Warehouse Real Estate Market Showing Signs of Recovery after Crisis

Large companies have rented and bought additional area in 2016.

The results of 2016 show that approximately 1.1 million sq.m of warehouse real estate were bought and rented; of that area, deals amounting in 994,000 sq.m, or 90%, involved tenants transferring to different logistical centers or adding new area, according to a report by the Knight Frank consulting company. This tendency was also noted the previous year, when approximately one million of the total 1.2 million sq.m of rented space was connected to relocations. However, Maxim Zagoruyko, the Director of the Department of Warehouse and Industrial Real Estate for Knight Frank, drew attention to an interesting fact: if in 2015, more than half of all transactions were for optimization and relocating tenants to a cheaper area, for example combining several warehouses into one, last year saw the expansion of large companies. This, Zagoruyko believes, shows the first signs of the market's recovery.

For example, Hoff, a seller of furniture and home goods, rented 50,000 sq.m in the Severnoe Domodedovo logistic park, after previously renting only 20,000 sq.m in the Absolut complex. Castorama moved from Severnoe Domodedovo, where they rented a little over 40,000 sq.m, to the Chekhov-3 Warehouse Complex, where they rented 50,000 sq.m. The online retailer Wildberris last year added an additional 42,000 sq.m to the 20,000 they already had rented at the logistical center MLP Podolsk. The largest grocery retailer X5 Retail Group increased the area they rent in the warehouse complex Sofino by more than a third, with a total area of more than 88,000 sq.m.

A third of all investments in commercial real estate in Russia in 2016 were made by the State.

570,000 sq. m of warehouse real estate was bought and rented in 2016's fourth quarter—about the same amount as in the year's previous three quarters, notes a report by analysts at JLL; this is a record indicator for this period in the entirety of the market's history. The economy's stabilization and a lack of major currency fluctuations have apparently prompted some companies to abandon their wait-and-see position, as cited in a report from Vyacheslav Kholopov, the Director of Warehouse and Industrial Premises for JLL.

The warehouse market's recovery has been noticed by Oleg Mamayev, Executive Director of one of the largest developers of warehouse real estate, PNK Group. The truth is, he said, calling the developing situation "a recovered market" is premature: the amount of vacant space is still quite high, about 10%, he explains. Despite expanding business, the amount of available facilities has not yet changed, confirms Zagoruyko. The reason: weak and inefficient companies are leaving the market and their facilities are then taken over by major players, he explains. Moreover, complex vacancy rates lower the closer a complex is located to Moscow, which demonstrates the concentration of demand from buyers and tenants for quality sites in good locations. Anton Alyabyev, the Director of the Division of Industrial and Warehouse Real Estate for CBRE, agrees with him: a large part of all transactions in 2016 dealt with tenants relocating to higher-quality premises. The current price level allows them to exchange old facilities for new complexes, he notes.

In one year, investment in Russia's commercial real estate has increased 1.5 times—Knight Frank.

The recovery in the warehouse market may also be connected to the lowering costs of debt financing and deposits, adds Mamayev. In 2015, investors were looking for facilities with a capitalization rate (a measure of the asset's market value in relation to its net income for the year—Vedomosti) no less than 15%, and today they are willing to invest in complexes at 12-13%, he says.

Demand will continue in 2017, as evidenced by the large number of negotiations, Khlopov notes.