Category: Industrial

Single-Tenant Net Lease Sales Volume Is on Pace for a Record Year, with Industrial Assets in the Lead

Industrial single-tenant net lease properties are highly coveted by institutional and private equity investors.

In a market rife with uncertainty, investors seeking risk-adjusted, recession-proof opportunities continue to be attracted to single-tenant, net-lease assets. As a result, total single-tenant net lease sales volume at the end of the third quarter had increased by 24 percent year-to-date, to $55.2 billion, according to a recent report from CBRE. It is now on pace to exceed last year’s sales record of $69.6 billion, according to the real estate services firm.

“This sector is growing and will probably total more than $70 billion this year in transaction volume,” says Will Pike, chairman and managing director of the CBRE net lease property group and corporate capital markets.

The industrial sector has been leading single-tenant net lease sales, with transactions totaling $22.3 billion year-to-date at the end of the third quarter, compared to $19.8 billion during the first three quarters of 2018. In the third quarter, single-tenant net lease industrial transactions jumped 48.5 jump to $10.2 billion, compared to $6.9 billion during the same period last year.

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Two Companies Are Dominating the Battle for Warehouse Space

Between them, Blackstone and Prologis have made more than $38 billion in warehouse acquisitions in 2019.

(Bloomberg)—It’s the year of the warehouse mega-deal, and the two largest players are running away from the pack.

Blackstone Group Inc. and real estate investment trust Prologis Inc. are locked in an Amazon-fueled acquisition battle, gobbling up U.S. warehouse space in a bid to profit from rising consumer demand for fast shipping.

Together, the two companies have inked warehouse acquisitions worth more than $38 billion in 2019. More than 40% of that total comes from a pair of deals announced in the last month.

“There’s a huge amount of demand coming from e-commerce,” said Lindsay Dutch, a Bloomberg Intelligence analyst. “The growth of online shopping and the desire for quick delivery times has really driven a need for more warehouses, especially in the last mile.”

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Are Industrial Developers Heading Toward Overbuilding?

A recent paper from NAIOP predicts lower absorption over the next two years, but it’s unclear if industrial developers are taking heed.

Industrial users are expected to absorb about half as much space quarterly over the next two years as they did in 2018 and 2019, when quarterly absorption averaged 60 million sq. ft., according to the semi-annual Industrial Space Demand Forecast from the National Association of Industrial and Office Properties (NAIOP).

This predictive model, which was co-developed by Hany Guirguis, professor of finance and economics at Manhattan College, and Randy Anderson, formerly of the University of Central Florida, is based on a process that involves testing more than 40 economic and real estate variables related to demand for industrial space and has been shown to be relatively accurate. In 2018, 222.2 million sq. ft. of absorption was forecast, which was in line with actual absorption of 229.5 million sq. ft.

The most recent lower forecast is based on a slowdown in U.S. economic growth, as the impact of tax cuts wears off and business spending and investment declines due to economic uncertainty initiated by the trade war with China. Other factors adding to the uncertainty, according to authors of the NAIOP report, include: a slowdown in Chinese and European economic growth and continued uncertainty over the impact of Brexit.

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Blackstone Extending Warehouse Bet in $5.9 Billion Colony Deal

The agreement follows Blackstone’s acquisition of $18.7 billion of warehouses from Singapore’s GLP Pte. earlier this year.

Blackstone Group Inc. has acquired more than 1 billion square feet of logistics space since 2010 as part of the firm’s global bet that the rise of e-commerce is driving demand for last-mile real estate.

The private equity giant is extending that effort, agreeing to acquire Colony Industrial, the warehouse arm of Colony Capital Inc., for $5.9 billion. The deal includes about 60 million square feet of warehouse space across 465 light industrial buildings in 26 U.S. markets, as well as an affiliated operating platform, according to a statement Monday. The unit’s properties mostly serve as the last mile of the logistics chain and are crucial for companies seeking to make speedy deliveries to consumers.
The agreement follows Blackstone’s acquisition of $18.7 billion of warehouses from Singapore’s GLP Pte. earlier this year.

“We’ve been the big buyer of warehouses around the world, probably bought $70 billion, on the simple premise that goods are moving from physical retail to online retail,” Blackstone President Jonathan Gray said in a Sept. 25 interview at the Bloomberg Global Business Forum.

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Black Creek CEO Raj Dhanda Talks About Why It Still Makes Sense to Buy Industrial Assets

In spite of low cap rates, Black Creek still sees opportunity in industrial and multifamily acquisitions.

Real estate investment management firm Black Creek Group recently reported that its fundraising had surged to $702 million through July 31, 2019, including $290 million in equity commitments from institutions. The company raises capital across different solutions, including its two non-traded REITs. Black Creek has been busy putting that capital to work. During the first seven months of the year, the firm acquired 4.7 million sq. ft. of assets and has 3 million sq. ft. of industrial properties under construction. Black Creek’s holdings currently span about 67 million sq. ft. of industrial, multifamily, office and retail assets. NREI recently talked to Black Creek CEO Raj Dhanda about the firm’s recent capital raising and the market climate for new acquisition and development opportunities.

NREI: Your firm raised $702 million through July 31st as compared to $817 million for the full year in 2018. What’s driving that momentum?
Raj Dhanda: I think there are a couple of factors contributing to our success. One is more specific to Black Creek. Black Creek’s story of being focused on a real estate operating model that combines acquisitions and development to assemble portfolios one property at a time is in demand and attractive to a lot of different investors. More broadly, I think commercial real estate continues to be an asset class that is benefiting from capital flows and increased investor allocations. Of course, low interest rates and a fundamentally strong economy don’t hurt either.

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Industrial Investors Drive Cap Rates Lower in Secondary and Tertiary Markets

Going into smaller markets in search of yield, industrial investors are starting to cause cap rate compression in those areas.

