Market Know-How: Warehouse Classification Failure

In the meantime, no agreement has yet been reached between the newly arrived consumers of warehouse services and experienced market insiders with regard to the classification of warehouse properties. The report that Swiss Realty Group (Moscow) has come up with its own classification system has aroused a lot of interest on the warehouse property market.

In September the company hosted a round table discussion, where leading developers and logistics operators engaged in heated debates. Recognizing the expediency of such a classification, the participants, nonetheless, questioned certain provisions of the paper presented by Swiss Realty Group and the criteria it was based on.

To the great astonishment of the companies involved in the September gathering, press-releases distributed after the event read that the “classification had been discussed and adopted”. Moreover, the document had never been discussed with the international consulting agencies – Moscow representatives of the so-called Big Four.

The Importance of Being Classified

When asked by Vedomosti why no rival companies had taken part in the round table discussion of warehouse classifications – as was the case with office space classification – Ilya Shershnev, development director of Swiss Realty Group, noted that no official invitations had been sent out to them; moreover, he said, today there are only three companies whose opinion is of interest to him.

One of those is Knight Frank, a direct rival that controls some 90 per cent of the warehouse property market. Others, says Shershnev, are unlikely to be ready to discuss the issue because of a lack of competent experts, a situation brought about by the high turnover of staff.

At the same time, the absence of “in-depth theorists” meant the discussion proved more dynamic, with no lobbying of personal interests: “Even the knowledge of the invited experts proved excessive, which led to attempts to get an understanding of the process, sometimes more detailed than was necessary,” says Shershnev.

“After all, the classification under discussion was supposed to be a standard document of general nature, reflecting all the market requirements. We are ready to see that document re-worked in the future, and with the participation of rival companies.”

One of the new criteria for classifying warehouse properties proposed in the document is the date of construction. Swiss Realty Group suggests that the A1 class space should include modern properties built no later than 1994 for warehouse purposes. Usually, the A1 group includes newly-built properties only.

Warehouses must be situated close to major motorways and adapted for any kind of storage, under conditions of a high turnover of goods.

As was stated in a description of the classes distributed to all the participants of the round table talks after it became clear that the classification had not yet been “adopted” and more amendments were possible, the minimum requirements a property should meet to be rated in the A1 class are as follows:

- a single-story building with bay spacing of 12 to 24 meters and ceilings up to 16 meters high

- smooth concrete floor with polymeric coating; floor load up to 15 tons/sqm

- one loading gate per 1,000sqm of warehouse space, equipped with hydraulic rams and dock shelters

- heating

- year of construction – beginning mid-1990s

- location – within 40 km of the city, direct link to major motorways

- adjacent premises – utilities, internal driveways, parking areas, areas for maneuvering, greenery – not less than 40 per cent of the entire territory of the warehousing complex.

Class A2 may include warehouse and industrial facilities built 20-30 years ago, provided they have undergone a major overhaul, with the use of modern materials and technology. Their characteristics are almost similar to those of the A1 properties, with the exception that they can be located within the city limits, in industrial zones.

Class B, C and D properties fail to meet some or all of the above stated requirements – some may have inconvenient road links, others require modernization or reconstruction of premises and equipment; still others, such as the class D warehouses, situated in basement facilities or in old garages, may fail to meet any standards whatsoever, which makes it more worthwhile to just demolish them and build new premises instead.

Swiss Realty Group experts believe the proposed classification is unlikely to downgrade the high ratings of any of the newly built warehouse facilities, or influence rental rates. Moreover, rates are not even cited as a criterion for classification.

In the opinion of Ilya Shershnev, today the demand is overheating, rental rates are soaring, but this does not scare off clients -- they are still ready to pay. The classification, proposed by his company in a bid to seriously vie with other realty firms involved in the warehouse sector, is aimed at assessing the actual size of the market, to offer a new instrument for its analysis. Practically none of the warehouse market’s reports today is comprehensive or completely reliable, Swiss Realty Group told the news conference.

