Aleksandr Aleynikov: "There is no a lucky escape: what will happen to office interiors and equipment"
12 March 2022
The market for office fit-out — services for finishing and engineering equipment of spaces — depends heavily on imports and the general state of the economy. But even in the current conditions, its development will not stop. Although the timing and cost of projects can change a lot.
Aleksandr Aleynikov
Commercial Director of Pridex
Project Status: Partial Freeze
The natural reaction of customers to the international isolation of the country and complete uncertainty in the economy is the freezing of projects. However, not everyone chose this option.
According to our estimates, foreign customers occupy about 40% of the fit-out services market. Among them, most — up to 80% - have already suspended current projects.
In the Russian segment, the situation is not so sad. Approximately 70% of customers have not yet frozen their projects. Among them are a number of federal companies that have previously launched large-scale office space renewal programs.
The remaining 30% of Russian customers nevertheless preferred freezing. These are the customers who were most vulnerable to sanctions or decided to reconsider their concepts.
In total, taking into account the situation in the Russian and foreign segments, the suspension affected a little less than half (45%) of the contracts. Mainly we are talking about projects that are in the initial stages, primarily preparatory ones. If construction work is already started, then the shutdown leads to serious financial losses. Therefore, for projects at more advanced stages of implementation, the freezing option was practically not used.
According to our estimates, foreign customers occupy about 40% of the fit-out services market. Among them, most — up to 80% - have already suspended current projects.
In the Russian segment, the situation is not so sad. Approximately 70% of customers have not yet frozen their projects. Among them are a number of federal companies that have previously launched large-scale office space renewal programs.
The remaining 30% of Russian customers nevertheless preferred freezing. These are the customers who were most vulnerable to sanctions or decided to reconsider their concepts.
In total, taking into account the situation in the Russian and foreign segments, the suspension affected a little less than half (45%) of the contracts. Mainly we are talking about projects that are in the initial stages, primarily preparatory ones. If construction work is already started, then the shutdown leads to serious financial losses. Therefore, for projects at more advanced stages of implementation, the freezing option was practically not used.
Materials and Equipment: New Supply Geography
The main component of fit-out services from a cost perspective is materials and engineering equipment. They account for 60% of the costs of implementing projects.
The specificity of the market involves the widespread use of foreign components. Their share is about 70% of the cost of purchases. Due to the weakening ruble, all these materials rose sharply in price. Moreover, about 60% of import positions are in the EU and the USA. New deliveries from these regions are now put on hold due to mutual sanctions and logistical problems.
There are also some difficulties with Russian suppliers. Domestic materials and equipment rose by 30%. And the conditions for their acquisition have become more stringent.
In such a situation, contractors will expand partnerships with Chinese suppliers. So far, they account for about 30−40% of components for office interiors. But operators are already actively searching for new suppliers for the most problematic positions — IT equipment, multimedia and automation systems, carpets, ceiling systems, electrical equipment, bathroom-and-lavatory equipment, etc.
Potentially, some of the positions can be replaced by Russian manufacturers — a weak ruble increases their competitiveness. So, in the new conditions, domestic suppliers of finishing materials and engineering equipment have additional space for development.
The specificity of the market involves the widespread use of foreign components. Their share is about 70% of the cost of purchases. Due to the weakening ruble, all these materials rose sharply in price. Moreover, about 60% of import positions are in the EU and the USA. New deliveries from these regions are now put on hold due to mutual sanctions and logistical problems.
There are also some difficulties with Russian suppliers. Domestic materials and equipment rose by 30%. And the conditions for their acquisition have become more stringent.
In such a situation, contractors will expand partnerships with Chinese suppliers. So far, they account for about 30−40% of components for office interiors. But operators are already actively searching for new suppliers for the most problematic positions — IT equipment, multimedia and automation systems, carpets, ceiling systems, electrical equipment, bathroom-and-lavatory equipment, etc.
Potentially, some of the positions can be replaced by Russian manufacturers — a weak ruble increases their competitiveness. So, in the new conditions, domestic suppliers of finishing materials and engineering equipment have additional space for development.
Personnel: more Russian specialists
The payroll fund is about 40% of the cost of office fit-out. A significant part of the workers who are engaged in decorating and equipping spaces are foreign citizens. They receive salaries in rubles and, as a rule, transfer most of their income to families abroad in foreign currency.
