In-depth: No Room for Goods

Custom-built development is the best solution to the problem. In Russia, such projects are still rare. Warehouse developers seek to cater to as many companies as possible. Being able to choose between tenants they secure higher returns on their properties. Therefore, developers are more interested in speculative projects. Adjusting to requirements of a specific user, a developer has to reconsider existing standards. As competition intensifies the number of built-to-suit warehouse projects will grow.

In views of that new trend leading property consultants have set about strengthening their corporate client services. Against the backdrop of acute shortage of information FMCG companies more and more often seek their advice.

Chain Geography

The transformation of the market has been brought about by the emergence of major network projects, launched to meet the growing demands of the Russian regions. Similar plans have been announced by major market operators MLP, Eurasia, Raven Mount, etc. The expansion of network warehouse developers became a noticeable trend of the last year.

Knight Frank reports that up to 10 prime warehouses, rated class A and B, will be launched in major Russian cities in 2007. In medium-term, network developers will start their projects in the majority of prospective submarkets whereupon mass construction of upscale storage facilities will kick off across the country. Precisely the development of network projects will accelerate transformation of the seller's market into the buyer's market.

Today, most experts are convinced that local markets have good prospects and believe that future growth of the warehouse property market will be brought about by large projects being realized in cities with population over 1 million.

Competing in Quality

The demand for class A and B facilities in the province exceeds the supply by several times, which allows landlords and logistics operators who offer safekeeping services to push up rents and fees for their services. For example, rents at large modern class A properties launched locally and let to major tenants stand at $120 to $135 per 1sqm per year. Rents at class B storage are estimated at $100 to $120.

Class C and D facilities account for the largest share of supply. For example, in St. Petersburg that segment makes up 89% of all properties available. In other parts of Russia the situation is similar.

In near term rents for top quality storages are unlikely to drop, given the acute shortage of warehouse space. However, the price/quality ratio may change as the industry is anticipating a boom in the next couple of years. As the number of projects grows the balance of forces in the regions will change too, as tenants will be able to choose between competing projects depending on quality and rental costs.

Developers of warehouses in the regions began to heed end-users’ needs much later than in Moscow as the demand for properties there is still growing slower than in the Moscow Region. Today, the total supply in major Russian cities is estimated at 200,000 to 500,000sqm. The supply in St. Petersburg, Yekaterinburg and Novosibirsk is somewhat higher – 700,000 to 900,000sqm.

Logistics Operators as Trendsetters

Network developers of class A and B warehouses in the province stake on major logistics operators. In 2006, logistics firms accounted for 62% of tenancies. Nowadays, the warehouse property market has adopted the following pattern. The client informs its partner - the logistics operator – about requirements regarding storage conditions and additional services, whereupon the logistics operator sets out its client’s requirements to the developer, who undertakes to elaborate the concept of the project, develop the site and oversee building works. As a result, what we come up with is a double built-to-suit project where the developer meets the end-user's requirements, negotiated through the logistics operator.

Advantages of Outsourcing

Cooperation with logistics operators helps manufacturers solve a variety of problems. If a production company rents storages directly from the developer it will be restricted in terms of volume of storage. The company will have to pay the rent in full regardless of how much space it actually needs to store its products. On the other hand, the storage space is limited and if a tenant's goods flow grows there will be no room for their storage.

Logistics operators have properties in reserve, which their clients can count on. Besides, when renting directly from the owner the manufacturer has to buy equipment, maintain and and repair it at own expense, train staff, etc. Labeling and packaging services also result in extra costs. Logistics operators are able to provide all those services.

In the West, manufacturers have long been convinced of the effectiveness of outsourcing and established cooperation with logistics operators. Those operators are integrated in business operations of their partners that is why quite often internationals manufacturers who launch their production facilities in Russia bring their logistics operators along. Focusing on the needs of clients in an increasingly competitive environment becomes essential both for developers and logistics firms catering to FMCG companies.

Warehouse on Turnkey Basis

The double built-to-suit scheme is convenient for companies that outsource logistics services. But some manufacturers exercise a different approach and order built-to-suit properties directly from developers. Usually such properties are let for a period of 10 years or longer, with an independent logistics operator hired to service them. Warehouses built on a turnkey basis are designed to meet special requirements for conditions of servicing and storage of goods. Such requirements are set by large distributors of cosmetics, dairy products, etc.

Logistics services are provided under contracts. The advantages of such approach are minimization of construction risks and completion of development on schedule. Hiring a professional logistics operator helps FMCG companies to use all spaces and adjacent territories effectively.

What to Choose

The growing demand for prime storages generated by logistics firms and FMCG companies will shape the development of the warehouse property market in the next 3 to 5 years. Many tenants renting warehouse space will be forced, depending on specifics of their operations, to decide whether to hire a professional logistics operator or organize warehousing without their assistance and whether to rent properties or order construction of a custom-built storage. In these circumstances evaluating all possible pro and cons is essential. Services of professional consultants are becoming increasingly sought-after at all stages of projects carried out in a highly competitive environment. The emergence of custom-built storages will stimulate demand for the services of professional property consultants, versed in specifics of logistics operations in FMCG companies.

Forecasts and Prospects

With the primary demand having been satisfied the market will soon begin to take into account the requirements set by end-users. This will bring about the development of new formats of warehouse complexes that will have certain unique characteristics. Such projects will be universal and at the same will be adjusted to the needs of a certain category of clients. For example, the structure of the property will be designed taking into account the specifics of storing furniture, perfumes, home appliances, car spare parts, etc. Adjusting to the needs of their clients developers will seek to maintain long-term cooperation with them. As a result, properties will be let for the period of up to 25 years, as compared to 10-year terms of today. Such tendency is typical for the majority of developed warehouse real estate markets in Europe. Russia is no exception.