Chain Reaction – the Big Four

However, good intentions do not always lead to positive results. Judging by the comments of the round table participants and direct rivals of Swiss Realty, not all of them welcomed the company’s classification imitative.

Interestingly, the Big Four companies responded to the report of the warehouse properties classification being drawn up in their absence more calmly than most others – possibly, because not all of them consider the warehouse sector a priority.

According to Yulia Nikulicheva, senior analyst with Jones Land LaSalle, a warehouse property classification already exists – apparently, a variant proposed by Knight Frank (formerly PMC) and adopted in the late 1990s – but the warehouse market is not yet sufficiently developed to calculate high-class properties.

Aleskandr Frolo, a warehouse property consultant with Stiles & Riabokobylko, noted diplomatically that just as the criteria for office space classification were adopted by the Moscow Research Forum, warehouse property classification should be prepared jointly, with all the leading realtors involved. The head of the company, Sergei Riabokobylko, abstained from comment on the issue.

In the opinion of Darrell Stanaford, senior director of corporate and industrial services at Noble Gibbons, all the market participants must be involved in the work on the system of classification. One has to keep in mind that in Russia potential tenants and buyers of class A warehouse properties trust their own eyes rather than classifications and prefer to inspect the sites personally, as otherwise they risk coming into possession of the ‘wrong’ warehouse.

Ruben Alchudzhyan, director of the warehouse department at Colliers International, believes any classification to be inexpedient. It is too early to do this, he says. The high-class warehouse sector, in which Colliers International is involved, is not yet filled with good properties for any such classification to make sense. As to the lower class properties, those are of little interest to realtors as they will gradually all disappear from the market.

The Knights of the Round Table

Even Knight Frank, represented by Swiss Realty as a partner, if not an ally, and several developers who took part in the discussion were quite critical of the proposed classification. The document in many aspects fails to conform to the state of affairs on the market and altogether requires re-working, claim Knight Frank experts.

The criteria set for the classification of all the categories contain mistakes – as regards to the height of the ceiling, floor load, bay spacing, etc. In accordance with the Swiss Realty Group classification, the territory adjacent to a class A warehouse building must account for at least 40 per cent of the entire territory of the warehousing complex, as compared to a 50-55 per cent requirement set by the realtors operating in the sector.

The proposed document falls short of indicating requirements such as 1.2-m elevated floors (class A), a professional property manager operating the site, etc. Another blunder was to link classification to year of construction and to suggest that reconstructed promises could be rated as class A, say Knight Frank experts.

As a result of the discussion Knight Frank came up with its own version of a single classification, prepared on the basis of Russian and international companies’ experience, and proposed another round table and interactive discussion of the draft. Knight Frank has invited all the companies concerned – not only developers but also realtors, logistics operators and management companies – to participate in the talks.

It is high time to adopt a generally accepted criteria for the classification of warehouse properties, noted Andrei Podgorny, commercial director at RosEvroDevelopment. In his opinion, at least five leading realtors should take part in this work, and Swiss Realty Group is not on that list.

Oleg Pozdnyakov, marketing manager with logistics company REVIKO, says that not only classification of warehouse properties but also that of related warehousing services is necessary.

Practically every developer has challenged the Swiss Realty classification. Alla Laoz, CIS marketing manager at FM Logistics, believes that proximity to Moscow plays no role for class A warehouses – the building can be 30 or even 70 km away from the city, as long as it is high quality.

Yuri Zarubin, development manager with Bouyguesstroi, and Aleksandr Fedotov, marketing manager at National Logistics Company, also called for a re-working and discussion of the warehouse property classification. The latter believes that the groundwork already laid is quite sufficient, but an official document ought to be discussed jointly with all the key market players and realtors.

Marina Mazur, marketing director at Kulon company suggests that the classification should take into account the opinions of tenants. Practically any building, as long it is not a poorly located steel hangar, can be rated as a class A property, she says. Clients attach much more importance to transport availability and a convenient location – not more than two turns away from the motorway – than to the construction characteristics of the building itself.

