Viacheslav Kholopov: "IT IS NO LONGER POSSIBLE TO GET A SUBSTANTIAL DISCOUNT IF THE WAREHOUSE IS 200 KM FROM MOSCOW”

Viacheslav Kholopov, JLL’s Regional Director, Head of Warehouse and Industrial Department, on warehouse market trends, tenant activity and requests, rate differences, and projections for the remainder of the year.

- Viacheslav, how did the Russian warehouse market feel in the first half of this year? What trends were there?

- In the first half, 2017, there was a decline in construction, which is natural in the current economic situation. To date, we have also seen an increase in the average transaction period: companies are spending more time considering bids, and taking longer to decide to move. In addition, there are now processes for optimizing internal logistics, which have helped a range of companies avoid moving. Retailers and distributors are active as they always are. Often customers require renting not pre-built storage facilities, but turnkey construction; companies have higher requirements for optimizing projects being constructed.  

In the current market, companies have become more demanding, however, this shows that the market is in some way “maturing,” it’s adapting to new economic realities that didn’t exist even three or four years ago.

- What has seemed unusual for the first two quarters of 2017?

- We’ve noticed an increase in requests from Russian and foreign production companies for constructing factories, but it’s important to understand that these are complex applications that require much more consideration.

As for the warehouse market, activity there is somewhat higher than for the same period in 2016. Several major deals are in progress in the Moscow region, and this year is far from complete. I estimate that the total amount of transactions for 2017 will be 10-15% higher than in 2016.

- According to your research, the number of facilities purchased or built for specific customers is about 20% for 2017, but earlier the figure was higher. What is this related to?

- Customers have become more demanding, “customizing” warehouse facilities now occurs on an ongoing basis – and before the end of the year, indicators could still change towards BTS. Many companies don’t need to build separate buildings, their demands can be met by modifying currently existing grade-A warehouse facilities. At the moment, most clients can develop their own logistics when they have a standard grade-A facility; this is one of the reasons why we’re seeing a reduction in the amount of built-to-suit. 

- Last year we often heard that a raise in rates is expected. Nevertheless, we have seen that they have not increased and, apparently, are still not increasing.

- Expecting rate increases in the coming year is, in my opinion, not worth it, because they directly depend on the amount of vacant facilities. To date, there has not been either an increase in demands, nor a sufficient decrease in construction; therefore, the level of vacant warehouses in the Moscow region will stay at roughly the same level, and by early 2018, will consist of approximately 1.5 million square meters. As a reminder, we saw record indicators of about 1.7 million sq. m. at the end of 2016 and beginning of 2017.

- What is the situation with the average requested rates depending on the distance from the Moscow Ring Road?

- In the past few years, there have been practically no new storage facilities near the Moscow Ring Road, and companies are already accustomed to arranging their own logistics for complexes far from the city, at a distance of 10 to 40 km. And in this area today, we aren’t seeing any extreme variations in rent, although, of course, facilities near the city have a higher rate.

Quite a few companies need to be closer to Moscow, for which they are willing to pay more compared to the average level of rates. Also in close proximity to the city, at a distance of about 15 km from the Moscow Ring Road, are facilities built over 10 years ago. If you don’t invest in their renovation and adaptation, they will obviously be inferior to those buildings that are being built now, and to fill them with tenants, facilities may be offered at lower rates.

- What about areas further than 50 km from the Moscow Ring Road?

- Transactions in recent months have suggested that there is demand even for more distant facilities. But it’s impossible to say that geography will expand to 200 km from the Moscow Ring Road. For logistics implies a clear time frame for delivery, that is, "every kilometer counts."  When dealing with a significant flow of goods, it makes sense to pay a little more for rent in order to be closer to Moscow to lower transportation costs.

It is no longer possible to get a substantial discount, if the warehouse is located at a distance of 200 km from Moscow. If you have the same proposal for a facility 50 km from the Moscow Ring Road and 150 km from it, then for someone to choose in favor of the latter location, it is necessary to draw attention to other aspects, such as the cost of labor, transport accessibility, possibilities for distributing goods, proximity to manufacturing, power capabilities, etc.

- What can you say about the second half of the year? What are your predictions?

- In terms of predictions for the second half of 2017, I expect that a number of deals in the "turnkey" construction format will be concluded for both food retail and manufacturing companies. Despite political difficulties, Russian and foreign companies aren’t wasting their time and are considering options for increasing production volumes in Russia, which is facilitated by low (as compared to other countries) labor costs and reasonably priced industrial buildings, which are comparable to European indicators.