Commercial Real Estate

For a number of years, the most common type of warehousing real estate on the Russian market was the re-profiled factory shop – cold, dusty, and populated by loading dock workers in quilted jackets probably a little too thin to keep them warm. Such facilities are still in use today, of course, but now this segment of the warehousing market is in fact beginning to dwindle. In place of the old shops and air-raid shelters, a new wave of storage complexes is approaching – easier on the eyes both inside the property and outside as well.

The General Situation

The nature of warehousing real estate does not allow for extravagance, and for this reason the warehousing developer makes fewer attempts at bold self-expression than, for example, the developer of a business center – but a truly modern warehouse may still strike the imagination of the passerby. The latest logistical centers create the impression of elaborate mechanisms running precisely, the various wheels and cogs harmoniously coordinated to act in concert with one another. All around Moscow developers are constructing more and more such properties with ever increasing degrees of professionalism as tenants request more and more. Until recently, developers had felt no need to compete over the relatively limited revenue available in this relatively quiet market, but now as commodity circulation is growing, and with it the flood of cargo streaming through the capital, market players have no choice - the goods have to be kept somewhere and they have to be distributed.

As the large logistical centers are spreading, warehousing real estate is now developing no less rapidly than the retail or office sector. Growth in quantity and scale of the warehousing projects under construction confirms that warehousing is becoming far more attractive for investors and developers. Besides the obvious upswing in warehousing properties available for lease, a second important indicator of the market’s tangible development is the diversification of the logistical services available to tenants: improvements in quality and speed are making experimentation worth the trouble. In response to growing demand, the large logistical companies are widening the scope of their activities in the Moscow region, and occupying nearly half of high-quality warehousing real estate.

Nearly all of the warehousing property currently under construction in Moscow is already reserved. But despite the obvious lack of quality storage space, market experts observe the stabilization of leasing rates, linking this to recent supply increases, which have simultaneously acted to slow the market rush. The ongoing deficit of warehousing property has led to the construction of facilities designed to suit more and more specific needs, such as Evroset, El Dorado, Tekhosila, Nidan, and others.

A year ago, the Moscow Oblast’s municipal administration launched a program designed to improve “Development in the Transportation and Logistics System in the Moscow Oblast for the Years 2006 -2010,” proposing the construction of 60 transportation and logistics terminals, the result of which will be the concentration of European Russia’s shipping system around a hub area in Podmoskove.

The Supply

The majority of high-quality warehousing properties are located outside the limits of the MKAD. Generally, this is because these complexes require more space, not only for the warehouses themselves but also for other infrastructural elements, including wide pathways and loading areas for the trucks. The price of land in Moscow does not permit the realization of high-quality warehousing projects within the city itself, and therefore modern logistics centers must find space along the basic transportation arteries leading into the oblast. Until recently, locations along the northern highways have been most popular, specifically along the Leningradskii Shosse. But crowding in these ‘Leningradki’ has forced developers to search for new possibilities – thus, the most active development in warehouse construction has shifted to the south – to the Moskva-Don and Podolskoe highways. Just as the road north from Moscow leads to the Window on Europe, the southern routes naturally form the Window on Russia, and the distribution of warehousing here is a more rational arrangement for internal shipping.

The general supply of warehousing complexes in Moscow, according to Knight Frank, increased to over 7.5 million sqm by the end of the first half of 2007. Class A warehousing makes up 1.795 million sqm, and class B 1.52 million. The remaining warehouses belong to classes C or D. According to the data of Jones Lang LaSalle, the figure for class A properties is closer to 2.19 million sqm, while class B warehousing covers only 970 thousand sqm.

The first half of 2007 also saw the establishment of between 80 thousand sqm of new warehousing property (Colliers International) to 249 thousand sqm (Knight Frank.) The increase in supply was largely driven by class A facilities (see Table 1,) which dominated among warehousing complexes beginning operation as well as those still under construction. By the end of 2007, about 825 thousand sqm (Praedium) of new warehousing space will begin operation. Expectations for the remainder of the year are detailed in Table 2.

A majority of warehousing projects is completed in phases, allowing developers not only to use their funds and human resources more rationally, but also minimizing the risks inevitably linked to the operation of large projects. It must be noted that the scale of warehousing properties currently under construction in the Moscow region is continuing to grow – the opening of a space less than 500 thousand sqm is already a rarity. Among these giants, the standouts include:

•  Tomilino, positioned 6 km from the MKAD, between Ryazanskoe and Novoryazanskoe Shosse. The complex will cover 500 thousand sqm of warehousing, manufacturing, and office real estate by 2010.
• The logistics park, Domodedovo, established by Capital Partners in the Domodedovskii rayon of the Moscow Oblast. The complex covers more than 600 thousand sqm.
• The production and logistics complex, Severnoe Domodedovo, established by Evrazia Logistick on the trasse M4, 11 km from the MKAD. Construction is now being completed on the first phase of the project, which covers 374 thousand sqm. After the entire project’s completion in 2009, the complex will cover 1.1 million sqm.

