Category: Industrial

Blackstone Bets $18.7 Billion on Amazon Effect in Warehouse Deal

Blackstone’s $18.7 billion deal with GLP PTE will almost double its U.S. industrial footprint.

(Bloomberg)—The mall is now a warehouse, and Blackstone Group LP is betting $18.7 billion on the shift.

That’s how much the alternative investment manager is paying for 179 million square feet of urban logistics properties — the warehouses used by Amazon.com Inc. and other retailers to fulfill orders from online shoppers. The deal with Singapore’s GLP Pte, the second-largest owner of U.S. logistics real estate, will almost double Blackstone’s U.S. industrial footprint.

The rise of Amazon and other e-commerce companies has increased the need for warehouse space by retailers seeking to expand their digital operations and cut delivery times. The shift toward online shopping is reconfiguring supply chains and shaping the fortunes of industrial landlords, with demand especially high in and around large cities, where e-commerce has taken off fastest.

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High Pricing, Few Available Assets Deter Industrial Investment Sales

In spite of strong demand from tenants, industrial investment sales have slowed down recently.

Industrial vacancy ticked up in the first quarter of 2019 for the first time in nine years, to 5.0 percent, mostly due to new deliveries, which totaled 54 million sq. ft., according to a JLL report. Another 405 million sq. ft. of industrial space is under construction, with more than 1 million sq. ft. underway in 75 percent of markets tracked, noted a national first quarter 2019 report from real estate services firm Transwestern.

Leasing remained strong in the first quarter, with 40 million sq. ft. absorbed, representing more than half of new deliveries. Asking rents increased to an average of $6.28 per sq. ft. nationally, reported Transwestern. Of the 47 markets tracked, 41 experienced year-over-year rent growth, due in part to high demand, but also because new construction commands higher rates.

Industrial and multifamily are currently the most popular commercial property types among investors, notes Mark Glagola, senior managing director of Transwestern’s Mid-Atlantic capital markets group. “There’s lots of money looking for a home, and all types of investors are allocating more to industrial real estate than ever before,” he says.

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Investors Go After Industrial Assets in Secondary Markets

Strong population growth and lower prices are luring industrial investors to secondary cities.

Strong economic and population growth in secondary markets is leading to increased investment in industrial real estate in those areas, according to industry experts.

While institutional investors are targeting secondary markets for office acquisitions, investments in industrial properties in those markets are increasing at the same time. In 2018, overall U.S. industrial sales volume totaled $54.9 billion, up 8.9 percent year-over-year, according to an Avison Young spring 2019 Global Industrial Market Report. Total sales volume in secondary markets was close to $3.9 billion as of March 2019, a slight drop from $4.1 billion in March 2018. Industrial sales volume is not expected to surpass the high of September 2018, as most transactions during that time were from large platform and company deals.

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Industrial Property Owners Increasingly Go After Value-Add Projects

With prices for stabilized properties rising, industrial REITs and other industrial owners invest in value-add and redevelopment.

As REITs and other landlords continue to reap the rewards of the red-hot industrial sector, they’re going beyond ground-up development to satisfy the growing appetite for space.

Several industrial REITs, for instance, are coupling traditional development activity with value-add projects. Meanwhile, a new report from the real estate and construction services practice at professional services firm BDO envisions a rise in the expansion of existing warehouses.

“Developing properties from the ground up is one thing. Redeveloping properties that are in place to make them work better and handle more goods is also part of the thought process,” says Stuart Eisenberg, national co-leader of the real estate and construction services practice at BDO.

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Industrial Sector Remains ‘Red Hot’ Despite Headwinds

Ongoing trade tensions do not concern investors in the industrial sector.

Investors still see industrial properties as favorably as they did six months ago, despite global trade tensions and labor shortages.

Trade talks between the U.S. and China are looming over the industrial sector. Due to these ongoing trade tensions, retailers are importing larger quantities of products than normal, in an attempt to beat potential hikes in tariffs on goods from China.

Barring successful negotiations, the U.S. plans to raise the 10 percent tariff on $200 billion worth of Chinese goods that took effect in September 2018 to 25 percent this spring. The U.S. has already imposed 25 percent tariffs on $50 billion worth of Chinese goods. On the other hand, reciprocal tariffs imposed by the Chinese government lowered Chinese demand for American-made goods. If this trend continues, demand from manufacturing occupiers could decline, according to real estate services firm Colliers International.

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Where Are Cap Rates Going in the Four Core Property Sectors?

Experts predict little change in either direction in the first half of the year.