Tenants are ready to do without office facilities, 10-meter high ceilings – as excessive space is rarely used but must be paid for – but not without zones for maneuvering and a temperature regime. There is practically no need for rail links, used, perhaps, only by Russian companies supplying goods to the regions; foreign tenants have virtually no need for rail links.

Computerized Storage System Corp. – a company, specializing in the sales of warehouse equipment – that also took part in the round table discussion initiated by Swiss Realty is not very optimistic either: “We would rather not be involved in the squabble, but all those agencies are not in the least bit professional in their approach to the problem. A warehouse should not be regarded merely as a real estate property; it is not just a complex of buildings but a product, with a set of functions. Even a warehouse built in 2004 could fail to comply.”

For her part, Alla Solovyova, head of the warehousing network construction project for the RLS group, notes that such a negative response by market participants to the classification attempt is just one of a great number of opinions on the issue, formed as a result of certain publications in the media.

One has to understand that the alignment of forces among real estate agencies is changing; some firms are moving out of the warehouse sector, others have only just arrived on the market, and still others control the lion’s share of the market, like Knight Frank, whose share, according to Vedomosti sources, stands at some 70 per cent of the class A and B properties. In the first half of 2004 the company leased out some 70,000sqm of warehouse space. Now that Swiss Realty has submitted its draft, it is necessary to convey it to a wider audience, following a thorough discussion and an actual adoption.

“We welcome the creation of additional instruments for the valuation of real estate. But in addition to the new classification there are at least three more similar classifications effective on the market, and each of those is used separately, having been created for the convenience of their authors. Like any independent product, each of those differs from the others and from the standards adopted in the West,” says Sergei Modestov, commercial real estate and development director at Miel-Nedvizhimost.

“But blindly applying Western standards to the Russian market would be wrong as domestic warehouse facilities differ fundamentally from European warehouses in terms of their characteristics, that is why some new principles have to be adopted and every market participant has the right to his own opinion.

“Besides, any classification in such a dynamic sector as the warehouse properties market segment will have to be revised at least once every two years, as new warehouses will emerge and new operators, setting higher standards, will arrive on the market.”

Unlike most developers and logistics operators, design companies treat Swiss Realty’s initiative with certain caution. Executive director of Inter Bar Code Ltd. Aleksandr Maksimovsky believes that such a classification is just a set of tools for realtors to valuate properties in such a manner as they consider convenient, and to sell them more cheaply or more expensively.

Some of the proposals made by Inter Bar Code Ltd, a company involved in designing warehouses for specific clients, never received any response from the organizers [of the round table] to their proposal to introduce a system of comparative assessment that would help to take into consideration the clients’ requirements as regards to managing the movement of goods. Besides, the company criticized certain numerical characteristics proposed by Swiss Realty.

The floor load of 4 tons per square meter, as proposed in the initial draft by Swiss Realty is too small, because in reality it can exceed a load of 15 tons per square meter.

In the opinion of Maksimovsky, the classification must be based not only on general technical parameters but also take into account the requirements of concrete customers, the nature of their business and turnover of goods.

Such a complicated task should be tackled by a large group of specialists under the aegis of the Coordination Council for Logistics, or the Institute for Goods Movement and Wholesale Market Research (ITKOR). ITKOR experts also agree that by elaborating its classification of warehouse properties Swiss Realty Group was guided by its own interests, not by those of the entire market.

As the document submitted for discussion at the round table had not been discussed with other market participants, they have now failed to work out an agreement on the issue, says Yrysbek Tashbayev, ITKOR development director. If Knight Frank comes up with its own version of classification – which has already happened – an independent professional organization should be invited to review all the existing proposals.

Swiss Realty Group experts say they had anticipated such a response from their rivals. “When people are not the first to do something, they often believe that what is done is wrong. We do not maintain that our classification is the only correct one; it will be examined more than once by market participants in the future.”