The weakening of the ruble hit such workers hard. Therefore, in the near future, especially if the currency continues to weaken, the market may face an outflow of qualified personnel.
Large contractors took into account these risks and over the past few years have developed recruitment programs in Russian regions. This will help partially compensate for the possible outflow of labor. But it is necessary to be prepared for the fact that Russian specialists are more expensive than nonresident workers.
The weakening of the ruble hit such workers hard. Therefore, in the near future, especially if the currency continues to weaken, the market may face an outflow of qualified personnel.
Large contractors took into account these risks and over the past few years have developed recruitment programs in Russian regions. This will help partially compensate for the possible outflow of labor. But it is necessary to be prepared for the fact that Russian specialists are more expensive than nonresident workers.
How this will affect projects
Given the supply situation and personnel problems, the cost and timing of projects will inevitably increase. Moreover, office fit-out will become more expensive and longer, regardless of who conducts the work — the company itself or a professional operator.
Although the sanctions situation and logistical problems inevitably affect the implementation of projects, operators will strive to fulfill their obligations under current contracts and, if possible, comply with the conditions of previously concluded transactions. For players in the commercial real estate market, reputation is extremely important. Moreover, each client is now worth gold. And good reputation and implementation of agreements can help in the search for new contracts, which will be greatly complicated in the current conditions.
In general, the professional construction services market for finishing and engineering equipment of office premises has a sufficient margin of safety. But if the international and macroeconomic situation develops according to the most negative scenario, companies may completely abandon some temporarily suspended projects.
Although the sanctions situation and logistical problems inevitably affect the implementation of projects, operators will strive to fulfill their obligations under current contracts and, if possible, comply with the conditions of previously concluded transactions. For players in the commercial real estate market, reputation is extremely important. Moreover, each client is now worth gold. And good reputation and implementation of agreements can help in the search for new contracts, which will be greatly complicated in the current conditions.
In general, the professional construction services market for finishing and engineering equipment of office premises has a sufficient margin of safety. But if the international and macroeconomic situation develops according to the most negative scenario, companies may completely abandon some temporarily suspended projects.
Who will remain in the market
A number of players in the fit-out services market have quite successful crisis experiences, including 2008−2009, 2014 and 2020. These crises had different causes, but the consequences for business were roughly the same. High-quality materials and equipment became less accessible due to the weakening of the ruble or sanctions. But market participants found a way out — they took up complex projects, expanded the range of services and the geography of supplies.
It is already clear that the consequences of the new crisis will be larger than all previous ones. And, apparently, the market will move towards the consolidation of contracting structures.
The chances of survival are higher for those companies that have enough resources and experience to complete current projects and fight for new contracts. Such players — through merging or simply personnel transition — will be joined by more vulnerable market participants. For example, those who focused exclusively on foreign customers or worked with one or two customers.
It can be assumed that the market will have the conditions for the appearance of large service operators related to the development of office interiors. Such operators can combine the classic competencies of a fit-out contractor and an IT integrator to create a smart office infrastructure.
At the same time, some of the players will go into the gray zone of the economy. They will return to the team principle of providing services and will focus on small single orders.
Although it is difficult to build more accurate forecasts now, it is safe to say that the market will not stop completely. A strong business, including in the field of fit-out services, over time can adapt to almost any situation. Even if it goes well beyond all forecasts and expectations.
It is already clear that the consequences of the new crisis will be larger than all previous ones. And, apparently, the market will move towards the consolidation of contracting structures.
The chances of survival are higher for those companies that have enough resources and experience to complete current projects and fight for new contracts. Such players — through merging or simply personnel transition — will be joined by more vulnerable market participants. For example, those who focused exclusively on foreign customers or worked with one or two customers.
It can be assumed that the market will have the conditions for the appearance of large service operators related to the development of office interiors. Such operators can combine the classic competencies of a fit-out contractor and an IT integrator to create a smart office infrastructure.
At the same time, some of the players will go into the gray zone of the economy. They will return to the team principle of providing services and will focus on small single orders.
Although it is difficult to build more accurate forecasts now, it is safe to say that the market will not stop completely. A strong business, including in the field of fit-out services, over time can adapt to almost any situation. Even if it goes well beyond all forecasts and expectations.
Source: realty.rbc.ru