Every fourth office in Kyiv will remain vacant until the end of the year

Photo: Konstantin Melnitsky

The economic crisis is forcing businesses to reduce their accommodation expenses with many companies moving to cheaper premises or reducing spaces. By the end of the year, the vacancy rate at business centers in Kyiv will be 23%, Head of Office Property Department at JLL in Ukraine Oleksandra Hlobina told Capital. For comparison, in January only 18.3% of offices were vacant. The vacancy rate of office centers in Kyiv is among the highest in Europe, said Hlobina.

Tenants cut back expenses

The office property market is declining for several reasons, the main one being the growing supply, which this sector cannot absorb. In H1 2014, five new business centers with a total lease space of 93,000 sq m opened in Kyiv: one A class center (IQ Business Center) and four B class centers (Forum Victoria Park, Lagoda, Sigma and Dominion), according to UTG. This increased the total supply of office space in the capital to 1.6 mn sq m, which is 60% more than in the retail space segment. At that, developers are working full steam ahead. In H2 one more center should be opened, namely Sky Towers with a lease space of 120,000 sq m, informed UTG. «It is easier for companies to finish projects that are nearly completed than to fully freeze construction,» says Deputy Director for Development at the Stokman Development Company Serhiy Ovchynnikov.

Lessees cannot catch up to developers. At the moment, new companies in Ukraine appear on the market very rarely, says Managing Partner at CBRE Serhiy Serhiyenko. «We have been looking for an office for a large international company that decided to start up in Ukraine. But this is a singular case,» he adds.

At the moment, most companies are busy optimizing their business. «Some lessees move to premises with a better design, which helps place the employees more effectively thus reducing the overall office space,» added Hlobina. For this reason, the demand is in decline. There are no official statistics for the 9 months of 2014, but, as UTG data shows, over 6 months of the year only 21,000 sq m of office space was leased, which is 45% less than in the same period of 2013.

Lessees are rapidly reducing their expenses due to the recession in practically all spheres of the economy, the sharp devaluation of the national currency and the military conflict in the eastern regions of the country. For instance, sales of clothing and footwear in boutiques dropped 30-40% over six months compared to last year. Also, industrial output dropped 4.7%, as reported by the State Statistics Service.

The end of summer and beginning of autumn did not bring any relief to the businesses as the negative trends continued. For instance, in August industrial output sank 21.4% compared with August 2013.

Centers make concessions

The majority of lease agreements are tied to the currency exchange rate, says Serhiyenko. Just as the case with the retail space market, lessees and owners of office centers are forced to find common grounds. «Practically all owners of office space agreed to fix the rates at a preferential UAH 9-10/US $1,» he said. Other companies provide 30-40% discounts on the lease rate. On average, the lease of an A class office costs US $25-40 per square meter per month, B class — US $15-25. Many businessmen delay their lease payments, but office owners are not in a hurry to kick them out.

There are very few players on the market that do not agree to make concessions. Senior Partner at Kravets & Partners Rostyslav Kravets says he was approached by two major lessees of A class office centers in Kyiv, who are experiencing difficulties in reaching an agreement with the office owners regarding discounts. «They are being charged based on the current exchange rate,» he explains, adding that he intends to defend the interests of his clients in court.

In the short term, lease rates will decrease as developers will be forced to offer discounts to fill the empty space, believes Hlobina. Some centers are already prepared to reduce their lease rates by up to 60% in order to attract new tenants.