Commercial Real Estate

Built-to-suit construction will not become the dominant tendency on the warehousing market. Despite all the talk about its potential, the real deals being made out there can be counted on the fingers one hand. Even so, the first international developers specializing in the built-to suit model are already active on the Russian market.

This format is particularly useful and in-demand in the West for all forms of development. It is used by those companies that operate in the non-standard product groupings – furniture, pharmaceuticals, producers of goods for national consumption, and many others. In a word, it is the arena of those who require specialized warehouses and production spaces built especially by the developer for his particular business. The Russian development trends, however, don’t favor that sort of market player. Specialized warehouse complexes constructed by developers for specific contractors are simply very few right now.

One of the first deals in the built-to-suit scheme was completed in 2006. We remind the reader that BMW Russland Trading had signed agreements with RosEvroDevelopment to create a distribution center on the territory of logistical park, Krekshino. As the president of BMW Russland Trading, Christian Kramer, has noted, the warehouses and production capabilities of the auto company allow it to use a very flexible policy of optimizing the supply of spare parts available for regional auto dealers. It is well known that the automobile holding has been conducting conferences with several developers and that, obviously, RosEvroDevelopment has found opportunities to construct its facility according to the tenant’s demands.

Beside this basic reality, the national logistical component of RosEvroGroup constructed within the Odintsovsky district of Moscow a pharmaceutical warehouse for Sanofi-Aventis. On the territory of the warehouse there are cooling chambers and individual buildings for the storage of powerful medicines. Interestingly, the pharmaceutical company, Protek, constructed its specialized complex independently, not rushing to take advantage of the profiled developer’s services. They decided that the creation of a specialized logistical network to operate in all the largest Russian cities was easier than creating their own development structure.

There are still other examples of built-to-suit schemes in play. At the beginning of 2007, Eurasia Logistik announced the construction of a warehousing complex in the built-to-suit scheme for a producer of packaging materials called Multiflex. These areas will be constructed built-to-suit and will be operated on a long-term lease of 20 years. Still, Roman Burtsev, a partner and director of the land, warehousing, and industrial property department of Knight Frank, points out that the first properties of this format had appeared some time earlier, in the form of RosEvroDevelopment’s projects for the National Logistical Company, which was financed by RosEvroBank. The result of this collaboration was the Terminal Lesnoy, which Roman Burstev considers to be the first warehousing complex realized in the built-to-suit scheme.

Still one more project in the RosEvroGroup vein was created especially for NLK – the national logistical park Khimki, where a large zone of mezzanine storage has begun operation. Several years ago a group of private developers was formed by the warehousing complex, Viaro, for Tablogix and the general contractor, Stroyfaza. As Roman Burtsev has asserted, this was also a built-to-suit format. Far from every expert agrees that the format has potential. “It’s better to put it like this: developers are happy to meet with more attractive tenants but it’s really quite serious to make significant technical changes to a design,” assures Peter Zaritsky, deputy director of warehousing and industrial property for Jones Lang LaSalle. The examples include BMW in Krekshino, DHL on Pushkino logistical park, Westwaco, and Multifoods.

An Under-ripe Market

Today according to Igor Yegorov, the commercial director of industrial property for RosEvroDevelopment, the number of built-to-suit deals has no more than a 4 or 5% share today when looking at the overall number of warehouses. All the same, the specialized complexes are much larger. “A larger part is built by the company-clients themselves,” observes Igor Yegorov. “Our market is still not so developed that this tendency has gained much ground.”

Western experience has shown that developers start by claiming narrow market segments only after the overall saturation of a market, when demand is compared to supply and between warehousing there arises a real competitive struggle. This should not be the case here for a number of years, however. According to Peter Zaritsky, the imbalance of supply and demand will remain part of life until 2009 or 2010. Accordingly, until that time the rapid growth of built-to-suit property just won’t the developers. “While the general demand is still unsatisfied, this sort of specialization isn’t worth the effort,” explains Zaritsky.

With the rare exception, there is nothing but unified warehousing property with standard technical characteristics, though occasionally they are customized according to the demands of key tenants. This is a good strategy considering the overall situation on the undeveloped market. Constructing several successful warehousing complexes in Moscow and Saint Petersburg, developers have begun to develop their own speculative network projects in all the large Russian cities. Companies with non-standard demands are stuck between a rock and a hard place. They are required to construct their own warehouses and use the necessary resources, which are today quite difficult to coordinate in the environment of rising prices and land costs, or to get accustomed to the properties that the network developers are already putting into play.

“Experience shows that the large majority of companies are well suited by the standard warehousing complexes,” says Alexei Nikolaev, a specialist on work with commercial real estate at GVA Sawyer. “Additionally, working on a project during the earliest stages, they will be able to work out all the necessary corrections with the developer himself.”

In fact, built-to-suit projects are quite numerous according to Roman Burtsev, making up more than 50% of the area of speculative warehousing complexes. Several years ago the consulting companies already began to recommend that developers work out technical parameters for their warehousing complexes for the largest tenants.

As for the construction of specialized complexes on their own power, there are not so many companies taking that step. “These types of projects have indeed begun to thin out,” says Burtsev. “Today we see that many retailers once operating with these products independently are now trusting logistics to professional providers and focusing their own resources onto their own basic business. In the end, the construction projects will be slowed down only by the price of land.”

At the same time there are such companies working on the market for which specialized warehousing complexes are simply unnecessary. We can point out that they are currently the only users of the built-to-suit format. “The initiators of these deals are for the most part those companies with specific demands for the storage services or geographical solutions of their future warehouses,” says Peter Zaritsky. “They who have distinct development strategies several years in advance also fall into this category. They want to get what they need, rather than what they already see on the market. Sometimes the general contractor approaches the developer simply because he already has the land ready for the construction of the warehousing complex.”

Built to Suit Networks

It is worth pointing out that today there are numerous factors that encourage the growth of interest in the built-to-suit projects. Peter Zaritsky draws our attention to the growing demand seen among tenants: working in specialized complexes can be much simpler, as they are beginning to realize. According to Igor Yegorov, in the next 2-3 years, the number of similar projects will grow in connection with the growth of competition on the supply side, but with the wishes of proprietors.

It has become known that the consulting firm of Knight Frank is working with two international developers specializing in the built-to-suit format. For now their names are not being revealed, but Roman Burtsev confirms that they are currently conducting talks. On the whole, by his information, the realization of the project in the built-to-suit schematic is now being worked over by 10 companies in various cities throughout the Russian Federation.

Peter Zaritsky believes that the brightest example of built-to-suit property is the signing of Immo Industry Group’s specialized Eldorado contract for the construction of 35 thousand sqm of warehousing territory with a supplemental option for 15 thousand sqm. In this case we aren’t speaking about Russia, however – but about Kiev.

It is also understood that at the end of last year the Russian holding, Rostik Group, and the Belgian developer, Immo Industry, is working throughout Europe in the built-to-suit form, creating the joint enterprise, Immorosindustry, which, according to Igor Yegorov, will work with the development of this segment in Russia.