Investors don’t like the high pricing and low cap rates on industrial assets, especially since cap rates continue to compress in some markets. But they still want to invest in this asset class, because continued rent growth and low interest rates should boosts net operating incomes (NOI), overcoming low yields during the first year or two of a 10-year investment horizon, says Jack Fraker, vice chairman and managing director of global industrial and logistics with CBRE.

Strong market fundamentals, including low vacancy and robust demand, have continued to attract investors to the asset class, increasing values and leading to sustained cap rate compression, according to CBRE’s first half 2019 cap rate survey.

Demand for industrial space is still outstripping supply, despite a record-high construction pipeline that delivered 126.8 million sq. ft. of new space in the first half of the year. Another 327.5 million sq. ft. underway, according to Cushman & Wakefield’s second quarter 2019 MarketBeat industrial report. Net absorption for the first half of the year totaled 88.6 million sq. ft., and new leasing activity in the first two quarters involved 256.6 million sq. ft.

With demand for logistics facilities still going strong, vacancy has remained at or below 5.0 percent, according to Jason Tolliver, managing director of investment services at Cushman & Wakefield.

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Trade War Increasing Demand for Industrial Space on Both Sides of the U.S./Mexico Border

U.S. manufacturers operating out of China are seeking relief from tariffs in Mexico, but will this last?

The U.S. trade war with China is casting a cloud of uncertainty over the U.S and global economies, but it is having a positive impact on industrial real estate on both sides of the U.S./Mexico border.

According to ATISA Industrial, a Tijuana-based industrial real estate developer, some U.S. manufacturers operating out of China are seeking relief from tariffs in Mexico, as the cost of labor and other operational expenses are similar to China, and transportation costs considerably less than moving products from China to U.S. markets. Additionally, in Mexico, which has its own patent system and respects that of other nations, there is threat around intellectual property theft, notes John Galaxidas, managing principal at the San Diego-based brokerage firm Synergy Real Estate Group.

For example, China-based Fuling Global Inc., which makes plasticware for restaurants, recently opened a new facility in Monterrey, Mexico and Texas-based Taskmaster Components, which produces tires and wheel assembly parts in China, has plans to build a factory in Mexico.

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The Fed’s Interest Rate Cut Could Boost Industrial Sales. Or Disrupt Them.

While the rate cut will lower hedging and borrowing costs, it can also drive values even higher in an already highly valued sector.

Can the new interest rate cut lead to an asset bubble in the industrial sector? Or will it result in more sales?

The Fed cut the federal funds interest rate Wednesday by a quarter of a percentage point to about 2.25 percent to protect the U.S. economy from an economic slowdown. As justification for the first rate cut since the height of the Great Recession, the Fed cited concerns over the slowing global economy and trade war with China.

In the short term, “commercial real estate investors will likely take the decision as a signal to continue buying property, even at lofty valuation levels,” says Ryan Severino, chief economist with real estate services firm JLL. “This could extend the trend real estate markets worldwide have seen during the last decade, with investors piling into the (industrial) asset class amid a hunt for higher yields and stable returns.”

The rate cut will also likely decrease the cost of construction and give REITs a boost, notes Byron Carlock, national real estate leader with consulting firm PWC.

In the longer term, however, Severino says the rate cut “risks widening the rift between market expectations and the underlying economic reality, which could form the seeds of an asset bubble. Since we did not see a strong chance of the economy backsliding into negative growth over the rest of this year, if there was no cut, the risks associated with the Fed’s decision may be greater than any boost to the market.”

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Midsize Tenants Dominate Demand for Industrial Space

Midsize tenants drive a significant portion of demand for industrial space in cities.

E-commerce and last mile logistics tenants are fueling additional demand for industrial space expansion in the U.S., spurring midsize space users to dominate the industrial market.

Midsize industrial tenants—those who occupy 50,000-sq.-ft. to 300,000-sq.-ft. boxes, are driving industrial demand in key markets, including Indianapolis, Chicago, Atlanta and Dallas, according to a report from real estate services firm Avison Young.

For example, between January 2017 to June 2019, tenants in Chicago signed 872 industrial leases totaling 97.3 million sq. ft., with an average size of 111,629 sq. ft. Tenants in Atlanta signed 320 industrial leases totaling 36.2 million sq. ft., with an average size of 113,243 sq. ft. Dallas tenants signed 490 leases totaling 52.5 million sq. ft., with an average size of 107,265 sq. ft. Tenants in Indianapolis signed 41 leases totaling 52.5 million sq. ft., with an average size of 146,341 sq. ft., according to Avison Young.

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Speed Bumps Ahead for Industrial Assets Don’t Diminish Investor Appetite

New research predicts a slight softening in demand for industrial space going forward.

Slowing economic growth, trade wars and a pipeline that is delivering new supply to the market may force investors to adjust return expectations for industrial properties, but it doesn’t appear to be putting much of a dent in buyer demand.

Industrial has edged out multifamily as the favored asset class and there continues to be abundant capital targeting the sector as investors expand allocations. In fact, industrial property transaction volume jumped 32.6 percent last year to a cyclical high of $97.7 billion, according to research firm Real Capital Analytics (RCA). Yet a new industrial real estate forecast from Deloitte suggests that investors may need to brace for slower growth ahead.

Deloitte is predicting that the annual demand growth rate, although still positive, will likely decline over the next three years to a little below 0.9 percent—nearly one-half of 2018 levels. Specifically, Deloitte expects the vacancy rate to rise from 7.0 percent in 2018 to 10.3 percent by 2023. Some of the factors that will weigh on occupancies and demand for space include the rising cost of capital, new supply and new space alternatives, such as aggregators that offer on-demand warehouse space for seasonal needs.

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