Arleen Jacobius of Pensions & Investments reports that investors are hungry for industrial properties:
Before the pandemic,
industrial properties were a more of a snack than a main course among
real estate's primary food groups, but investors' voracious appetite for
the sector may result in it occupying a larger place in their
Many investors were already
overweighting warehouses and other logistics properties in their
portfolios to take advantage of consumers' growing acceptance of online
shopping. But the COVID-19 crisis and stay-at-home orders supersized the
trend and investor demand.
Traditionally, office and retail have
been the largest property types in institutional portfolios. At 34%,
office remains the largest investment category in institutional real
estate portfolios, even as questions remain about the future of work
post-pandemic, according to the Pension Real Estate Association. But in
2021, asset owners plan to invest the most capital in industrial,
followed by multifamily, according to a 2021 investment intentions
survey issued jointly by real estate investor trade groups PREA, INREV
According to Real
Capital Analytics Inc., the office sector's share of total deal flow in
2020 shrunk to 23% in the Americas, below industrial for the first time.
In Europe, the Middle East and Africa, office sales fell below
apartment and industrial, Real Capital Analytics data show.
Jim Costello, New York-based senior
vice president of Real Capital Analytics, called it a "sea change" for
the industrial sector. In the past, industrial had not been a big part
of institutional portfolios because it seemed boring, he said.
"It was slow, stable and steady.
Nobody wanted to focus on it," Mr. Costello said. "Slow, stable and
steady are fantastic right now."
Whether industrial supplants office
and/or retail as a leading property sector among institutional investors
depends on where their investment dollars end up, Mr. Costello said.
"It's a capital race," he said.
Office deals down
Office deals continue to be down from
prior periods — $2.8 billion in February, down 71% from a year earlier,
RCA data shows — because buyers and sellers cannot agree on price, Mr.
Costello said. Banks are not forcing properties into default based on
technical breaches of lending agreements, buyers want bargains and
sellers aren't willing to take a price cut, he said. There were $4.9
billion in industrial transactions in February, the most of any sector
tracked by RCA, even though the deal volume was also down, by 69% from
February 2020 due to a large portfolio deal that occurred last year.
Asset owners are continuing to invest
in the asset category, in part, drawn by outperformance. In 2020,
industrial along with self-storage were the only real estate investment
trust sectors with positive total returns, according to PitchBook Data
Inc.'s latest global real estate report released in March. Industrial
REITs earned 12.2% total return and self-storage had a total return of
12.9% for the year ended Dec. 31, PitchBook data show.
"Industrial is a nice cash-flowing
business and probably one of the lowest risk category of real estate,"
said Glenn Brill, New York-based managing director in the real estate
solutions practice of FTI Consulting Inc. "It can be perceived as a core
asset under the right circumstances because it is relatively low risk
and cash flowing," he added.
By comparison, in the office market,
every major employer is rethinking its office needs, making office
investment an iffier proposition, Mr. Brill said. "You can't continue to
pack people in like sardines," he added.
"The recovery or growth of office
into the future is a bit of a question mark while the demand for
industrial space is strong," Mr. Brill said.
Industrial was also the
highest-performing private real estate category in the NCREIF Property
index in 2020 at 11.78%, surpassing the next-highest-performing sectors
of multifamily at 1.83% and office at 1.57%.
Asset owners are not only accessing
the sector by investing in diversified and specialist funds but also in
open-end funds, separately managed accounts and in some cases, direct
CalSTRS makes a move
The $286.9 billion California State Teachers' Retirement System,
West Sacramento, is acquiring a five-property industrial portfolio in
Southern California for $320 million from real estate developer and
investment manager Crow Holdings.
CalSTRS officials declined to comment beyond confirming the transaction.
The story of how the CalSTRS deal
came to be reflects the broader trend around industrial, which grew
stronger during the pandemic, said Michael Levy, Dallas-based CEO of
CalSTRS is buying half of a portfolio
that Crow Holdings originally was to sell to another buyer in January
2020, a few months after it had been put on the market. Crow Holdings
had assembled the portfolio two years earlier, buying the land and
constructing the buildings, he said.
