Refrigerated Warehouses in Moscow
Lyudmila Bokina
Russia now has virtually no speculative projects in the segment of refrigerated warehouses. They are typically expensive to build, there are fewer chances to lease them, while they beget many specific requirements. Experts say this segment of warehouses will come back to the market as soon as the market stabilizes.
Refrigerated warehouses are popular among the companies producing and supplying foodstuff, namely meat processing, fish and seafood, milk and dairy products, ice creams, fruits and vegetables, confectionery products, semi-finished foods and meals, etc. Population consumes these products on a daily basis, therefore trade and manufacturing companies in this sector managed to survive the hard times rather easily. Despite a growing demand for refrigerated warehouses, experts note that the market supply of speculative projects is still weak. Both investors and developers have not been interested in this particular segment so far.
Supply
Based on CRE data, total volume of high-quality warehouse real estate in Moscow and in the regions is about 6.5 million sqm. The total area of refrigerated warehouses adds up to approximately 550,000 sqm (7.8% of the total warehouse space). Based on data from the Federal State Statistics Bureau, annual food consumption in Moscow in late 2008 equaled 876.4 kg per capita. As of today, products stored in dry and cold warehouses account for 13.5% of the total food consumption. Products to be frozen in refrigerators (meat and fish) make 12.6% of the total; 28% of them are dairy products that require low temperatures of 0 to 15 degrees. Thus, 40.6% of the products require high-quality refrigerators and freezers, while the rest of products can be stored in variable temperature modes.
Some dry storage areas are often converted into low temperature warehouses. "Cold warehouses of 0 degrees are similar to universal warehouses by their structure. The only difference is that they can be converted into other temperature modes if necessary," says Maria Revzina, Director of Consulting at Core Group. The volume of warehouse space adapted to other temperature modes is hard to calculate. Such warehouses are usually of grades C and D, they are high-rise buildings with low ceilings, limited handling options. Despite the lack of infrastructure,
these warehouses are more affordable to rent. According to Cushman & Wakefield, rental rates in low-temperature warehouses of Grade A are $270-300/sqm/year less operating expenses and VAT. "Just like dry warehouses in late 2008, rental rates in low-temperature warehouses fell and remained fairly stable. According to warehouse operators, 70-80% of their facilities are currently filled with tenants," comments Alexander Kuntsevich, Head of Research Monitoring at Cushman & Wakefield.
As experts at Jones Lang LaSalle note, the warehouse market is divided according to temperature modes: refrigerators account for 11% of the market, freezers - for 37%, mixed-use facilities - for 52%. According to Praedium Oncor International, more than half of low temperature warehouses (55-60%) were built back in Soviet times. The Soviet-era warehouses are in demand mainly because tenants can rent small spaces there without any long-term contracts. However, the quality of these old Soviet refrigerated warehouses does not meet modern requirements or expectations," says Ruslan Suvorov, Vice President of Giffels Management Russia.
On demand
High quality refrigerated warehouses have many technical aspects, in addition to specific consumer preferences. According to Yaroslav Darusenkov, Senior Consultant at Praedium Oncor International, tenants of low temperature warehouses typically consider the following factors: the load on floors (should be no less than 5 tons per sqm), electric power should be 600 to 1,500 kW per 10,000 sqm, ceiling height - 10-12 m, the column grid should be 12x24 m or 12x18 m. According to CRE, refrigerated low temperature warehouses consume much more energy than regular storage facilities. They also differ structurally, primarily in ventilation, air conditioning, foundation, exterior building walls and floors. Special coolants are used to ensure required temperatures during continuing operations. There are refrigerated warehouses operating on ammonia. As a rule, these are warehouses located in old buildings. As for modern warehouses, they typically use freon.
Strict legal requirements regulate the use of coolants, especially dangerous substances. "The process of obtaining necessary permits is complicated. Facilities that use hazardous substances such as ammonia are classified as hazardous industrial facilities. There is a Federal Law "On safety at dangerous industrial premises," explains Elena Pristanskova, Lawyer at AB EPAM. According to this law, hazardous industrial premises are to meet numerous requirements: registration in the state register, declaration of industrial safety, equipment certificate, permits for the use of technical devices, and production control.
Based on the said requirements, freon is more popular in Russia today. "One-component freon used in Russian warehouses is prohibited in Europe, while the ammonia is widely used there," says Vyacheslav Kholopov, Director of Warehouse, Industrial Real Estate, and Land at Knight Frank. All those factors increase project costs. Experts at Jones Lang LaSalle say that a decreasing number of new warehouse projects is associated with high costs of construction. Another factor is that developers in Russia have little experience in building low temperature warehouses. "There are many land plots to build warehouses in Moscow and the region. However, developers consider it risky to build speculative projects. Today, both developers and investors have little interest in this market segment. Owners of already built facilities often have to construct new ones as they need to expand the range of rendered services in order to be in line with the market demand," says Vladislav Ryabov, Director of Warehouse and Industrial Real Estate at Colliers International.
