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Tuesday, November 30, 2010

Making a building smart

I read a couple of interesting articles in Vedomosti about commercial real estate the other day. In one of them the authors advocated the idea of a new concept to be offered to buyers and tenants. Participants of the discussion spoke primarily about the redesigning of their existing projects.

From my personal experience I know that there are two main trends in commercial real estate tenancy. Trend 1 is ‘slicing’ space up into as many small rooms as possible and leasing each out at a price as high as possible. There’s good demand for small, 10-20 sq. m offices while supply is low.

Tenants come and go very fast; it’s next to impossible to remember all of them. The same office space may house pet stuff sellers yesterday; a lawyer’s firm today; and somebody else in a week. I regard this kind of tenancy as an Oriental bazaar where you’re fooled into buying goods at the highest price possible. This is business for quick money lovers: “I want it here and now.”

Trend 2 is offering big clients big office space on a long-term and moderate-rate basis. I think it’s a good strategy for you to move from one finished project to another with an eye to long-term and stable revenue.

When I was doing my Teledom business center project in Nizhny Novgorod, I ventured to ‘make the extremes meet.’ And I succeeded in doing that; today several companies rent one floor (within 700 sq. m), with most offices covering from 60 to 200 sq. m. Some of the tenants are ‘infrastructure’ firms important for the business center, including a restaurant, a dentist’s, a notary office, etc.

It’s worth mentioning here that at the time we launched the Teledom project Nizhny Novgorod hardly had any class-B office space, not to mention class A. When you consider a new business, assessing a local market and international best practices is one thing; forecasting trends is quite another. Construction of a class-A business center was a leap over the class-B step but we had to skip B not to be chronically lagging behind.

It was the time when business people would privatize buildings that Soviet-time research labs used to own, give them a face-lift, chop space into small offices and offer rooms for rent. The class-B era was looming as the next stage of commercial real estate development. We asked ourselves: why should we go where everyone will come soon? I came up with a concept that had its zest.

I decided to build a ‘smart building.’ I studied Russian and international experience and ordered design from a Moscow firm. It turned out that the cost of what the designer was suggesting was almost the cost of overall construction. This caused its payback period to skyrocket, too; in Russia’s instability doing a project with a ten or more year payback period is a losing strategy.

Scrapping the project looked like a logical move, but I decided to continue. I brought my own company, Internet Laboratory, into it; the firm made its own unique and less costly intellectual building system adapted to the needs of the future business center. I bet on less known but better-customized high-quality equipment.

Our ‘smart house’ developments have brought about a new business as the system can be easily tailored to an apartment, a cottage, a shopping mall or a residential complex. Unlike competitors we offer turn-key solutions including design, installation, FOCL, telephone gateways, high-speed Internet and cable TV. This Internet Laboratory initiative has made it possible to now use the system at many other projects.

The Teledom project was our attempt to peer far into the future and anticipate market trends. Being ‘smart’ the system is constantly developing.

To pull down and rebuild business centers from scratch or to renovate what is already available? This is a dilemma now faced by owners of land where ‘frozen’ factories stand. The owner of Danilovskaya Manufactura in Moscow took an unorthodox approach (see http://www.vedomosti.ru/newspaper/article/249607/ot_proletariev_k_dizajneram). He rebuilt some of his out-of-use parts of the factory to make a ‘loft quarter’ there. The guy was quoted as saying, “…this has wrought a unique atmosphere of working process where creativity is of value.”

A current office space glut in Moscow is apparently causing owners to ‘put a lovely face’ on offices to be specifically offered to professionals in creative sectors. In my opinion, the developer simply didn’t have enough long funds, which prompted him to launch an option that pays off fast. And he hit the mark!

However, it is service that makes commercial real estate business successful. I would also recommend that a developer bet on convenient location, availability of communications lines and the concept of prestige—this is what business people value.

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