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. Last Updated: 07/27/2016

Supply Delays: A Good Thing for the Market? Logistics Market Short-Term Forecast

UnknownVladimir Pinaev
Recently there has been a lot of talk about the ability of the Russian logistics market to deliver new products to the market in a timely fashion. The property market has a reputation of being burdened by development delays, and while to some extent this is true, the situation is exacerbated for the logistics market because there is a severe demand overhang tied to limited availability. Property professionals are concerned with whether these supply delays will continue.

The quick answer to this is "no." There is no evidence to suggest that an emerging property segment such as the logistics market will continue to be saddled with delays throughout its evolution. Moscow is a market that only had about 3 million square meters at the end of 2006 -- more an indication of the market's youth than its inability to deliver.

Concerns over delays in development have risen around the inability of some recent projects to get off the ground. Consequently, some investors and occupiers face empty plots and issues of pre-leasing and forward purchasing. For many this suggests an element of risk that is as difficult to cope with as ambiguous completion dates.

While resolving supply delays is critical, another concern is the way and speed with which this is done. If all development obstacles were suddenly lifted from the market in one fell swoop, the market would be in serious danger. Rents would drop, cap rates would probably stabilize or soften, and taking the rate of evolution of other segments of commercial real estate as precedent -- a significant portion of the logistics market would be downgraded. In other words, we would have a much larger market, but the higher quality product would not be evenly distributed, and occupiers and investors would still be concerned with the short-term growth prospects. Effectively the market would finish the first half of its cycle.

However, supply delays are real and no marketwide reforms are in place to change them overnight. A forecast for short-term investment and occupier markets is complex. By 2010 the market is expected to grow to over 7 million square meters -- that is an addition of more than 4 million square meters. Normally when these kinds of volumes are delivered to an emerging market, it can easily translate into equilibrium. The Russian logistics market, however, is expected to buck this trend.

Growth in demand for quality logistics space in Russia is relentless. Pent up demand from international interests continues to grow -- primarily on the back of sustainable growth in retail and a generally sparkling economy. We can, however, rethink supply delays and limited product and regard them as "positive bottlenecks" that "control delivery," staving off equilibrium rather than preventing future growth.

At the end of the day, market equilibrium is inevitable -- it's just a matter of when it occurs that will decide how future growth is forecast. The idea of a positive bottleneck views supply delays as both temporary and as a safeguard against flooding the market with new product. At the same time it is still not known whether this means that developers will to continue to face construction delays over the short term. Initially we said that by and large delays will not continue. So how do we reconcile this dilemma? The market needs more products to service the demand overhang, but too much product too quickly will negatively affect the market.

On the surface, this sounds like the sort of demand-supply problem that every property market faces. Russia has distinguished itself from other markets simply because the internal market mechanisms that control this balance are different -- and well they should be. Russia has an emerging property market in an economy that in terms of dynamism and scale can only be compared to China. So if the stages of evolution do not always match a Western model, it shouldn't be cause for concern.

Over the next three years the logistics market will grow significantly. Bringing new product to the market will be easier and investment activity will rise accordingly -- based both on improved access to new product and also improved investor confidence. Once the market starts performing, Western-style evolution is more likely to take over. The threat of equilibrium will not be a question for the short term, simply because it assumes demand will remain stable. Demand has until now grown exponentially both from investors and occupiers. There is no evidence to support a decline in demand over the short term. In fact there is evidence to suggest that Western brand logistics and retail occupiers are likely to be encouraged to enter the market as the segment gradually deepens and consistent, quality delivery will give confidence that standards can be maintained.