"Then came COVID and the market froze for a $700 million portfolio," Mr. Levy said.
In May, PGIM Real Estate offered to
buy the stabilized, or leased, properties in the portfolio, leaving the
rest of the portfolio that had yet to be leased, he said.
"We have strong relationships with
CalSTRS and, like many institutional investors, it was seeking more
industrial," Mr. Levy said. "As each month went by, the zero-percent
leased portfolio got leased up — and CalSTRS got more comfortable."
By the time CalSTRS and Crow Holdings
close the transaction in the second quarter, all of the properties in
CalSTRS' portfolio will be fully leased, "demonstrating that the
industrial market is even stronger after COVID," Mr. Levy said.
Since January, demand from
institutional investors for industrial properties has accelerated, he
said. At the same time, banks and other lenders "are out in force, more
than in even 2020," Mr. Levy said.
"I think that we have several years of outperformance ahead for industrial," he said.
Eventually, supply will increase and meet the demand "and the torrid growth will settle down a bit," Mr. Levy said.
"I don't know about five years or 10
years, but I feel awfully comfortable saying it will continue to
outperform for the next several years," he said. Crow has about $20
billion of assets under management.
Uncertainty about office
There's a cyclical aspect to
investors' current demand for industrial, said Greg MacKinnon, Hartford,
Conn.-based director of research for the Pension Real Estate
"There is a lot of uncertainty
surrounding office at the moment as investors try to figure out what the
future of work will look like in a post-COVID world, while at the same
time industrial has been the big winner among the property types," Mr.
MacKinnon said. "That naturally leads to more interest in industrial and
less in office."
However, while COVID-19 has
accelerated the trend, it has been in place for a few years, he said.
Allocations for open-end real estate funds, as represented by the
MSCI/PREA U.S. Property Fund index, have shown a rising allocation to
industrial and a decline to office since the end of 2017. Office fell to
31% at the end of 2020, from 34.9% in the fourth quarter of 2017, the
MSCI/PREA U.S. Property Fund Index shows. Industrial rose to 24.1% at
the end of 2020 from 16.5% at the end of 2017, according to the
MSCI/PREA U.S. Property Fund index.
However, office is still the largest
allocation, followed by multifamily, in the MSCI/PREA index of open-end
funds, so there is a ways to go before industrial could overtake office,
Oregon Investment Council, Tigard,
which manages the $82 billion OPERF's long-term investment strategy for
its $8.4 billion real estate portfolio, is to underweight office and
overweight industrial and multifamily, and to a lesser extent niche
assets, according to a report by its real estate consultant Townsend Group.
SDCERS began actively building up its
exposure to industrial in 2019 with commitments to the RREEF Core Plus
Industrial Fund LP of $50 million and Lion Industrial Trust of $30
million, said CIO Liza Crisafi in an email. By design, the pension
plan's $1 billion real estate portfolio is underweight office,
multifamily and retail, she said.
There's no doubt about it, industrial (logistics) is the hottest property sector right now.
It was hot before the pandemic struck and the pandemic only accelerated trends that were going on due to the rise of e-commerce.
Moreover, Retail was in trouble before the pandemic hit and it got killed once shutdowns took hold.
And in a post-pandemic world where uncertainties abound, large investors are flocking to certainty.
What is the main attraction of industrial properties?
This sums it up well:
"Industrial is a nice cash-flowing business and probably one of the
lowest risk category of real estate," said Glenn Brill, New York-based
managing director in the real estate solutions practice of FTI
Consulting Inc. "It can be perceived as a core asset under the right
circumstances because it is relatively low risk and cash flowing," he
Of course, we all know what happens when everyone is looking to buy the same assets, valuations are pushed up, prompting some investors to sell out.
