Money Growing: Warehouses from our Grandfathers' Time

The warehouse real estate market in Russia is growing very rapidly. In particular funds from large western funds and investment companies are being directed to this segment. However, to provide the best quality warehouse often it is only possible within the limits of the realization of a new project, a substantial part of class B warehouse complexes have been constructed on the basis of old premises. Furthermore, the majority of warehouses which have remained from Soviet times are still being used inefficiently. For these premises to start to make returns, it is necessary to redevelop them.

According to Ruslan Suvorov, head of the department for warehousing and industrial real estate at Praedium, "if the basic parameters of a premises, such as the location, space for maneuvering transport, high ceilings, floor parameters, security engineering communications, correspond to the requirements of warehouse logistics it is possible to make a modern warehouse complex of such a premises. As for profitability, it is necessary to calculate each specific case individually."

"Building new warehouses in Moscow is complex, it is easier to renovate existing premises. The construction of a new building is more costly than renovating an existing one. Aside from that, on the warehouse real estate market demand noticeably exceeds supply, with that in mind, already realized areas are snapped up, and in the given situation it is profitable for investors to make returns on investments now, rather than putting new funds in the hope of receiving profit in the future," considers Andrei Bushin, general director of MIEL - Commercial Real Estate.

Nobody can calculate precisely, exactly how many old warehouses or premises used for such purposes have remained in the region of the capital since Soviet time. It is difficult to estimate the volume of old, post-Soviet warehouse complexes in Moscow and the Moscow region, but this volume is quite large. The Moskvoretskaya warehouse base, which totals almost 200,000 sq.m, and similar warehouse bases in Moscow totaling almost 15, can be used as examples of old Soviet warehouse space used for the storage and processing of cargo intended for distribution within the limits of Moscow," Maxim Shakirov, director of the department for warehousing and industrial real estate at Colliers International says. According to him, several similar warehouses have been reconstructed, but on the whole they remain as they are, with only few internal furnishings.

"The supply of soviet-construction warehouses totals about 800,000-850,000 sq.m. In most cases these are terminals measuring 10,000-20,000 sq.m, previously belonging to industrial enterprises," says Vladimir Zhuravlyov, the executive director of NAI Russia. Yury Surkanov, president of UniTrans Logistics, does not agree with these estimations. “In Moscow and the Moscow region there are several million square meters of old warehousing and unused industrial buildings,” he says. Such a difference in estimations can be explained by the broad interpretation of the concept of Soviet warehouses.

The market of warehouse complexes from Soviet times is represented by various premises: from dilapidated warehouses, elevators and vegetable warehouses, to refrigerating warehouses and underground bunkers," Ilya Shershnev, director of development at Swiss Realty Group remarks. According to Roman Sokov, director of the consulting department at Becar Commercial Property Moscow, "Old warehouse complexes in Moscow and the Moscow region are often former factory sections or abandoned industrial premises.

"These buildings were under construction in the 1950-80s. Basically they are brick or ferro-concrete boxes with a large gated entrance," he says.

"During Soviet time there were powerful corporations with their own systems of distribution, and consequently, with their own warehousing network, for example the State Technical Supply Office of the USSR . In addition, we should not forget about various vegetable bases," Igor Dorofeyev, director of the warehouse and industrial premises department at Cushman & Wakefield/Stiles & Riabokobylko, adds. According to Bushin, in "Soviet times practically every ministry had a warehouse, for example the warehouses of the Ministry of Atomic Energy. More often they were used for providing employees with materials needed for everyday work, and for the maintenance of any enterprise." In his opinion, "there is no exact data on the quantity of old warehouses in Moscow and the Moscow region, as many of them are not on the open market and others have small areas."

The wholesale bases of the State Technical Supply Office of the USSR make up a substantial share of this market. "In its time the State Technical Supply Office of the USSR provided deliveries of non-food goods in all republics and regions, the nomenclature of the delivered goods was defined by the economic orientation of the region. Bases were located near transport throughfares: sea, rivers, railway, and auto transport. Practically everywhere there were railway tracks adjoining the main highways," the group's director of the department for warehouse technologies says.

According to him, after the disintegration of the Soviet Union the management structures of the economy were demolished and the bases of the State Technical Supply Office were privatized. The owners of other Soviet warehouse complexes have also been replaced. "Now the premises basically belong to legal entities that have come from old Soviet enterprises. Raiders want these companies," says Surkanov.

