With demand for U.S. industrial space rebounding and still relatively little new supply on the horizon, institutional investors are once again out scouring the market for warehouse portfolios, prompting heated bidding for larger and pricier transactions.
Institutional funds such as Blackstone Group LP and AEW Capital Management, private REITs and equity firms such as Industrial Income Trust, Verde Realty and Cole Capital have been the most active buyers of industrial real estate so far in 2012. THe lack of available high quality core properties is causing capital to flow into stronger secondary markets such as Phoenix, Houston and Portland, according to information poresented during CoStar’s Second Quarter Industrial Review and Outlook this week.
Returns on warehouse and distribution property investments have exceeded its office and retail counterparts in recent quarters, although the relatively small average deal size of between $10 million and $25 million commanded by even top-grade warehouse properties often deters institutional investors from dealing for individual properties since they face more competition from prospective buyers.
The largest industrial property transaction of the first quarter was a portfolio purchased by Verde Realty from AEW Capital for $290 million. However, three deals in a single week early in the second quarter eclipsed that amount, led by Blackstone’s massive $770 million purchase of 65 assets across nine states totaling 16.6 million square feet from Australia-based Dexus Property Group.
“The portfolio premium is back in the market,” after large trades all but disappeared from the market during the recession, said Rene Circ, director of industrial research for CoStar’s Property and Portfolio Research (PPR). “The story from this quarter is that industrial is back on investors’ radar. These portfolios are trading because the large institutions want to play a lot of capital at a time. Paying $10 million (to buy) one building at a time is way too inefficient for them.”
And stronger trading activity may prompt some opportunistic investors to attempt to “roll up” their own portfolios in hopes of selling it and capturing the premium that buyers are willing to pay, added PPR Senior Economist Shaw Lupton.
Along with low U.S. interest rates and an increasing demand for well-located logistics property by companies reconfiguring their supply chains, part of the reason for the uptick in investment sale volume is the continued strength of warehouse fundamentals, which rebounded from a relatively soft first quarter.
The U.S. industrial market posted 35.5 million square feet of total positive net absorption in the most recent quarter – well above the historical average of 21 million square feet — with 142 markets showing positive absorption, the most since demand began to rebound in 2010.
The national vacancy fell to 9.2% in the second quarter, down 30 basis points from the first three months and 92 bps lower than a year ago. Despite the higher absorption, lower vacancy and very little new construction, asking rents remained flat for the quarter in most markets.
“It’s still a market that’s getting better, but there’s still too much space available, that explains why rents are still not coming back,” Circ said. “We’re not expecting a huge increase in demand for industrial real estate. Given the miniscule amount of new construction, vacancies will continue to trend downward, and it’s very easy and quick to build warehouses, so it’s almost certain more building will occur.”
“I can see a scenario in the next quarter before the election where only the companies that have to pull trigger will do so.”
However, on the investment side, foreign capital continues to see upside in North American logistics and industrial property, as evidenced by the recent entry into the market by Australian CRE investor and developer Goodman Group, according to Jones Lang LaSalle.
Goodman Group expects to invest $1.5 billion in the sector across North America, mainly in new developments, through an agreement with Irvine-based Birtcher Development.
Jones Lang LaSalle, which acted as strategic advisor on the Goodman-Birtcher agreement, views the influx of foreign capital to the U.S. industrial market as one of the key trends driving the resurgence of the sector.
The venture will focus on the West Coast logistics hubs of Los Angeles, San Francisco and Seattle, and East Coast markets including New York, New Jersey and Central Pennsylvania.
“With favorable market conditions, increasing demand and a lack of large facilities in A+ locations, the time was right for Goodman Group to move into the U.S. industrial real estate market,” according to Tim O’Rourke, executive vice president at Jones Lang LaSalle (credit R. Drummer-Co-Star)