Commercial Real Estate

Logistics parks or hubs are an essential component of national logistics chains and a top priority in many economies. The Russian industrial market, however, had a late start, and such large­scale logistics projects have yet to be developed in the country. Luckily, a number of warehouses are scheduled for delivery in the near future. Until then, the race for space continues.

Construction on logistics hubs or multimodal centers, many with areas of over one million sqm, has been a major trend in Western Europe for some 1015 years. A multimodal complex is more than just a handling terminal: it is a large distribution center. Its infrastructure may include warehousing and office functions, customsrelated services, refrigerated storerooms, freezing chambers, hazardous freight storage facilities, showrooms, car service and repair areas, public catering outlets, recreational facilities, etc. In the opinion of Maxim Shakirov, warehouse and industrial property director at Colliers International, infrastructural amenities at such distribution hubs may vary depending on location, business specificity and main objectives.

The industrial development of warehouses enables the consolidation of all freight flows in one place, which can minimize the handling time and widen the range of services. Handling cargoes delivered by all kinds of transport (motor, rail, air and water) is another important characteristic of a distribution hub. “The more transport flows converge in a hub, the more promising the latter is,” states Ruslan Suvorov, industrial and warehouse real estate director at Praedium.

No wonder that developers focus on project location. “Such properties must be situated in a strategically important point, such as near international airports, production clusters, seaports and at major interchanges,” Maxim Shakirov believes.

Jack of all trades

Why is a distribution hub so attractive to potential users? Because it offers its tenants a full range of logistic services due to a developed transportation infrastructure and vast industrial space. Since everything is concentrated in one place, handling and distribution operations are not very timeconsuming. Logistics parks enable motorrail cross dock operations and host customsrelated warehouse space to serve several logisticians at one time.

Tenants all over the world are also interested in light production services, such as VAD (valueadded services), which are presales commodity handling services (repacking, labeling, kitting, testing, picking, putting stickers and Russian manuals etc). “It does not pay to do this job at stores, as the latter would rather use the space needed for this type of operations for their core business, such as shopping,” opines Polina Vinokurova, PR and advertising expert at NLC. Large retail chains are interested in VAD services more than anybody else. It is also possible to offer assemblage services (another VAD variety) on distribution park grounds. For example, microcircuit chips for cellular phones are assembled at European logistics parks. To cut it short, logo­parks may host a multitude of functions. “A large logistics hub is a perfect shelter for both warehousing companies and manufacturing concerns in need of adjacent storage facilities,” comments Aleksei Grishko, commercial manager at Eurasia Logistic, “as they are not impeded by land shortages, infrastructural or social problems there.”

Social infrastructure is one of major concerns in such largescale projects. On the one hand, a logistics park may lie in close proximity to a large inhabited locality, which partially solves the labor problem. On the other hand, the complex itself can form a nucleus of an industrial district with advanced infrastructure and different recreational areas. “A 10,000sqm warehouse terminal is manned with 150200 personnel working in three shifts,” reasons Roman Burtsev, partner and industrial real estate director at Knight Frank. This figure increases by orders of magnitude at large logistics parks. According to most conservative estimations, about 25,000 employees will be needed to attend to 1 million sqm of warehouse space. This is a whole city in need of such infrastructural amenities as business centers, housing, recreational facilities and hotels to accommodate the constantly arriving experts.”

Britain’s Milton Keynes, home to Magna Park huge complex, which was developed by Gazeley in a joint venture with Land Securities, exemplifies such a project. “This hub comprises a great number of distribution centers offering their tenants different logistic, handling and transportation services,” says Polina Vinokurova. “Magna Park is one of the world’s biggest multimodal centers,” adds Vladimir Avdeev, partner of S.A.Ricci in association with King Sturge. “Its development became possible due to the unique urban infrastructure in Milton Keynes, officially founded in 1967.”

Development models

Experts have not come out with clear criteria for a multimodal hub yet. Its infrastructure and development model depend on numerous factors, such as main goals and objectives, national traffic patterns and a number of others. A multimodal logistics hub may result from a private initiative and have a strictly determined concept. But, on the other hand, a cluster of logistic properties that are owned by different landlords and become an outgrowth of burgeoning freight flows in the given location also can be a multimodal, Ruslan Suvorov notes.

As reported by Knight Frank, both public and private ventures may take the initiative of creating a multimodal center. For instance, in France, largescale logistics projects were initially developed by two private companies (one of them was taken over by American Prologis, while the other ran into financial problems and was nationalized). As a result, a mixed development model is more characteristic of France.

In Spain and Italy, logistics hubs were developed on public investments. Later on, private equity funds stepped in, but the government retained a stake in management companies. “A plain and effective scheme is generally used when a company is granted an industrial allotment. After that, parties must agree on property, land and income tax deductions and launch into development. This is the most common form of partnership between government and developer used to boost up logistics operations,” says Roman Burtsev.

Large intermodal centers (terminals handling containerized freights), characteristic of continental Europe, are missing in UK, where logistic projects were developed by private equity (even though originally it was the stateowned British Railways that had tackled intermodal warehousing terminals). After accession to EU, this company went into private hands. “Some form of government participation in creating logistics platforms has been a common practice and in this country it would be indispensable: too many factors are to be coordinated in one place and at one time. Projects of this scope imply bulky longterm investments,” concludes Mr. Burtsev.

