moscow, Tallinn, and Warsaw, where the security is higher. In Riga, there are 1.1 square meters of quality offices per inhabitant, in Vilnius - 1.2 meters, in Moscow - 1.7 meters, in Tallinn - 2.2 meters, in Warsaw - 3.2 meters.

"30-40% of employees of IT companies will no longer return to work in offices"

- How much office space has been freed up over the year? What examples can be given that are similar to the story with the Krasavik business center? What is the share of IT companies among refuseniks?

- Yes, there were examples of tenants' leaving, but this was not massive. Rather "remote work" can be called massive, which was introduced everywhere, and not only in IT companies. Some non-IT companies have reduced their areas precisely because of the fall in demand for their products, goods, or services.

The story with Krasavik, according to the expert, is part of the optimization strategy of an IT company (EPAM. - Ed.).

- The same thing happened in several business centers in Minsk and in regional business centers where large areas were released in 2020 or early 2021. Of course, most of these companies are in the IT sector, which, among other things, most positively perceived the "remote" work of employees. I think that 30-40% of employees from these companies will never return to their usual work in offices. However, this does not directly mean a decrease in area. Rather, it will be their optimization, transformation into more flexible spaces, agile offices with coliving and coworking spaces, and so on. The future lies in versatility and flexibility.

- What was the demand for offices at the beginning of 2020 and what is it now? How much has the demand from IT companies dropped?

- Demand at the beginning and middle of 2020 was practically zero. There were rare requests like: "What about the rates, they fell twice? No? Well, then, we'll wait." Now, starting in February 2021, requests have been sent, and not only from companies from the IT sector. We can say that the market has revived. But in fact, compared to the beginning of 2020, the demand has definitely fallen by 2−3 times. Especially new projects suffer, and even more so, those that do not have finishing. Such premises are practically not interesting to potential tenants. No one is ready to invest in finishing now. Therefore, projects with finishing are a priority.

"Rental rates have decreased within 10%"

- What are the reasons for abandoning space and falling demand? Is this significantly influenced by the relocation of IT specialists after the elections in the second half of 2020?

- I would not say that relocation is a significant factor, rather COVID-19 had a greater impact on the market. I would even say that it has even more influenced international companies not from the IT sector, as they have made a common decision around the world to "work remotely." Moreover, for a year at once, and some even for 1.5-2 years. Accordingly, the question arose about the advisability of renting premises and reducing areas.

However, this does not mean that there has been a massive exodus, Aleshkin says. Rather, there were a dialogue between the tenant and the landlord and the search for scenarios acceptable to the parties.

- Those landlords who met halfway, listened to the tenant and developed strategies that took into account both the realities of the market and the situation of tenants, were able to maintain not only good relations with tenants but also did not allow them to leave the facilities. Somewhere it was a short-term discount, and somewhere it was a reduction in space, sublease, vacations, and so on.

- How far have rental rates for offices in different segments sagged over the year?

- As I said above, new projects that were introduced at the very peak of "covid" restrictions are particularly affected. In them, rates fell by 20-40% compared to those that they announced in late 2019 or early 2020. In the current in their own business centers, after negotiations and the development of joint mutually favorable conditions in the bulk, the rates were retained or slightly reduced - within 10%. Basically, this happened with the condition of the return of rental rates during the second half of 2021 to the current ones at the beginning of 2020. But, of course, in each case, it all depends on the project and the loyalty of the landlord.

According to Andrei Aleshkin, as of the end of 2020, rental rates for class A business centers were in the range of 24-28 euros per square meter per month excluding VAT, for class B1 offices - 12-24 euros, for class B2 offices - 7 −12 euros.

- If we talk about current rental rates, then I would mark everything with an asterisk since everything is now being decided through individual negotiations. But on average, the amounts are as follows: class A - in the range of 18-25 euros per meter, class B1 - in the range of 10-17 euros, class B2 - in the range of 5-12 euros excluding VAT, utility and operating charges.

"The future belongs to flexible offices"

- How does the situation in Minsk differ from the situation, for example, in Kyiv?

- According to our colleagues, office vacancy increased by 5.5% over the year - by the end of 2020, it was 12.5%. According to NAI Ukraine polls of corporate office tenants, 63% of companies did not change their office space, 13% reduced it to 10%, and 6% of companies saw a decrease of more than 50%. Office rental rates have declined by an average of 20% throughout the year. A very striking trend - due to the pandemic, along with the transition to a remote work format, many companies are forced to optimize office costs by using coworking spaces.

- What are your forecasts for the office real estate market in Minsk?

- We have not yet seen active reconceptions in existing facilities, but we see an active movement to introduce new formats into projects under construction. New projects move away from the ready-made solutions of the past and actively follow trends.

Common spaces - lounge areas and reception halls - are increasing because these are the places where tenants interact with couriers and visitors. If possible, terraces and exploited roofs are equipped for the possibility of working in an open space and organizing events here.

But the most urgent is the provision of spaces for flexible lease, Andrei Aleshkin says. These are separate parts of the building and floors, including coworking infrastructure, and office spaces for different work models. For example, hot desks (open spaces, in which employees instead of a fixed workplace occupy a free one, coming to work on their own schedule. - Ed.), fixed tables in open space, mini-offices with ready-made repairs, meeting rooms.

“This allows you to count on a larger audience, create a stronger market position, extending the benefits of coworking infrastructure not only within it but throughout the building. As a result, by renting by tables and more expensive short-term contracts, to increase the income per square meter of such a floor by 15-30%, depending on the location.

The described model of work for a business center is more complex, but it is a solvable problem. In the West, for example, it is being solved at the expense of the same coworking operators.

- So, for example, the operators of flexible offices Własne B, Mindspace in Warsaw interact with classic landlords (owners of land and buildings. - Editor's note) according to the system of management contracts. Thus, a classic business center is rented in a coworking format and is managed by a professional operator. But contracts are concluded directly, and the income is received directly by the owner of the facility, and the coworking operator diversifies its activities, receiving additional income to the main business.

As for the general trends in the Belarusian office market, according to the expert, in 2021 the prevalence of the remote work format is expected with a gradual return to offices in the second half of the year.

- However, the main market uncertainty is directly related to potential quarantine restrictions and the speed of vaccination. In any case, flexible offices are the future.