New or Refurbished?
Logistics services providers, manufacturers, retail chains and other companies generating demand for warehouse space, when deciding to invest money in building their own logistics complexes often consider rebuilding old existing warehouses. In which cases does rebuilding an old warehouse complex make financial sense, how much cheaper is it to modernize a building than to build from scratch, and which companies stand to benefit from this approach?
Starting with a clean slate
Nobody questions the fact that building from zero has numerous advantages. However, not all companies have the financial resources required for new construction, while at the same time it is not all that easy to find an appropriate site. In view of these considerations, developers often wonder whether it is worth rebuilding the market’s existing premises.
Construction of a new building is financially profitable for companies intending to service a large turnover of goods with maximum efficiency. Thus, the Pyaterochka chain, present in the Urals market, currently uses rented and purchased premises for warehousing, although in 2008 it plans to build a logistics distribution center in Yekaterinburg designed to be the transfer terminal of Pyaterochka goods for the entire Urals Federal District.
“Nowadays, building a modern logistics park must take into account numerous factors: the site’s location, proximity to main roads and convenient transport links, the availability of extensive grounds for heavy goods vehicles to be able to maneuver, the possibility of connecting to the infrastructure networks (power grid capacity to charge the generators that drive warehouse technology, construction of a boiler house, installing fire and security systems), etc.,” say experts at at National Logistics Company (NLC).
Reconstruction
It is often difficult when rebuilding to create the required conditions for a warehouse’s efficient operation with large goods turnover – the main parameters already exist and the contractor is obliged to plan the reconstruction around already existing features. In most cases, difficulties arise in relation to obtaining gas and electricity supplies; floors are not always appropriate for heavy loads; the surrounding territory may not be sufficient for convenient transport and parking of commercial vehicles. Furthermore, it is also not always possible to redesign the layout of internal premises.
At the same time, companies frequently don’t have a choice. The lack of suitable plots for construction and bureaucratic problems associated to formalizing ownership rights, often drive companies to agree to the alternative of reconstruction. “Because of the difficulties connected to finding appropriate sites, developers are starting to consider the possibility of modernizing existing buildings,” say specialist in the warehousing real estate department at DTZ. “Rebuilding old premises is a fast and often efficient way of satisfying immediate needs for warehousing space.”
The reconstruction process often precedes a building’s acquisition (an unfinished build, non-profile assets of a particular company, etc.) or the acquisition of the company itself, often close to bankruptcy. At the same time, the second option makes it possible to avoid the administrative difficulties encountered with formalizing land rights, receiving authorizing documentation, etc.
Adapting premises for the required purpose often requires considerable effort and the advice of a professional consultant. The specifics of Soviet construction fail to meet the standards required of modern warehousing premises at present. For this reason, the final volume of works can only be defined by analyzing each individual building. Characteristic features of a modern warehouse include: an even concrete floor with dustproof coating, with a loadbearing capacity of no less than 5 tons/sqm, at a level of 1.20 meters from the ground, high ceilings no lower than 10 meters, either without pillars or with a column span of no less than 9 meters, and a distance between bays of no less than 24 meters. Resolving these tasks is what takes the most time and financial effort.
Almost always reconstruction involves leveling the floors. Many manufacturing premises in fact do meet the requirements of class A premises in terms of ceiling height and column span. Often the fire alarm and extinction system needs to be refitted. Another stumbling block can be the issue of heating. Many industrial premises have no heating system.
Specialists recognize that often only the walls are retained under a reconstruction project, while the entire “filling” is installed anew.
To build or to rebuild?
Market analysts affirm that on average, rebuilding one square meter of warehousing can cost a company approximately $60–120 per 1 sqm, as opposed to $300–400 if building from zero (only the shell).
Another advantage of reconstruction is that the majority of old premises already have legalized documentation. This fact guards the owner against bureaucratic loopholes related to obtaining the necessary permits. Another important fact is that reconstruction takes far less time than new construction.
And yet another advantage is that many old complexes are already linked to the railroads. When building a warehouse from scratch, it is often difficult or altogether impossible to link it up to the railway system. One of the largest retail chains in Yekaterinburg – Kirovsky – bought part of a property belonging to Yekaterinburg’s dairy combine at an auction. According to Kirovsky Supermarket’s press secretary Olga Nagibina, the warehouse’s area is 1,200 sqm. One of the defining factors in deciding to buy the premises was the existence of the railway. The new owner bought loading technology and cosmetically refurbished the premises. “Here, we store large wholesale batches of goods, and for the remaining product assortment we use warehousing premises by our stores.” Another part of the dairy combine was bought by the food processing firm Khoroshy Vkus (Good Taste), and here at present, following reconstruction, the company has installed processing and warehousing premises.
Up until now, many cities in the Urals have industrial zones that are being remade into warehouse complexes. Understandably, large logistics operators are unlikely to be interested in such buildings given the difficulty for HGV access, their unsuitable layout and so forth; but for companies less concerned about the standard of premises used for storage (equipment manufacturers, raw materials suppliers, etc.,) they are perfectly suitable.
Market situation
At present, a significant percentage of the Soviet era’s industrial heritage is in private hands, although many owners do not have a precise idea of how to use their resources most efficiently. Market analysts suggest that a large proportion of the old manufacturing, industrial and military bases are used as warehouse premises; approximately 70% of warehouses are in such buildings and in factory workshops. In the 90s, the lack of warehouse premises was covered on account of these workshops, which attracted tenants due to their relative cheapness. At that time, they were used as buffer (reserve) storage and the levels of turnover were not intensive.
“In the last 2-3 years, within the boundaries of the Urals region there has been a stable growth in demand for class A warehousing premises,” notes Alexei Novikov, head of warehousing and industrial real estate and land at Knight Frank. “However, its share in the total volume of quality space is insignificant because local market players and medium retailers and manufacturers do not always understand how to make efficient use of class A warehouses.” Sometimes, their use is limited by the old warehouse technology employed by the company, he suggests. Precisely for this reason, quality warehouse premises in the Urals are mostly class B, comprising renovated buildings previously classified as class C, he clarifies.
Warehouse real estate analysts believe that rebuilt complexes will continue to offer for the next few years a reasonable solution for many companies that prefer to have “a bird in the hand.” However, in the near future we can expect the serious regional expansion of quality warehouse premises. For example, Yekaterinburg is to be included in the International Transport Corridor (MTK-2): Berlin–Warsaw–Moscow–Nizhny Novgorod–Yekaterinburg. This promotes conditions for establishing the infrastructure to ensure supply, storage, reloading and repackaging capabilities.
The city authorities have confirmed the project for the planned “International transport and logistics corridor” as part of the strategic plan for the city’s development entitled “System of modern transport and logistics centers,” which envisages the construction of well-developed terminals and warehouse infrastructure to satisfy demand for cargo storage, packaging and transportation. By 2010, the total area of warehousing premises in class A, B+ and B should grow from 50,000 sqm at present to 300,000 sqm. In addition, an impulse to developing the class A warehousing segment could be the active regional expansion of retail chains and logistics operators who are the main users of quality warehouse premises in the Urals’ region.