"Such warehouses during Soviet time belonged to various departments, including the Ministry of Defense, the Ministry of Agriculture, etc. However a large number of warehouses are part of the property complexes of industrial enterprises. Their proprietors may now also be the above mentioned departments, industrial enterprises, and private individuals who acquired the buildings during privatization," considers Mikhail Gets, vice president of strategic development at Blackwood. As a result new proprietors have the problem of what to do with these premises.

Details of reconstruction

"Because of the lack of funds for re-equipping warehouses, they divide such premises into smaller, separate areas, and lease them to small manufacturers. Low demand for such premises leads to the buildings falling into decay. The solving of this problem proprietors rest on the shoulders of the tenants, who are also strapped for cash," says Sokov.

According to him, to reconstruct such premises is rather difficult and they are usually used as markets, or as warehouses. "However the use of such buildings as warehouses is inconvenient: there are not enough entrances, there are no ramps, etc," adds the expert. According to Vyacheslav Zuyev, old warehouse premises have low ceilings and more often were used only for floor storage.

"New owners after a short time were certain of the unprofitability in operating such premises. By virtue of the high shortage of old warehouses it was impossible to provide the demanded level of service for the storage and processing of cargo. "It is obvious that to provide customers with complex warehouse services, a major overhaul of the logistical concepts of the functioning of such premises, and full reconstruction and re-equipment with modern equipment is necessary," says Zuyev.

According to Surkanov, "The reorganization of warehouses includes dismantling old equipment and networks, adding new equipment, cleaning of the territory, repairing of the floors and roofs. New premises are usually not extended. Construction of a new fence along the perimeter of the territory is possible, with a check point and also a building for administration," he adds.

According to Suvorov, it may be necessary to replace engineering equipment: such as ventilation systems, lighting, electric wiring and boards, repairing or installing a new fire fighting system and fire alarm system. In addition, it is necessary to clear away and pave areas for maneuvering large-capacity transport vehicles, and also create parking on the territory of the warehouse.

"The office component and premises of general use - toilets, showers - of such a project should take up 7-10 per cent of the total area. It is important to correctly design a zone for loading-unloading, and the layout for throughfare and moving on the territory. However the main tenants of such premises may be small companies which do not have such strict requirements for their warehousing," Gets adds. So, according to Andrei Bushin, "Old warehouse complexes were built under a 6 х 6 columned network, which doesn't even meet the requirements of a modern class B warehouse, therefore it is not possible to talk about high quality areas in these cases."

Expensive reconstruction

If the owner of a Soviet warehouse, all the same, decides to reconstruct, they should be prepared to spend serious money on it. "The cost of reconstructing a premises depends on many factors, for example on the type of building, the quality of communications, etc., however in total it can reach up to $400 per sq.m. It is expensive, therefore only extremely interested people can take this on," Dorofeyev says.

Bushin gives similar figures. "The cost of reconstructing a warehouse depends on the work that is necessary and varies from $100 to $350 per sq.m. The more work that is required, the more expensive reconstruction will be. Today the capitalization of a warehouse is approximately 12 per cent, but in the case of reconstruction this can increase up to 15-18 per cent," he says.

According to Zhuravlyov, "If the building is in a decent condition, the developer will only have to make cosmetic renovations to the roof and walls, and also create high quality floor covering. The cost of such reconstruction is about $150-250 per sq.m," he says.

Because of the high costs of work many experts do not have faith in the prospects of reconstructing Soviet warehouses. "To reconstruct an old Soviet warehouse into a modern warehouse is impossible because as a result you will only get class B or C warehouse, no higher. The only option is to completely demolish the existing warehouse and construct a new one in its place," says Shakirov.

In Dorofeyev's opinion, another factor in the high costs of altering a premises is insufficient space. "It should be remembered that Soviet warehouse buildings by modern scales are small at only up to 10,000 sq.m. These days the scales are different, from the point of view of investors, users, and distribution," he says.

In addition, he says, many such premises are located in the center of the capital and in Moscow "no wise investor would invest in warehouse projects in connection with the administrative risks, as in recent years cargo flows from the city center have actively been cut. Warehouses in any case presuppose the shipping of freight. Currently the Central Ring Road is under construction, as soon as this will be complete, I am sure there will be restrictions on the movement of traffic on the Moscow Ring Road. Therefore I would recommend for office or shopping complexes to be built in the place of old soviet warehouses in Moscow," he explains.

