Courtesy of Raven Russia

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From the outside, the Uhrenholt Logistics warehouse in the PNK-Chekhov logistics park beyond Moscow looks much like any other warehouse, just a box with rows of loading docks. But inside, the warehouse has a combination of features unique to this building and tenant, notably four different temperature regimes with low electricity requirements.

Designed and built according to Uhrenholt's specifications by developer PNK Group, the 13,000-square-meter project became one of the first examples of a "built-to-suit" warehouse in Russia when it opened in 2010. Although sporadic warehouse projects in the past foreshadowed this method of construction, which tailors a project to a future tenant's or owner's needs, built-to-suit is now emerging as a trend in industrial real estate here, consultants and developers said. A handful of built-to-suit warehouses have already come online, and increasing numbers of such projects are expected in the future.

"Design-and-build-and-sale and design-and-build-and-lease are actually just coming to the market as of this year," said Vyacheslav Kholopov, director of industrial, warehouse and land at real estate firm Knight Frank, which was a consultant on the Uhrenholt project.

Although Russian developers have long been making modifications to warehouses, they are now starting to construct true built-to-suit warehouses, Kholopov said. He expects several more built-to-suit deals, both for sale and for lease, to take place in the next year, most of them in the Moscow region.

Suiting Up for Customers

The roots of built-to-suit in Russia can be traced to the financial crisis, according to PNK Group, which has emerged as a leading developer in the built-to-suit market. With real estate prices plummeting, it was assumed that developers would begin to only build projects for predetermined clients, said PNK Group executive director Oleg Mamayev.

"These expectations didn't completely bear out, but this was when the idea of built-to-suit formed," Mamayev said.

The company began its first built-to-suit project in 2009. Now, about one-third of PNK projects are built-to-suit, and this proportion continues to increase.

About one-third of the 200,000 square meters in warehouse rentals and sales done by Colliers International this year were built-to-suit, said Vladislav Ryabov, director of industrial, warehouse and land at Colliers. He estimated that this number was typical of the warehouse market as a whole.

Built-to-suit is less widespread in this country than in the West because Russia is developing rapidly and companies can easily outgrow a newly commissioned facility in just two or three years, said Mamayev. In addition, banks and investors are much more cautious about financing built-to-suit projects in Russia since companies have shorter track records. Nonetheless, analysts expect more built-to-suit projects to arise as the market develops.

Consultants named the 33,000-square-meter Multiflex project, the first stage of which opened in the Severnoye Domodedovo logistics park in 2007, as Russia's first-ever built-to-suit warehouse. (Knight Frank consulted on the project). Another landmark built-to-suit project was the 24,107-square-meter warehouse built by PNK Group for the holding company TVOE in its PNK-Chekhov logistics park outside Moscow this year.

Currently, PNK Group is building two 50,000-square-meter built-to-suit projects for Russian retailers, and it just signed an agreement with a supermarket chain for a 40,000-square-meter built-to-suit project, Mamayev said. Developers see the most demand for built-to-suit projects ranging from 10,000 to 15,000 square meters, but the companies seeking a project of this size are smaller and completion rates are lower than with larger projects, he added.

Alongside these projects are several heavily modified warehouses that can't be considered built-to-suit by the traditional definition, which stipulates that the project must be designed and built for a certain client from the ground up.

Real-life situations are not always cut-and-dry, consultants point out: If significant construction is done inside the shell of an existing building, for instance, Kholopov said he would also classify this as built-to-suit.

Delivering a New Trend

Over the past five years, Raven Russia has made a specialty of adapting existing or partially constructed warehouses for specific clients, said Viktor Afanasenko, director for rent and marketing. The developer has built tailor-made warehouses in Noginsk, Rostov-on-Don, Novosibirsk and other places for clients such as Oriflame and X5. Afanasenko said it's already normal market practice for a potential tenant to request adaptations, which are then reflected in the rental price.

"Today there is not one tenant who would come take a building in the form that it is in; everyone has requirements," he said.

Common modifications that have been used in built-to-suit and heavily-modified projects in Russia include the addition of ramps, alternative roofing systems, changes to the proportions of the building or site and the installation freezing and cold storage equipment, different fire-protection systems in different sections and production lines, Kholopov said.

Although built-to-suit warehouses can be either sold or leased upon completion, market players disagreed on which was more common in Russia. According to Mamayev, leasing is less prevalent because Russian developers, investors and banks are wary of the risk involved. If a tenant leaves, the highly specialized warehouse is difficult to rent to someone else, he explained.

Built-to-suit for lease is also more expensive, whereas the cost of a built-to-suit for sale is comparable to an ordinary speculative project, Mamayev said. Of course, special requirements such as temperature units can quickly drive up the price: A simple warehouse usually costs about $1,200 per square meter, whereas built-to-suit can cost up to $2,000 per square meter, depending on the requirements of the project, consultants said.