At the beginning of 2007, a number of notable warehousing projects were announced for construction:

• The British fund, Raven Russia, cooperating with Turkish developer and logistical operator, EGL Holdings, will construct a logistical complex near the Sheremetevo Airport. The complex will cover nearly 55 thousand sqm. Raven Russia will ultimately purchase its partner’s share and become the sole owner of the property, though EGL will continue to rent 60% of the area.
• Raven Russia, cooperating with RDI Group, plans to construct a 100 thousand km warehousing complex on Kashirskoe Shosse, 9 km from the MKAD. The completion of the project’s first phase is anticipated at the end of 2008, while the second phase must also be ready for operation before summer of 2009.
• Raven Russia also declared plans to cooperate with Russian-Byelorussian construction company, Feliks, to create a 110 thousand logistical complex on Simferopolskoe Shosse in Klimovsk. Construction will be completed in the middle of 2009.
• The European Developer, Parkridge Holdings, has declared plans to invest more than a million dollars in the construction of warehousing facilities in Russia before 2011. By the end of 207, it will begin construction of a 150 thousand sqm warehousing complex on Leningradskoe shosse near to Sheremtevo, the first 40 thousand sqm phase of which will be completed in the fall of next year.
• The development company, MosCityGroup, plans to build a logistics complex called Eco Logistics 15 km from the MKAD on Kievskoe Shosse. The project’s total area will consist of 400 thousand sqm, and construction will be completed in 2009.

The Demand
The most remarkable aspect of the current demand situation in Moscow warehousing is the number of properties that have already found all their tenants before construction is completed. According to Cushman & Wakefield Stiles & Riabokobylko, this is the case with nearly 95% of high-quality real estate. Colliers International points out that there is an unsatisfied demand for as much as 1.5 million sqm of class A warehousing property, and a serious deficit of specialized warehousing, such as refrigerated spaces or pharmaceutical storage. Despite the active construction of logistical complexes all around Moscow, the recent deficit in quality warehousing is not going to be solved soon – the arrival and expansion of new market players has caused demand to grow far faster than supply. According to GVA Sawyer, the amount of available Class A property for new tenants is only 0.5% of what is needed, with Class B property not faring much better at a mere 3%.
Jones Lang LaSalle suggests that the companies calling for this quality warehousing property predominantly include logistical operators (40% in the first half of 2007) and retail and distribution companies (30% over this same period.)
Knight Frank points out that a majority of warehousing operators now use facilities from 2 to 5 thousand sqm, or larger spaces more than 10 thousand sqm. Experts at Jones Lang La Salle conclude that developers of Class A warehousing complexes seldom offer areas less than 5 thousand sqm for lease, due to design complexities – for example, the obligatory individual access points for every tenant.
Experts point out that investors continue to demand warehousing property, even though there has been a dip in this sector’s level of yield, just as there has been in every segment of real estate. Data from Cushman & Wakefield Stiles & Riabokobylko suggests that the average profit margin in the warehousing real estate sector is between 9 and 9.5%.
After a number of large investment agreements in 2006, the completed properties of investment quality offered for sale on the market are now exhausted, and now international investors like Raven Russia are searching out new ways to enter the market, participating in development plans themselves and cooperating more closely with Russian companies.

The Rates
According to GVA Sawyer’s data for the first half of 2007, basic leasing rates practically remained unchanged, ranging from $115 to $140 per sqm annually (triple net) in a warehouse of class A quality, and from $90 to $100 per sqm annually for class B. Operational expenses ranged from $25 to $35 per sqm annually. Smart Logistic Group (SLG) notes that logistical complexes often sublet properties purchased wholesale from their former proprietors, and in such circumstances prices may reach as much as $200-$210 per sqm annually for a thousand sqm of ordinary warehousing property, or from $230 to 250 for storage of medical or excisable goods, not including VAT or communal payments.
On the whole, market experts acknowledge that leasing rates are stabilizing for high-quality warehousing, thanks to the arrival on the market of a considerable amount of new property. It should be noted that leasing rates play a considerable role in market organization, as do projects still awaiting operation, since these properties enter the market almost immediately after construction begins and make up a basic mass of the supply available to tenants. As regards security services, according to SLG, the value of security services offered by logistical operators depends on the storage volume, type of storage, and other factors, with an average pallet area costing between $0.50 and $0.70 per day without VAT, with loading and unloading work costing between $2-3 for an average pallet area. Processing fees may cost from $40-50 for ordering a similar pallet area.
The average sales price for high-quality warehousing property, according to Praedium, is approximately $1400−1500 for a sqm. This is clearly indicative of the lamentable dearth of class A and class B property on the market. The cost of construction for this type of real estate is approximately $700 per sqm, not including the cost of the land or external communication, says Cushman & Wakefield Stiles & Riabokobylko.

• Tendencies
• Class A is beginning to dominate the supply of warehousing property, both among existing facilities and those currently under construction or announced for construction;
• The gap between demand and supply of quality warehousing is beginning to dwindle, thanks to the stabilization of leasing rates;
• The entry into the market by a large quantity of high quality projects is heating up competition;
• In conditions of economic stability, companies are trying to cooperate with one another for more long-term gains, as expressed by the lengthening of warehousing contract terms to 8 to 10 years.
• The related tendency, toward larger-scale warehouses and larger orders on the part of tenants, is also continuing.

The Prognosis
Despite the large quantity of warehousing area ready for operation, market experts do not expect the warehousing sector to reach market saturation until 2009. If the favorable economic situation observed currently in the country continues, there will naturally be more growth among modern logistics centers and all the projects currently under construction or announced for construction will find tenants. Traditional delays in construction will prolong the deficit. The level of vacant property seen in recent years will be kept to a minimum. Market experts do not expect leasing rates to stabilize significantly, pointing out that they could very well grow, in fact, with the increased value of projects currently under construction. Interest among in investors will bring in more and more capital and, as a result, reduce the rates of capitalization.