Gushing Life in Epicenter

Today the mall Epicenter opened in September 2006 has hundreds of various goods, food court services and entertainments to offer. The pool of its tenants is largely formed from local retailers. The anchors include the food supermarket Bomba (Vester Group), the household equipment and electronics supermarket Maximus (Vester Group), the nationwide chain Detsky Mir, the English pub Britannica, City Bowling entertainments and the children’s fun center Star Galaxy.

The project developer and investor is BIN Bank. Conceptual development and brokerage was exclusively performed by Paul’s Yard Kaliningrad, which will also manage the property at least for eight years from the opening date, according to the contract terms.

The Very Center

Epicenter is situated in Kaliningrad’s largest and most densely populated district Leningradsky at the intersection of Professor Baranov and Gorky streets where about 35% of the entire urban population resides, mostly young families. It takes only five minutes to walk to the actual downtown. Kaliningrad’s street retail with fashion boutiques, beauty shops, cafes, telecom services , video and audio equipment shops is concentrated on the bustling adjacent streets Gorky, Baranov, Chernyakhovsky and Proletarskaya…

“The building sits on the central hub linking all major districts ” comments Nina Tupiy, spearheading the commercial real estate department at Paul’s Yard. “The main traffic flow runs along Chernyakhovsky and Gorky streets towards the center. In the daytime the average traffic intensity reaches 900 cars per hour, both ways. On the whole, the retail and entertainment center’s four-story facade has a good visibility and access, even though it is moved away from major thoroughfares. Yet the roads are congested during the morning and evening rush hours.

The prospects of future urban development make the property look even more attractive. Thus completion of the road junction on Gorky Street coupled with reconstruction and widening of the roadbed and dismantling of streetcar rails provided exit to the ring road and, accordingly, to the Baltic coastline resorts.

A multitude of retail-office and multifunctional properties, quite large by Kaliningrad standards, are located in Epicenter’s catchment area: retail-office center Acropolis (various trading pavilions) with multilevel parking, Trading House Europe (clothes, shoes, sports ware, crockery), retail-office center Kaliningradsky Passage (an arcade of manufactured goods), SC 55 (a wide variety gallery) and, finally, the Clover House now under construction (shopping arcade, four-star hotel, office center and fitness club). The 15,000-sqm Central Market is also close at hand; for many years up to 60% of local residents choose it as their main shopping place.

All of them are Epicenter’s potential rivals, though until recent a great concentration of commercial facilities around the property has played into a synergy effect. However, in the opinion of Ms. Tupiy, Epicenter still runs competition risks like all other Kaliningrad properties: “An impressive number of new commercial projects slated for delivery in 2008 may increase the share of vacant retail premises given a rather low consumer market absorption. At the present time REC Epicenter is 100% occupied by tenants in spite of their rotation.”

The plot where Epicenter is stationed borders on the urban park and the building of Kaliningrad Public Prosecutor’s office on the north. You may get inside from any of the four cardinal points: Gorky, Partizanskaya, Baranov streets, or on the side of Parkovy Creek. On the whole the surrounding development cannot be characterized as dense. The park occupies roughly 4 ha and there are no apartment buildings directly adjoining the Center. The apartment stock is concentrated in five-story houses along Chernyakhovsky, Sommer and the extension of Gorky streets (behind the park), where first and basement floors perform commercial functions. On the other hand, the bedroom district Selma, being actively and densely built up, and prewar three-story developments in the area of Sovetsky and Mira prospekts and Borzov St. lie within 15-20 minutes of walking distance. Epicenter’s main competitors in this area are the 91,000-sqm SC MEGA, the 15,000-sqm Mayak, Victoria and Sedmoi Kontinent supermarkets, the 37,000-sqm Kaliningrad Plaza and the 3,300-sqm Baltic Business Center on Moskovsky prospekt.

In the opinion of Grigory Pechersky, vice president of ADG Group (developer of SC Kaliningrad Plaza), an impressive entertainment function can make this complex very popular, though its tenants will most likely face considerable competition. “There is a number of large shopping centers that have opened its doors in two recent years including Kaliningrad Plaza, Mega, Acropolis and Epicenter. SC Mega, rather successful at the initial stage thanks to its innovative pool of brands, was the first to enter the local market. Acropolis and Epicenter followed soon. The latter stakes on entertainments, whereas only 10% of retail operators represented there are well-known brands. The last but not the least to enter the market was Kaliningrad Plaza fortunately located at the intersection of central routes with a wide variety of chain stores. Not in vain was it celebrated with CRE Award as the Best Mixed-use. After it had been constructed more than 30 new national and world brands made their appearance in Kaliningrad along with the first multi-screen cinema of KARO chain…”

It should also be remembered that the peripheral catchment area for Epicenter actually includes the entire city of Kaliningrad with suburbs to boot. The city’s distinctive feature is concentration of all major retail outlets in the downtown, save for the New City Center at the end of Moskovsky prospekt and SC Grand at the end of Sovetsky prospekt.

