View From Within: Evolution of Cellars

“A cold storage is a property where temperatures are kept below the environmental level. Such facilities are designed for storage of perishable foodstuffs,” says Ruslan Suvorov, head of warehouse and industrial real estate at Praedium. Sofia Marlen, consultant at S. A. Ricci / King Sturge, says: “Given the shortage of prime cold storages and, as a consequence, improper storage of goods you can often see frostbitten potatoes in grocery shops, as well as bad fish or fruit and vegetable that are no longer a source of vitamins.”

History of Cooling

Low temperature storages can hardly be called an invention of recent years. “They appeared quite a long time ago and were originally defined as cellars. Ordinary storages were known as barns in those times. Construction of cold storages became possible after industrial cooling systems had appeared in the early 20th century,” says Ilya Shershnev, development director at Swiss Realty Group. Unheated warehouses are sometimes referred to as cold storages here, Andrei Zhamkin, senior commercial real estate analyst at Blackwood, says.

“Cold storages as we see them today emerged in Russia about 90 years ago. At least, that was when the first-ever cold storage facility was launched in Russia. Originally they were utilized for storage of goods that required special temperature regime - foods and pharmaceuticals,” says Yuri Taranenko, commercial real estate consultant at Miel Nedvizhimost realty.

Sofia Marlen adds that low temperature storages first appeared in Russia in 1932, while first refrigerating plants built in Mocow are Pervy Khladokombinat (First Cold Storage) and Portovy Khladokombinat (Port Cold Storage). Those projects were necessitated by the need to provide reserves of frozen foods for large regions of Russia. In those days frozen foods included meats, fish, processed dairy products such as cheeses, butter and cottage cheese, and some other foodstuffs. Refrigerating units were also necessary for storing exported short-life goods and imported goods.

“In Russia, low temperature storages are to be found chiefly in ports of Kaliningrad, St. Petersburg, Murmansk, Arkhangelsk, Nakhodka, Vladivostok and Novosibirsk. The choice of location is predetermined by transport routes for imported and domestic goods and convenient logistics conditions of those regions,” Sofia Marlen says.

Nowadays, each Russian region stores 10,000 to 20,000 tons of frozen foods, according to expert estimates. The capacity of old Soviet-era refrigerating units is clearly insufficient for such quantities of goods, and each year the shortage of cool storage spaces grows even more acute. “Moscow is no exception, the shortage of vacant storages for frozen has been increasingly acute, after the city’s oldest refrigerating units – the First and Third cold storages – closed down, while the 5th and 6th combines suspended operations pending redevelopment,” Sofia Marlen notes.

Moreover, existing cold storages fail to meet modern logistics standards. Practically all of them are multi-storied developments, with lifts using which significantly increases the duration of cargo operations, and hence leads to delays in transportation and extra costs. It is natural that in these circumstances there is an increased demand for construction of new cold storages meeting modern requirements.

New Requirements

Modern refrigerator warehouses differ greatly from cellars and cold storages of the first half of the 20th century. “Cold storage implies maintenance of a certain temperature regime, different from environmental levels. Those are specialized structures, devoid of heating systems, with refrigerating equipment put in. Those properties are used primarily for storage of all sorts of foodstuffs. Depending on the type of goods stored there the facility must to provide a certain temperature regime,” says Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global.

“Refrigerating equipment as such takes up about 25% of the entire property although recent developments allow more efficient use of spaces," Shershnev reports. Suvorov notes that cold storages fall into two categories – refrigerators and freezing plants. “Refrigerating plants maintain higher temperatures, of 2 to 4 degrees Celsius, while in freezers temperatures are lower and fall down to minus 24 degrees Celsius. Warehouses usually provide both.

“A low temperature warehouse may comprise a freezing unit, a cooler, loading and segregating bays,” Maxim Shakirov, head of warehouse and industrial real estate at Colliers International, says. These storages operate round-the-clock, he says.

Goods are brought inside in pallets, or special metal trays, from trucks or refrigerator cars. The movement of pallets inside a freezing unit is fully automated, monitored by an automated control system.

The height of the warehouse property must not be below 10 meters or over 36 meters.

“For the purposes of storing fruit and vegetables storages are raised where storage units along with temperature and humidity regime maintain a certain composition of air – a controlled environment with increased nitrogen or carbon dioxide content, in order to ensure longer shelf life, improve quality of foods and reduce storage loss," Zhamkin adds.

Logistics requirements warehouses are to meet are no less stringent. “Low temperature storage facilities in Moscow Region are usually located no farther than 10 to 15kmd from Moscow's outer ring road (MKAD), in industrial zones. Those projects require convenient approach roads, a sufficient number of loading bays and a rail link. Moreover, certain foods, such as frozen fish transported chiefly from Murmansk and Vladivostok, are transported mainly by rail," Shakirov adds.

Additional special features depend on the type of goods stored and specific industry requirements. “Cold storages are quite widely used in Russia, especially in the wake of grocery retail growth. Distributors seek to meet the increasing demand for frequently imported foods, which must be stored in refrigerators or freezers. Pharmaceutical and medical firms also generate demand for cold storages,” notes Tim Huckstable, head of project group for warehouse and industrial real estate at Cushman & Wakefield / Stiles & Riabokobylko.

In winter months temperatures in Moscow Region fall below zero. “But the demand for cold storages in winter is just as high as in summer as temperatures may change regardless of wishes of companies interested in preserving their goods. They may climb too high or fall below the level needed for different types of foods. In this connection, a cold storage can switch to the heating regime if it gets too cold outdoors,” Suvorov explains.

“Tenants do not care about weather conditions; what they seek is an optimal and stable temperature regime ensuring undamaged state of their merchandise," adds Yuri Taranenko.

