'To the Right Is Moscow, to the Left Is Europe'

Cat food. Cubic meter after cubic meter of canned cat food. And Mars bars. And shiny new toilet bowls. And heart-shaped hot tubs for two.

For the next few hours or days, row upon row of food and consumer goods will reside on the 12-meter-high racks in the Multinational Logistics Partnership warehouse. When an order arrives, they will be plucked from their perches through a complex dance of forklifts and bar code scanners and then whisked to shops all over Moscow.

Analysts say facilities like these -- run by the country's biggest warehouse firms, including MLP, Raven Russia and Eurasia Logistics -- represent the future of the sector, which is growing faster than any other segment of Moscow's booming real estate market.

"Over the next two to three years, the warehouse sector will be one of the main focuses of foreign investors," said Oleg Altshul, an associate director of the industrial and warehousing department at Jones Lang LaSalle.

"Warehouses are one of the most interesting directions for investment at the moment," he said.

Although it is a certain future, analysts say the sector is nonetheless being held back because funding for construction projects has dried up and land prices are rising rapidly.

The MLP warehouse compound, finished in 2006, is one of the first fully occupied, Grade A logistics facilities in Russia -- linking the capital to the rest of the world.

"To the right is Moscow, to the left is Europe," MLP site manager Ilya Rybyakov said.

John Wendle / MT
The 190,000-square-meter Multinational Logistics Partnership warehouse, pictured above, is one of Russia's first fully occupied, Grade A logistics facilities.

The 190,000-square-meter facility sits on a 42-hectare lot located 14 kilometers beyond the Moscow Ring Road on Leningradskoye Shosse. With its clean, prefab walls and newly paved drives and parking lots, the facility wouldn't look out of place in the United States or Western Europe.

"We have everything, including grass," said Rybyakov, pointing out the window of his car at the freshly mowed lawn between the parking lot and the neighboring pine-and-birch forest. "It seems laughable, but even that was difficult."

To qualify as Grade A, warehouse space must include one loading dock per 1,000 square meters of storage space, one parking space for each dock, fire systems, specially leveled floors, good lighting and 14-meter ceilings.

Vladimir Garin, health and safety manager at 20A Logistics Agency, said on a recent tour of his firm's space at the site that dedicated warehouse developers were "safer and more professional." The complex's five main buildings also host a number of Western companies, including Volvo, Caterpillar, Mobis, UniTrans and Itella.

"All of the buildings are occupied. They are divided half and half between Russian and foreign firms. They have all signed seven-year contracts -- nobody wants to leave such a good facility," Rybyakov said.

Enormous demand and high occupancy at already built sites are among the strongest indicators that the sector is set for continued, rapid growth, analysts said.

Warehouse firms are set to get an additional boost from the $570 billion that Prime Minister Vladimir Putin approved on May 21 for upgrades and expansion of the country's transportation infrastructure -- an essential for warehouse development -- through 2015.

Earlier this month, Putin said 522 billion rubles ($22 billion) would be set aside for the construction of a ring road in the Moscow region, which would be completed by 2015.

John wendle / MT

"All of the biggest projects next year will be to the south and to the east of Moscow along the Simferopolskoye Shosse and Kashirskoye Shosse," said Altshul, of Jones Lang LaSalle.

Although "the cost of land is the biggest problem in the south, the local authorities there are more ready to negotiate," he said. "Previously, warehouse construction was along Leningradskoye Shosse, but the price of land has gotten too high and there are major traffic jams," he said.

According to a recent report issued by MLP, the warehouse sector has exceeded the growth of Russia's overall economy for several years. It also said Moscow was the largest European warehouse market in 2007 in terms of new space being occupied, or takeup.

In total, 110 projects comprising nearly 5.1 million square meters exist or are under construction in Moscow, the report said, and a record of almost 1.6 million square meters of space were delivered in 2007.

MLP predicts a certain availability of around 418,000 square meters for 2008, commenting in the report that "the effect of the financial crisis is clear in the 2008 and 2009 deliveries."

Stephen Inscoe, a director at EID Group and one of the writers of the MLP report, said deliveries were "well within the market's ability to absorb space."

Around 1.3 million square meters were rented in 2007, compared with 700,000 square meters in 2006 -- representing an 86 percent increase. Including pre-signed contracts, the forecast for 2008 is 1 million square meters, the report said.

"There are practically no vacant places for tenants in the Moscow region," Altshul said.

Prices for high-end warehouse space are rising accordingly. Over the coming months, MLP expects prime rents to move from $140 to $145 per square meter to $150 per square meter or more. Jones Lang LaSalle reported that Moscow rents in the sector increased by 7.1 percent from the first quarter of 2007 to the first quarter of 2008.

"The cost of land continues to be a significant part of the cost and cost increases," Inscoe said. "Tenants want to pay Grade B rent but get Grade A products."

"The biggest problems for developers are the increasing cost of land, increasing construction costs and increasing materials costs," Altshul said. "That is why rents are rapidly growing."

"Also, there are some obstacles from our local government for getting construction permits. And sometimes it's difficult to find out who the owner of a piece of land is," he said. "Most land deals in our country are rather complicated and dirty."