Government support

Multimodal centers can also be integrated into a unified national logistics network, which would have a positive effect on trade and commodity turnover between Russia and its principal trade partners. Knight Frank’s experts assume that the emergence of multimodal hubs in Russia is just a matter of time, as it would be a natural development precipitated by the needs of the fast­growing market. The concept of such projects looks appealing to large investors, developers and tenants. “Smallscale production on the territory of logistics parks is the type of business highly developed in Europe,” says Roman Burtsev. “In Russia, however, only highprofile logistic operators are engaged in this business, and even they use mezzanine floors or dedicated warehouse areas for this purpose. It’s certainly easier for them to hand over this noncore business to outsourcing than to overtax their own industrial facilities. Those services will boom in a few years and even now many retailers and manufacturers of fast moving consumer goods request them.”

In experts’ opinion, both professionalism and allround government support are needed to implement multimodal projects with their unique performance and operation. Russian companies have only started tapping into the successful experience of their Western colleagues. “Unfortunately, our warehouse market develops spontaneously, slaving to the market demand, and Russian developers have not seriously contemplated a logistics center with its multiple services,” Mr. Burtsev points out.

In the opinion of Knight Frank’s experts, government support is one of the most important prerequisites for successful implementation of largescale logistic projects. Private business is unable to solve all problems involved in the development of largescale multimodal hubs contributing to effective operation of the entire national logistics network. Any developer is interested, above all, in the fastest possible return on investments and in risk minimization. And creating big logistics parks with their lengthy payoff periods is a risky undertaking. Rental rates are relatively low here compared to other commercial real estate sectors, while investments are rather sizeable. It takes 710 years for an average warehouse project to pay for itself, while the payback time for a large logistics park may extend to 1520 years. In Europe, the aggregate investment in such largescale projects comes to $34 billion on average, and Russian developers are not willing to stump up that much.

A development concept is yet another major problem: what to build and for whom? “A logistics park must have a clear and easily understandable development concept. Whenever it is available, developer has nothing to worry about. Such projects always find their tenants interested in the longterm partnership with a landlord,” states Mr. Burtsev.

The government can also chip in by allotting a parcel to be hooked up to all utilities or by creating other essential externalities, such as roads. It shouldn’t be forgotten that at least 50% of precious land (prices start from $50 per sqm in the Moscow region) in any warehouse project is reserved for heavy haulers’ parking and maneuvering. It’s difficult for a developer to stump up this pretty penny when he is just about to enter a project, and so the role of state cannot be overestimated.

Government involvement can also give renewed impetus to transport regeneration, including national railways, which are no longer adequate to the growing needs of private business. “Many developers try to allow for a branch line in their warehouses, but very few are aware that having a container terminal does not mean it will operate efficiently,” Roman Burtsev believes. Effective railway service largely hangs on the railroad monopoly. It is the Russian Railways that keeps trainhandling capacity at main terminals under control and sets all requisite limits. The decisions taken by this state monopoly are not quite transparent or predictable at present.

Points of growth

Large multimodal complexes with developed infrastructure can develop in the Moscow region on the basis of existing logistics parks. Experts cite that the delivery of the Central Ring Road may precipitate this process.

The local authorities are also interested. For example, the government of the Moscow region has already adopted a program of industrial districts to be formed before 2010.

Experts assume that a project implemented by Eurasia Logistic may turn into a large logistics hub with time. North Domodedovo industrial and logistics complex will reportedly provide 1.1 million sqm of Class A warehouse space and builttosuit storage facilities. It is known that Russian packaging materials manufacturer Multiflex will be among the major tenants at North Domodedovo. It is also known that Pepsi is going to build its biggest factory in Eastern Europe on North Domodedovo grounds.

“We develop Class A warehouse space and lease it,” says Aleksei Grishko. “The scope of construction activities lets our tenants to constantly build up their operations. Construction work is split into phases, which enables any given company to rent extra floor area with time. It’s noteworthy that various complementary functions will be realized within this project.”

“It’s hard to foresee whether North Domodedovo will eventually develop into a multimodal complex,” Mr. Burtsev adds. “The company carries forward interesting largescale projects that have ample preconditions for turning into multimodal centers, developer willing: the warehousing terminal’s close proximity to the international airport gives weighty grounds to such assumptions.”

“Projects centering on Domodedovo may evolve into some kind of logistics hub,” believes Ruslan Suvorov. “Capital Partners, Giffels and Eurasia Logistic have already launched their construction activities in this locality. Sheremetyevo where a great number of warehouses is concentrated shouldn’t be forgotten either. New logistics projects of different purposes and scope spring up one after another in that area.” Shushary district in the Petersburg region is another logistics and industrial cluster. Yet the illmatched development of this territory hinders its positioning as a large logistics hub, in expert opinion. Vladimir Avdeev does not see any projects of logistics hubs on the nationwide scale but he is positive that they will soon emerge. “Given the vast expanses of our native land the entire regions like Moscow and Petersburg might claim the role of distribution hubs,” says the expert. In the opinion of Maxim Shakirov, Moscow does not need a great number of big distribution centers. “The most effective alternative would be to provide distribution centers in all major Russian cities that would raise the cost efficiency of business operations.”

It should be noted that large multimodal hubs will most likely appear in the major national transshipment points of Moscow, Petersburg and Novosibirsk regions.