Ryabov, however, said that built-to-suit in Russia is more often for lease, since not all developers are ready to sell, with many preferring a stable rental income. In addition, not all clients have the money to buy a site, he said.

Driving Built-To-Suit

The behavior of both developers and clients is contributing to the emerging built-to-suit trend, consultants and developers said. Although they differed on some of the characteristics of the fledgling market, all agreed that the current deficit in warehouse space is playing a key role in the increase in built-to-suit projects. With few ready-made warehouses on offer, clients have to appeal to a developer to build a project especially for them. Forced to plan their purchase in advance, customers often "arrive at a built-to-suit solution," as Kholopov put it.

Previously, high demand had meant companies had to simply take whatever the market offered them, which was "absolutely generic big warehouses, basically hangars," Mamayev said. Warehouse customers became "harder to please" during the financial crisis, making built-to-suit a natural fit in today's market, he said.

"There wasn't an opportunity to develop the art of being a consumer," he explained. "They learned during the crisis, and now … they often come in with specific, reasonable requirements."

In addition, companies in the FMCG industry improved their technologies during the crisis, with the result that working out of a specialized warehouse became particularly advantageous, Mamayev said. The retail sector, which is growing rapidly in Russia, is one of the main sources of demand for built-to-suit projects, consultants said.

A built-to-suit project "allows you to save pretty substantially on your expenses and raise work efficiency at the warehouse," he explained.

One other impetus for built-to-suit from the consumer side is the strict warehousing requirements of international companies — they often require Factory Mutual Global standards, currently not present in Russia — which forces them to arrange built-to-suit projects, Ryabov said.

Kholopov, on the other hand, focused on new behavior on the part of landlords, naming a new "customer-oriented approach" as the main driver of built-to-suit warehousing. In the landlord-dominated market before the crisis, developers preferred to build standard speculative warehouse projects, which are simpler in terms of both construction and financing.

Now that both sides have been on top — the crisis brought a tenant market, which is now again shifting to a landlord market — they've realized that "it's better to cooperate rather than fight," he said. Developers are more amenable to modifying planned or existing projects to meet their clients' requirements, and tenants are making their needs known earlier in the process.

A Role for Investors

"Business works better when there is an understanding of customer needs rather than simple, straightforward undersupply," he said.

Ryabov disagreed, saying that although building a good reputation and serving customers was important during the crisis, the trend is slipping because of less space available.

A major "growth impetus" of the built-to-suit trend is the increasing number of developers who are buying their own land plots on which to build warehouse projects, including customized ones, Ryabov said.

Before, companies entering the Russian market usually bought their own land and constructed a warehouse themselves, due in part to doubts about the quality and reliability of developers, Afanasenko said.

"As developers started to buy such plots and offer such services, built-to-suit started to grow," Ryabov explained.

This trend has been taken to the next step by developer-owned industrial parks, which can simplify and speed up the process. It usually takes from two to four years to build a warehouse, but built-to-suit clients are usually only willing to wait a year or less for the project to be completed, Mamayev said. By building industrial parks in which to construct its built-to-suit warehouse projects, PNK has reduced construction times, he explained.

"We are now offering construction times from six to 12 months," he said. "Thanks to this offering, companies are now ready to buy or lease built-to-suit projects."

Building inside an industrial park means the utilities for a warehouse can be put down quickly, if they haven't been already. If a suitable land plot with already-built utilities is available, PNK can construct a built-to-suit project in as little as five months, Mamayev said. PNK built the TVOE project in eight months, he said.

PNK's projects aside, for now many built-to-suit projects are built on a separate land parcel the client has purchased for this purpose, although Kholopov expects an increasing number of built-to-suit projects in industrial parks as the industrial-park market develops, he said.

Mutual Agreements

A final factor in the emergence of built-to-suit deals is better negotiating between developers and clients. The most important component of a deal is the guarantee given by each side to follow through, and determining this guarantee is the most fraught stage of process, said Dmitry Gerastovsky of S.A. Ricci said by e-mail.

"Previously, deals just fell apart at this stage, but as of recently, both clients and developers have learned to find mutually beneficial conditions for cooperation," Gerastovsky explained.

Alongside developers and clients, banks and investors also are playing a role in the built-to-suit trend. In post-crisis real estate, financiers are reluctant to provide money for speculative projects. They're much more likely to greenlight a project with an already agreed-upon buyer, though, and the loans offered will also be cheaper, Ryabov said.

Despite differing opinions on the nature of the emergence of built-to-suit in Russia, consultants and developers expect to see only more of such projects. Even without taking into account the motivations of developers, clients, banks and investors, international experience points toward built-to-suit as the ultimately predominant approach to warehouse real estate.

The beginning of built-to-suit in Russia is a "consequence of the fact that the market is becoming more legitimate," Gerastovsky said.