Warehouses – Signs of Green Shoots

The business community is chanting in unison that the main trend today is market recovery. This proposition seems to be corroborated by a growing demand from the tenants of storage facilities. Vacant areas are rapidly dwindling. The absorption of warehousing areas was rather high in 2010; other positive market dynamics included the fixing of rental rates at a certain level and increasing the size of an average rented unit. “Concurrently a trend towards construction of build-to-suit, customized industrial and warehousing projects is also picking up. The supply has swelled in the segment of industrial parks where plots of land with ready-to-use utility lines are put up for sale,” notes Vitaly Antonov, General Director of Espro Development.
According to Knight Frank, the pace of new development has slowed down dramatically: the accrued new supply in 2010 amounted only to 450,000 sqm of quality warehouse premises – down 40% against the new supply in 2009. In 2011 the rates of new warehouse space delivery won’t notably change. For all that, the market absorption in 2010 may have reach 700,000–750,000 sq m, which is comparable to the showing of 2009.
A positive market trend is the emergence of investment deals which for now are not so numerous, though. Here are the most remarkable ones:
The Austrian fund Immofinanz sold a block of warehouse space (53,000 sq m) at the Tomilino logistics terminal to Sberbank for $39 million; the selling price is estimated to be much lower than the asset market value. As reported by Immofinanz, this transaction was part of the company’s debt restructuring scheme.
It became known in late summer of 2010 that Raven Russia sold the 28,000-sqm logistics complex Baltia situated on Novorizhskoe Highway, 7 km past the Moscow Ring Road (MKAD), to Cyprus-based Casebre Holdings Limited for $42 million.
Mirland Development Corporation plans to build a 150,000-sqm Grade A warehouse complex in the Saratov region. The German investor and developer SIF&B announced its intention to invest more than 1 billion euro in the project of an industrial logistics park in the Kaluga region.
Tenants also become more interested in buying warehouses for their own needs to be less dependent on fluctuations of rental rates. However, the lack of liquid offers on the warehouse market is the main reason why these intentions are seldom converted to real deals. “Landlords prefer lease to sale and are not prone to split large lots which do not rouse any interest of potential buyers,” notes Vera Boykova, spearheading the client relations department at ASTERA.

What’s next?
The key trend of next year will be the reduction of vacancy rates. According to Knight Frank, under the current pace of warehouse construction and absorption the vacancy rate in warehouse complexes will sink down to 5.5–6.0% towards the end of 2011. Mr. Antonov stakes on the vacancy level of 7–8%. “Against the backdrop of a slow construction pace this parameter will continue a downward slide. Big deals are also cut, which is very important for the market at large. Thus Arconada leased 32,000 sqm in A-Terminal and Central Division Co. leased 16,000 sqm in the industrial park Vostochny,” he illustrates.
The situation will look like this: the market will keep on growing, an increasing number of tenants interested in new spaces will appear; however, very little space will be delivered to the market. An overwhelming majority of developers will be stabilizing their portfolios and waiting for the cap rate growth. “The year 2011 will be the year of landlord on the Moscow warehousing real estate market, which means the market will be short of storage premises, especially for large tenants. It won’t be easy for the latter to find properties that meet their requirements and to negotiate the terms of lease for the available areas,” knows Alla Soloviova, Executive Director of MLP.
She projects demand at least at the level of 700,000 sq m, supply (including the commissioning of new areas) – at the level of 50% of the demand, vacancy rates not exceeding 5% and rental rates at the level of $120–125/sqm/year (triple net).
“The base ‘triple net’ rates for class A warehouses in the Moscow region will most likely keep within the $110-115 range in Q1 of 2011, since there is a certain reserve of vacant storage facilities. For now it’s not clear what may happen in the Moscow region in Q2, since to date the Moscow City Council has not developed any clear stance in relation to warehousing real estate in the city of Moscow, says Vladimir Yelin, Board Chairman of Smart Logistic Group (SLG). Chris van Riet, CEO of Giffels Management, brings up the issue of a new development cycle with rental rates rising to the level whereby the financing of new construction projects would become expedient, i.e., about $130–140 per sqm of quality class A warehouse premises.
“I’d like to note changes in the structure of demand for warehousing real estate. Thus warehousing real estate is in highest demand among retailers and distributors; the demand of logistics companies has almost doubled and yet not aligned with pre-crisis figures. This is a proof that positive dynamics on the warehousing real estate market is gathering momentum and that prerequisites are being formed for the demand to grow further in 2011,” Mr. Antonov opines.

Build-to-suit projects are the only ones that make sense
Because the market has not yet demonstrated its ability to absorb areas at an acceptable level of rental rates, investments in speculative projects will remain negligible. As noted by Antonov, no big projects have been announced for the year 2011. This point of view is shared by Alla Soloviova who thinks that the delivery of new areas will be so scanty that the market won’t even notice it. “Large areas won’t be brought out to the market in this segment any time soon. Frozen projects will remain frozen. At the present moment none of the developers plan large-scale construction. The rates of project delivery, which have notably slowed down under the influence of the world recession, will remain at the same level in the nearest future,” agrees Ms. Boykova. Given the dearth of warehousing areas and the lack of speculative projects, build-to-suit projects will most likely fill the gap. “Talking about the prospects for 2011 and 2012, the construction of build-to-suit customized warehouse projects will prevail during this period for one plain reason: because of a longer payback period of construction projects, investors will start looking more soberly on this sector,” comments Mr. Yelin. The Russian version of build-to-suit projects has certain specificity.
The classical build-to-suit is about the construction of projects meant for a certain industry or sector – e.g. storehouses for liqueurs or pharmaceuticals. However this construction is possible only when clearly specified standards exist for facilities, meeting the needs of any particular industry. A grounded forecast of demand for merchandise in any particular sector is of no lesser importance. Such forecasts do exist in the West and they allow developers to confidently assess the prospects of such projects. In Russia, where it is next to impossible to forecast the demand dynamics, the construction of tailor-mase warehouses to meet the requirements of a particular industry or sector can be fraught with the freezing of invested funds. “In the Russian realities the build-to-suit format is realized as construction of a project geared towards the needs of the end user or customer. Such a project is based on a specific technical assignment and this gives certainty to the developer that a given project will be in demand. But in case this tenant abandons such a project upon expiry of the lease agreement, the future fate of this customized premise is rather obscure,” notes Boykova. Yet she assumes that even with these risks it is this version of the build-to-suit format that will see further development both in Saint Petersburg and across Russia in the area of industrial real estate development.
Unless the trend towards the slow recovery of global economy is reversed, the warehouse market will continue its upward climb in the year to come. Next year developers will gather strength and probably solve their problems with project financing, at last. Very few industrial projects will hit the market, if any at all. On the other hand, quite a few new projects will be announced.