Status Quo

“Moscow Region has about 40 low temperature storage facilities, the majority of which operate on the sites of old refrigerating plants. Today, the overall supply of low temperature facilities stands at 300,000sqm,” says Maxim Shakirov. According to Shakirov, the state and production capacities of existing properties fail to meet the requirements of Moscow’s groceries market. Furthermore, companies who offer frozen foods storage services today are few and far between.

“The Soviet-era refrigerating combines are unable to meet the demands of the fast growing food industry. The Russian Union of Refrigeration Industry Enterprises reports that five refrigerating plants are slated to be closed down in the years 2006 to 2010, with a total storage capacity of 40,000 tons, the move that will further aggravate the shortage of those facilities. New projects are rare, most of them having been built for own use by distributors of frozen foods," Suvorov explains. Among those are the companies Agama, Inko and Ledovo, who given the seasonality of demand for their merchandise can rent out part of their storage units for safekeeping.

“Refrigerating plants, perhaps, is the only and forced alternative to modern cold storages today. Finding space for storing meat, for example, is possible in such storages but organizing logistics operations there is difficult, and, altogether, they may be considered obsolete," says Ilya Shershnev.

“The recently-built cold facilities are available at logistics complexes of the National Logistics Company, FM Logistic, or Tablogix. One more example is a prime low temperature facility KPD Terminal. In the future the company Viktoria plans to finalize a cold warehouse complex in eastern Moscow,” Vladimir Zhuravlyov reports.

The competition between major logistics terminals in the Moscow Region and old refrigerating plants is growing increasingly tense. “Older developments have only one advantage over newly built storages, namely, their location. Most of them were built within the city limits, some are even centrally located. Today it is practically impossible to find a vacant plot in Moscow for construction of a cold storage. However, in terms of quality of logistics services refrigerating plants lose out to modern projects. It should also be noted that foods storage is not the core business for the plants," Zhamkin says.

Modern terminals for cold storage are virtually non-existent in Moscow. “Among projects under construction I could mention a low temperature storage being raised by Miratorg on Simferopolskoye Shosse. The project, to be finalized by late 2005, will provide storage units for the company’s own use and spaces for safekeeping," Maxim Shakirov says. In 2Q of 2007, Springs Group plans to launch a 7,800sqm low temperature storage as part of the industrial and warehouse complex Springs Park in Ramensky District in Moscow Region, situated at a distance of 15km from MKAD.

Variants Are Possible

In existing circumstances many companies look for alternatives to Soviet-era plants and storages. “Companies who need a cold storage are quite ingenious in dealing with the shortage of properties. In addition to refrigerating plants, they use vegetable stores for the purpose. Production companies such as meat packing plants and milk plants where properties are equipped with refrigerating units also partially help in dealing with the shortage of cold storage facilities. Then, there are various ways of creating a cold storage facility, ranging from re-equipment of available properties with refrigerators to converting decommissioned refrigerator cars into storage units,” Vladimir Zhuravlyov says. Ilya Shershnev says that back in 1990s even morgues were used for the purpose. However, such solutions are unacceptable for major businesses.

“Manufacturers whose goods require special storage conditions are forced to use facilities of their own. The examples are Campina Stupino, Ehrmann Ramenskoye, Nestle Zhukovsky or Lactalis Istra. But since building a warehouse for own use requires huge investment and thermal equipment and know-how only large firms can afford such projects,” Maxim Shakirov explains.

Tim Huckstable says that many western food manufacturers who operate their production facilities in Russia are known to nurture plans of building own storages on their territories. “With companies being unable to rent cold storages on the open market, many operators are forced to consider construction of own warehouses on the built-to-suit basis. Both logistics companies and foods manufacturers order development of such projects. For the most part built-to-suit storages are developed by wholesalers, such as Viktoria,” Vladimir Zhuravlyov notes. At any rate, says Ilya Shershnev, those costs are justified and aimed at reducing risks.

Good Prospects

“The situation is similar to that on warehouse market as a whole, where the demand for modern top quality properties exceeds the supply. With this in mind certain developers, logistics operators and manufacturers focus on construction of new low temperature storages or refurbishment of existing properties,” Maxim Shakirov says.

Vladimir Zhuravlyov puts down the shortage of storage facilities to the increased demand for conventional warehouses and high proceeds from such projects. “Given the shortage of warehouse space in Moscow Region, developers seek to build up marketable plots wtih prime properties, leaving no space for refrigerating units. The demand in that segment is much more predictable than in the case is with cold storages; besides, the cost of construction and equipment of cold storages is 2 to 2.5 times higher than the cost of a conventional warehouse," he says.

However, as soon as the demand for conventional storage facilities is satisfied cold spaces will become quite attractive for investors. “Sooner or later many investors’ attention will shift towards construction of cold storages with a view to rent them out or offer safekeeping services. High costs are offset by high rents, which stand at $200 to $470 per 1sqm per year as early as now,” Yuri Taranenko says.

The advantages investors who undertake cold storage projects include the possibility of diversifying their operations and creating a unique product that will remain competitive once the market of warehouses for dry goods is saturated, Ruslan Suvorov believes. Disadvantages are the lack of flexibility in terms of uses and high energy costs.

In turn, the lack of cold storages may result in serious changes in entire industries of the Russian economy, particular, in drastic changes in supply schemes. “The shortage of storage capacities affects the structure of the market. Most retailers who do not have refrigerating equipment for storing foods agree with manufactures on direct supplies, bypassing wholesalers. In this connection more and more major wholesalers begin to offer logistics services at their cold storages,” Vladimir Zhuravlyov says.