Maria Kryukova, Swiss Realty Group’s public relations manager, says that although the company is open for dialogue it still has not received any calls following the news conference. On the other hand, Knight Frank says it has never received any official invitation from Swiss Realty Group and learned of its proposals from the media only after the conference where the classification system was presented.

Classification – Attack on New Warehouses?

Perhaps, when the companies operating on the warehouse property market do eventually come up with a final version of their classification, they will be able to put it into practice.

For the time being, there are practically no vacant properties on the market that could be classified. Before building a new warehouse investors usually seek to clinch preliminary agreements with future tenants, primarily, with FMCG giants and major logistics operators, explains Andrei Patrushev, PR-director at Knight Frank.

Roman Burtsev, head of the industrial real estate department at Knight Frank, says that there are practically no vacant properties on the market because all the properties are being built for specific clients under the ‘build-to-suit’ schemes.

Today some 500,000sqm of commercial class A warehouse space is leased or used for storage services, according to the National Logistics Company. Logistics operators occupy some 80 per cent of those facilities. As regards to class B warehouses, expert opinion varies, but NLC estimates their size at about 2-2.5 million square meters. The total space of class B and C warehouses amounts to some 3-4 million square meters of which approximately 35 per cent are considered vacant.

23 warehouse construction projects are currently under way, of which the smallest one will have a space of 10,000sqm, while the largest one, erected in Tomilino near the town of Lubertsy within 6 km of the Moscow Ring Road (MKAD), will be 500,000sqm (source: Knight Frank). By the end of this year the second phase of the NLK-Khimki logistics park, of 50,000sqm, is to be commissioned at Leningradskoye Shosse, 7 km from the MKAD. The first phase -- of 30,000sqm -- was opened earlier this year in March. The total investment in that project is estimated at some $50 million.

Another logistics operator – French company FM Logistic – is now completing construction of a 70,000-sqm warehouse in the town of Chekhov.

The first 50,000-sqm phase of the giant class A warehouse complex Logopark in Novoryazanskoye Shosse, 3 km from the MKAD, is to be commissioned by the end of 2005, according to Stiles & Riabokobylko. Logopark is a joint project by agricultural producer Belaya Dacha and French building giant Bouygues Construction. The first phase will include two buildings of 18,000 and 38,000sqm. Later on, the space of Logopark may expand to 250,000-300,000sqm, say NLC experts.

Under one of the largest deals of late, according to Knight Frank, the company Tablogix rented two warehouses – a 10,000-sqm property in Shchelkovo and a 38,000-sqm warehouse in Dzerzhinsky. At the same time, Tablogix will have to vacate some of the facilities it rented earlier.

Another class A retail and industrial complex, the 25,000-sqm Sherland, has opened in immediate proximity to Sheremetievo Airport. A 10,000-sqm warehouse has been built and commissioned for Gradient, a company in the town of Vidnoye. The largest deal brokered by Colliers International is the lease of a 30,000-sqm property at Tekhnopark, in Klimovsk, to Adidas.

Several new warehouses are to be commissioned in early 2005. One of those – a class A 30,000-sqm property, worth $17 million – is being erected by BEL Development. Kulon’s new project is the Kulon-Baltia warehouse complex along the highly popular Novorizhskoye highway.

By early 2005 the company is to commission 23,000sqm of warehouse facilities and 3,000sqm of office space, says Kulon’s Marina Mazur. Another project of the company, Kulon-Istra –to be built on a 35-hectare site on Novorizhskoye Shosse, 40 km from Moscow – has yet to receive approval from the authorities. The new complex will include premises for leasing, as well as build-to-suit industrial facilities.

Market specialists are looking forward to several new projects that will be launched in 2005. They are the first phase of the Domodedovo industrial park (on the Moscow-Don motorway) with 38,500sqm of industrial and warehouse facilities, and the Northpoint project of AIG Lincoln on the Altufyevskoye highway near the MKAD.