Against the tide

Despite the advice of experts, many Soviet warehouses have been reconstructed into modern complexes. "One example of the redevelopment of a warehouse is the successful reconstruction of the Tkatskaya factories in Dedovsk in the Moscow area, at 18 Gagarina ulitsa. The developer bought this enterprise and, having improved the characteristics of the building, now has a successful premises which is completely rented out to tenants," says Bushin.

According to Zhuravlyov, the Transport Security-Forwarding Company took the same path when in 1998 it acquired a terminal near the Severyanin bridge in the VDNKh area and has only partially reconstructed it. The concept of the project envisaged the short term rent of palette places, which has allowed for the profitability of the complex to increase, while the parameters of a similar project focused on long-term rent, are considerably lower," the expert says. According to Suvorov, a great example of the reconstruction of old industrial premises into warehouses is the class B Millenium Logistics Park, located on the premises of the former Ukhtomsky factory in Lyubertsy.

Normally old warehouses are reconstructed into new complexes. "Farm premises have played a huge role in the development of modern logistics. An incalculable number of hen houses, pigsties and cowsheds have been converted into warehouses and for some time have satisfied demand for warehouses. Of course, they don't correspond to the modern requirements of logistics and consequently modern warehouse buildings have been built in their place. Here a good example is the Tomilino Techno-Logistical Complex, a former integrated poultry farm where a modern logistical park has now been developed," says Suvorov.

The transitive variant between the approaches above is represented by the technology of Maksstor. Recently we have received rather a lot of orders for the reconstruction of the wholesale bases of the former State Technical Supply Office of the USSR, and I think that this will continue. Time passes and equipment and logistical concepts used in the creation of bases, has become outdated. Existing warehouses have become unfit for use, and the area these premises take up is rather significant," says Zuyev.

According to him, at the first stage of construction they keep all the buildings and start to construct one new warehouse model. At the second and third stages they build two more similar models. "In total these three stages provide for previous volumes of turnover of goods. "This makes the opportunity to demolish existing buildings and construct big warehouse complexes and space is left to build a separately standing office center, and premises required for servicing and parking," says the expert.

Old perspectives

"There are practically no large developers or warehouse operators not engaged in the alteration of old buildings. Imperfect systems of heating, single glazed windows, weakened roofs and other defects in old buildings considerably raise the price of their repair. New warehouse buildings are built at rather high speed. The prime cost of such a construction is $500-700 per sq.m," considers Sokov. "Taking into account that it is necessary to spend three quarters of that figure on the reconstruction of a Soviet warehouse and that rental rates will be twice as less, the expenses are unjustified."

"Newly built premises are the future. It is often more effective to demolish old buildings and construct new buildings in their place. It is almost impossible to create a modern complex from an old project, as when such premises were built, warehouse logistics were organized completely differently from modern technologies," says Surkanov.

However, according to him, old warehouses can be used a little differently. "The main characteristic of such warehouses is a good location. The main requirement of the market at the moment is for distribution centers which do not need high ceilings of up to 12 meters but only for a significant amount of docks. Accordingly, the given type of warehouses are necessary for positioning first of all distribution centers."

"Market participants name two situations when reorganization of an old warehouse can be favorable for the owner. "If an aggressive entrance onto the market is necessary a short-term project of reconstruction of a terminal can become the only right and effective decision for a developer. The profitability of such projects is less than for high quality complexes, but at the same time has a number of important advantages, among which are a low level of investments and the possibility to realize the project in a short period of time," says Zhuravlyov.

In Dorofeyev's opinion, "the only case in which it is worth altering a premises, is when the premises is small, for example 2,500 sq.m. At the moment there are no modern premises this size on the market. It is also worth it if a small premises is needed in some particular place," he explains.

As a result such warehouses are easy to rent out. The most important things are the right concept of reconstruction and quality of work. A warehouse is not an office or shopping center. "It does not have an emotional component. Therefore if the parameters of a refurbished building correspond to the expectations of tenants then you only need to work well on renting the premises out with some emphasis on the history of the building and the quality of its reconstruction," believes Suvorov. In any case, according to experts, developers have lots of premises for reconstruction. "Now about 60 per cent of premises are being reconstructed and belong to small logistical operators while the remainder belong to functioning enterprises or structures, affiliated with the management of the given premises," says Zhuravlyov. According to him, about 20 per cent of soviet constructed warehouses on offer are class C, about 35-40 per cent are suitable for use with significant stipulations, and 40-45 per cent of premises urgently require complex reconstruction.