Stable Warehouses

On a backdrop of decreasing rental rates reaching 40% for office and retail premises, prices for warehouses are not falling. The reason for this is that they are in still ion great demand.

Good years

The Moscow transport hub accumulates the majority of freight traffic of the Russian Federation. About 40% of all internal Russian cargo passes through the capital, approximately half of which carries out customs registration in Moscow. The total area of all class A and B terminals as of July 1, 2008, was 5,052,163 sq.m. In the first half of 2008 almost 302,000 sq.m of class A and B warehouse space came into operation. The overwhelming majority of these premises were absorbed by the market in 2007. Despite the active construction of logistics complexes, demand for high-quality warehouses remains high. By our estimations, the backlog in demand is about 2.5 million sq.m. The deficit has been this high for 5 years already. According to Cushman & Wakefield / Stiles & Riabokobylko, demand exceeded supply 10-12 times.

The average rates for warehouse in the Moscow region vary depending on the period and other conditions of the contract (deposits, guarantees) and the rented area.

For class A premises it ranges from $135-$155 per sq.m triple net for lease and for class B average rates are $120-$130 per sq.m. For class B premises the presence of a famous tenant with a renowned brand is not very important and the period of rent can be anything from 11 months as these buildings, as a rule, belong to private proprietors and are not an investment.

Class C premises (depending on the location and distance from the MKAD) rent varies from $50 to $100 per sq.m, excluding VAT and municipal payments. However, if a terminal of this class is located in Moscow, the rates can sometimes seem to be lower than class of A terminals. There are many such examples of fruit and vegetable base premises at prices that compare to quality terminals.

Moscow rental rates for class A premises can be compared to rates in London, while in other countries the rate is much lower, at times up to 2 times lower. For example, in Poland, there is an overabundance of logistics parks. Rental rates in the capital and the Moscow region are among the top ten highest in the worldwide.

At the time of a high quality premises being put into operation very little of it remains empty: the level of vacant areas is about 1% for class A and B premises and about 2% for class C premises.

The volume of premises announced to enter the market in 2009 exceeds 2 million sq.m, however in the situation that ahs developed in the market, by our estimations, the real volume will not exceed 30-40% of that announced.

Optimistic future

In a view of recent events we , the situation could change for the worse. As well as in any other market, absence of demand could lead to a fall in prices. Retailers have actually stopped rapid growth, trade flows have decreased and a decrease in commodity stocks has been observed, which without doubt all lead to a reduction in demand. But this reduction is a drop in the ocean of the recent deficit when demand has exceeded supply several times.

In turn, some developers have observed a decrease in the volume of financing, and in some cases have a complete absence of it leading to a reduction or a complete stop of construction of warehouse terminals. This fact, undoubtedly, will support the ratio between demand and the deficit of supply, and in the future will lead to a sharp growth in demand and, as a consequence, a rise in prices.

The cumulative level of vacant class A and B areas is currently 200,000 sq.m, i.e. approximately 4%, or double that of last year. Now in the market there is a tendency to subrent vacant areas. But in this case rent can exceed market rates by up to 20%.

The correction of prices of up to 15-20% in the class B and C segment of warehouses is possible to be expected till the next quarter. But mainly for premises that are in remote and unpopular places. As for class A premises, the revision of rental contracts is practically impossible by virtue of rigidly structured investment contracts and existing secured deposits. In this case it is more logical and economically wise to subrent any vacant areas which will keep frozen depositary funds safe.

There could only be a serious situation in the warehouse segment if something big happened, for example if a large logistics operators that rents out 50% of premises went bankrupt. Currently there are no signs of this.

It is worth noting that previously no-one considered demand for areas measuring up to 1,500 sq.m and it was difficult for such "small" tenants to find areas in the more expensive segment and so were forced to rent lower class warehouses. Now owners of high-quality warehouses are not prepared to offer areas of less than 2,500 sq.m, and often even 5,000 sq.m, by virtue of the design features of the premises and the desire to lease a maximum area in one go. This means that demand for premises measuring 2,000 to 5,000 sq.m is roughly equal to 30-35% of total demand, is not satisfied. In turn, many subrenters have the opportunity to rent out premises by offering smaller areas.

Of all the "anti-recessionary" measures taken by developers, it is possible to note a decrease in rental periods from seven to five years, and in rare cases, to three years, the fixing of rental rates by instruction of corridors of growing or falling currencies, and decreasing security payments.

Thus, in the given segment the balance of supply and demand is kept. This allows proprietors to hold prices practically at former levels.