Looking for cold
According to Jones Lang LaSalle, 39% of refrigerated facilities belong to food manufacturers, 39% - to retailers, and 22% - to catering companies. In 2000-2010, the total amount of refrigerated warehouses increased by 2.3 times, from 240,000 sqm to 550,000 square meters. The total consumption has also grown respectively. Based on official data, the population of Moscow in the same years increased by approximately 9.5% while food consumption, according to the Federal State Statistics Bureau, increased by 11.2%, from 803 to 893 kg per capita per year. This increase concerned consumption of meat and fish products, fruits and vegetables. Therefore, the demand for low temperature warehouses keeps growing, as many facilities are getting older and need upgrading. According to Igor Kazimov, Head of Warehousing and Industrial Real Estate at Penny Lane Realty, every group of market players is in need for quality warehouses that meet specific requirements: manufacturing companies, importers, distributors, retailers, logistics and transport companies, and government agencies.
Experts are currently watching the growing demand for quality refrigerated warehouses of 2,000 sqm to 10,000 sqm. It is not an easy matter to find suitable facilities in the market. As Vladislav Ryabov estimates, it is hard to find finished projects, as it is hard to diversify customer preferences. "There are too many details to consider: to maintain a multi-temperature climate, to differentiate size requirements, location, number of columns, etc. Therefore, in many cases, developers of warehouses need to consider a number of specific characteristics that each individual customer normally has. Today, many warehouses are customized, build-to-suit projects." However, there are successful speculative projects in the market, such as the Springs Park and A-Terminal near Podolsk. It is obvious that the diverse client preferences make it difficult to build refrigerated warehouses that would satisfy a wide range of tenants. Experts say that the construction costs prevent many developers from building these facilities. By comparison, the construction costs of regular dry warehouses are two times lower than refrigerated warehouses with a diversified temperature mode.
Rental rates in refrigerated warehouses of Grade A are 70% higher as well. According to Polina Shipitsina, Chief Consultant of Warehouse and Industrial Premises at Jones Lang LaSalle, there is a limited number of developers having experience in this particular market segment. Build-to-suit projects typically require long-term lease and possible leaseback deals while few tenants of these premises can plan their activity for such periods. Alexander Perfiliev, Director of Warehouse Real Estate at NAI Becar, explains the situation in the following way: "Until recently, we were not able to build such expensive and technically complex facilities. However, the market is close to saturation, so many developers need to enter the market with high quality refrigerated warehouses. When the crisis started, many projects were frozen. To date, mainly build-to-suite projects are in the market. Eventually, we will see a growing number of speculative projects as well."
Vyacheslav Kholopov believes that spec-ulative projects should match two main criteria: good location and small (fewer than 500 sqm) spaces available for lease. "These are the facilities that tenants need most of all. Especially, this concerns retailers and distributors serving Moscow and the Moscow region. According to Knight Frank, the most popular locations for warehouses are the South, Southeast, East and West of the Moscow region.
Experts at Knight Frank estimate that the highest demand for quality refrigerated warehouses comes from large retail companies and manufacturers who build warehouse facilities for their own needs. Such logistics operators as KPD-Cargo, Severtrans, Caravan-Group, East West, Agama, agro-industrial holding Miratorg and X5 retail Group are the major market players.
Leasing non-core facilities According to Alexander Perfiliev, companies operating in food industry and retail build their own warehouses, but this activity is not their core business. The reason for that is the general lack of facilities that companies need to have. In the future, those companies are likely to start leasing warehouse facilities instead of building them on their own. "The demand for speculative projects will grow, as developers tend to build fewer facilities than the market needs. I would say that the future belongs to the lease," says Alexander Perfiliev.
Ruslan Suvorov, in turn, notes that the largest manufacturing and retail companies are no longer willing to deal with such non-core businesses as building real estate. They prefer to deal with developers since the general situation in the market is favorable for developers who intend to provide specialized projects for clients.
Trends and forecast:
As we can see from the given statistics on food consumption, the potential of refrigerated warehouse facilities in Russia is very huge and will only increase with time;
Because of the legislation on the use of ammonia refrigerant, the market will gradually move to using a single-component freon in warehouses. This will lead to more costly projects and higher rental rates;
Consumer preference analysis proves that developers need to work out at least several models of warehouses that are suitable for different segments of customers;
Depending on company status and quality of products, the market needs quality supply of refrigerated warehouse premises. Many operators are likely to transfer regular dry warehouses into refrigerated ones;
In mid-term, build-to-suit warehouses will determine the market development;
Speculative projects will gradually come back to the market as soon as it stabilizes.