With late 2018 jitters gone and investor optimism returning, the commercial real estate market should experience mostly steady cap rates through the first half of 2019, although there are particular market segments and geographies that could experience some bumps.

“On the interest rate side, I think everybody has dismissed, at least for the time being, the inflation threat so that kind of stress on pushing cap rates higher isn’t there right now,” says Manus Clancy, senior managing director of applied data, research and pricing with Trepp. “We went through a tough period in December when people were jittery. Now everybody has taken a deep breath; they don’t feel like the wheels are falling off either the U.S. or the global economy.”

Still some changes, although potentially muted, could be in store. Recent trends suggest there is little room left for cap rate compression, according to Matthew Schreck, quantitative strategist with online real estate marketplace Ten-X. “We expect increases to both interest rates and spreads to drive some loosening in cap rates in 2019 across all property types,” he says.

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HNW Investors Might Start Entering the Industrial Sector to Capitalize on Higher Returns

Historically considered too “unglamorous” by HNW investors, industrial assets now offer some of the best returns in the market.

By and large, it’s big institutional investors that scoop up industrial assets in the United States. However, there now appears to be more room for a different class of buyers in the industrial sector—high-net-worth (HNW) investors.

Why? Because industrial opportunities in secondary and tertiary markets—where there is likely to be less competition from institutional investors with big pockets—have grown more attractive.

A new report from commercial real estate services company Cushman & Wakefield says many of the dynamics that spawned the industrial boom, including the e-commerce explosion, will continue to play out in ways that bolster strong demand in secondary and tertiary markets, as well as across a broader array of asset sizes. And a recent report from asset manager DWS Group suggests smaller local distribution facilities—although not necessarily in smaller markets—“generally offer superior investment prospects.”

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Southern and Midwestern Towns Are Already Seeing a Manufacturing Renaissance. A New Maritime Regulation May Create a Nationwide Manufacturing Boom

With an expected increase in the cost of fuels used by ocean carriers, many manufacturing plants might move from Asia to the United States.

Manufacturing is once again a growing U.S. industry, especially in Southern “right-to-work” states, which tend to have lower wages than unionized states, and Midwestern cities with an abundance of highly skilled factory labor, according to Jack Fraker, vice chairman and managing director of global Industrial and logistics group with real estate services firm CBRE. In addition, there is a build-up in the high-tech manufacturing sector in Silicon Valley, with 1,500 manufacturing facilities with 65,000 jobs alone in San Jose, reports a local ABC News affiliate.

Due to this ramp-up in demand for industrial space in secondary markets, some smaller markets, like the Spartanburg-Greenville area in South Carolina, are performing more like primary, core markets, Fraker says. Growth in manufacturing in these towns is adding pressure on industrial vacancy and rent, and spurring new industrial development around plants and ports.

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New Opportunities Are Emerging for Industrial Investors

Cold storage might be the new frontier for industrial real estate investors as online grocery sales grow.

Over the last three years, nearly 1 billion sq. ft. of new warehouse space came on-line, but demand for new space continues to outpace supply, with absorption hitting a record 261 million sq. ft. in 2018, according to JLL’s 2019 Industrial Outlook.

With vacancy nationally dropping to a record low of 4.7 percent, real estate services firm Transwestern reported that the average national asking rent, which has been on an upward trajectory for six years, ended the fourth quarter at $6.29 per sq. ft. Of the 47 industrial markets Transwestern tracks, more than 90 percent experienced year-over-year rent growth, and all but four markets posted positive net absorption for the year.

The supply-demand imbalance, which has averaged 97.3 million sq. ft. annually for nine consecutive years, has driven rents up by 20 percent since 2014, according to a CBRE report.

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The Tightest Industrial Markets in the U.S.

A look at the major industrial markets currently with the lowest vacancy rates.

The continued proliferation of e-commerce remains a boon for the industrial sector. In all, North American industrial absorption is forecast to register 495 million sq. ft. in 2019 and 2020, with 550 million sq. ft. of new product delivered by year-end 2020. IN addition, vacancies will remain at around 5 percent and average asking rents will rise from $6.24 per sq. ft. all the way to $6.68 per sq. ft. by the end of 2010.

Those were some of the conclusions in Cushman & Wakefield’s recently released 2019 North American Industrial Outlook, which line up with the sentiment expressed in NREI’s recent industrial research study.

According to the firm, “Market conditions will encourage development in port-proximate markets, intermodal hubs, and inland population centers but supply will not overwhelm demand.”

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