 Getting Ready for Explosion
The Epicenter building is a reconstruction of the architectural monument – The Königsberg House of German Engineering Achievements erected in 1925 for holding the East German Fair. In Soviet times this building housed the Trading House Tsentralny. In December 2003 the majority interest in Tsentralny was purchased by BIN Bank at the investment tender. The 1.3522-ha plot was leased for 37 years and already by September 2006 the remodeling was completed.
A large adjacent territory allowed the developer to arrange its own parking and a nice square with six standalone advertising hoardings and benches for visitors. But there were some snags too. In particular, the guest car park failed to pass through the environmental check-up procedure on time and in autumn 2006 the District Office of Public Prosecutor brought two suits against the Baltic Investment Corporation, the customer of construction works. The first suit claimed prohibition on exploitation of the SC parking area, presumably straddling the urban creek. The second demanded that the developer should have made up for environmental damage to the city in view of unauthorized felling of five trees.
In the first project version a parking area under the pedestrianized area was lacking. Later on the City Hall demanded that the parking garage should be put underground and its space increased. The municipality’s second prescription was to finish off all walkways before the city jubilee. But the speed of getting essential documents in this case did not hang upon the developer: the environmental examination had not been conducted for more than half a year by that time because of reorganization of the regional Ministry of Natural Resources. In view of those circumstances the Office of Public Prosecutor did not suspend construction works but just warned the developer.
“SC Epicenter now has a paid above-ground car park. The central location ensures good access by public transport, and even congestion of the roads during the rush hours is not too critical,” Mr. Pechersky recapitulates.
Upon termination of construction works, three lower floors (12,247 sqm) were passed into possession of the investor, Kaliningrad Investment Corporation Ltd, or rather its subsidiary. The fourth 3,479-sqm floor is owned by the Trading House Tsentralny. The investor’s share in the 5,272-sqm public space nears 78%.
In the years to come the operating margin will grow with rental rates (by 5-8% a year, assume the experts of Paul’s Yard Kaliningrad, provided the occupancy rate remains at the level of 90% or higher). Epicenter’s landlord highly appreciated the consultancy’s successful operations, having awarded it the property management contract for eight years. The contract stipulates both for the facility management and control over financial flows.
Nevertheless many complain about the floor plans, which do not facilitate the management of human flows. Perhaps this has become the fate of most reconstructed buildings. “Epicenter’s blind alleys hamper normal navigation and searching for specific brands,” points out Mr. Pechersky.
“The project’s main challenge was that the reconstructed building had the status of architectural monument. The landlord was challenged to fit a modern-day retail-entertainment center into the historic facade,” comments Nina Tupiy. “Furthermore the complex’s original concept was wrong, so we had to carry out re-conception within the shortest time possible. Having surveyed the market of services offered by major competitors, we staked on average-income Kaliningrad families. A new pool of tenants was formed in line with the new concept. Food supermarkets, household equipment, children’s goods, a family leisure complex became the main anchors, while shoes, cosmetics and perfumery, books and stationery, computers, drugs and Britannica pub became mini-anchors. The shopping gallery was filled with small retailers (clothes, crockery, lingerie, souvenirs etc.). Services are mainly represented by cashing machines, currency exchange and payment terminals. We also involved such operators as City Bowling Ltd and the children’s fun system Star Galaxy to take care of family leisure. Coupled with Detsky Mir, the biggest regional children’s store, they are now the salt of Epicenter.
The average annuity per sqm of usable area is $276 (VAT inclusive). The most expensive sectors are accommodated on the first floor; their occupants have to stump up $1,800 per sqm.

Epicenter Caught in Whirlwind
The opening of Epicenter was accompanied by a tempestuous advertising campaign in local media. The tenants were also given ample opportunity to place their ads on indoor plasma panels and outdoor scrollers stationed in a cozy square in front of the Center.
Given that Epicenter’s target audience is middle-class Kaliningrad families with women accounting for three-fourth of the shoppers, it’s quite logical that foods, household equipment, children’s goods and family entertainments became major anchors. Bomba hypermarket is a new format devised by local Delta Ltd combining retail and small-wholesale trade. The electronics and household equipment supermarket Maximus owned by the same company became the 15th store of Kaliningrad’s leading chain in this segment. As for the brand and assortment of Detsky Mir, they were quite new to the city dwellers. Even competitors recognize the apparent conceptual advantages.
Since July this year an entertainment center with a bowling alley and a five-screen multiplex has been operating at the mall. More than 400 visitors can simultaneously watch movies – both in the five cinema halls and in a cinema bar. In September the children’s entertainment center Star Galaxy will be put into operation.
“The main principle underlying Epicenter’s concept is powerful anchors occupying considerable floor space complemented with versatile small tenants: this approach allows maximum diversification of the consumer basket, filling it with foods, household goods, books, clothes and shoes for children and adults,” says Ms. Tupiy. Outside observers are less optimistic, pointing to incompatibility of many brands. “With the coming of modern projects this property will most likely need repositioning and a change in the pooling of tenants.”, opines Mr. Pechersky.