Private Equity Insights reports that Partners Group just sold its US industrial real estate portfolio for over $1billion:
Partners Group, a leading global private markets firm, has, on behalf of its clients, sold a large-scale portfolio of US industrial properties at a Gross Asset Value of over $1 billion.
The Portfolio has a combined leasable
area of 8.6 million sq ft and consists of 88 industrial properties
primarily located across the Mid-Atlantic and Southeast regions of the
US, including Atlanta, Nashville, Norfolk, Raleigh-Durham and the
Shenandoah Valley, near Washington DC. The properties include 74 light
industrial buildings and 14 Class A bulk industrial buildings, which
primarily serve distribution tenants in the e-commerce supply chain.
In line with the firm’s build-to-core strategy, Partners Group built
the Portfolio by aggregating three separate lead investments, in
partnership with Equus Capital Partners, located in five fast-growing US
markets, offering unique exposure to attractive industrial assets in
multiple geographic regions. At the time of the exit, Partners Group had
executed its full transformational value creation plan, increasing
occupancy levels to 98 per cent and executing lease renewals of key
tenants; maintaining high average lease terms to a diversified,
long-term tenant base; and enhancing the quality of the portfolio since
acquisition by executing value-add development opportunities.
Since Partners Group’s original investment, an additional 750,000
square feet of space was added to the Portfolio. Demand for large-scale
logistics and industrial real estate has accelerated since the onset of
Covid-19, benefiting from structural tailwinds from the e-commerce
sector. Partners Group created a unique opportunity for an institutional
buyer to acquire a diversified portfolio of attractive industrial
assets in a high-demand, low-volatility sector. The exit represents a
return in excess of 2x for Partners Group’s clients.
Ron Lamontagne, Managing Director, Co-Head Private Real Estate
Americas, Partners Group, says: “Partners Group built this portfolio of
quality assets across attractive industrial markets, gaining exposure to
key transformative trends, such as the rise of e-commerce and
relatively outsized expansion of regional growth cities. We are proud to
see the transformational results of the work we have done during the
past three years and believe this exit represents an excellent outcome
for our clients. We continue to see relative value in the industrial
sector and, in particular, we have conviction in last-mile distribution
facilities, smaller urban logistics warehouses and cold storage
facilities, which are supported by resilient structural market trends.”
Jessica Wichser, Global Head Asset Management, Private Real Estate,
Partners Group, adds: “This Portfolio generated strong demand from
buyers due to its strategic geographic positioning, strong operating
fundamentals, diversified tenant base and long-term tenant appeal.
During our holding period, we navigated the Portfolio through market
disruptions caused by the Covid-19 pandemic, and adopted an
entrepreneurial governance approach that allowed us to execute on our
transformational investment strategy and maximize potential cashflows,
fueling the Portfolio’s growth and securing sustainable returns for our
Partners Group’s real estate business has a total of USD17 billion in
assets under management and has invested USD20 billion in real estate
opportunities since inception on behalf of its clients. Other notable
transactions in 2021 include the acquisition of a portfolio of UK
industrial properties for GBP253 million; the firm also made its first
direct real estate transaction in Japan in five years in January,
acquiring 24,000 sq m of Grade A office space near Tokyo.
Now, Partners Group didn't sell this industrial real estate portfolio for over $1billion because it thinks we are at the top of the market.
It sold because it's a fund, they wanted to realize on their investment and they made excellent returns, generating in excess of 2x for their clients.
They can move on to their next fund.
Global pensions are different in the sense that they will hold these assets for a lot longer but even they are willing to sell if the price is right.
Still, there's no denying industrial properties are all the rage right now and there are compelling arguments to believe this is a secular trend which can last for a while.
And it's not just industrial properties.
IPI Partners, LLC, a global investment platform focused exclusively on data centers and other technology and connectivity-related real assets, just announced the final closing of IPI Partners II, L.P. at $3.8 billion.
Now, we can argue whether data centers are infrastructure or real estate, all I'm doing is pointing out which sectors are hot right now and why secular winds are blowing their way.
Multifamily is also doing well because pandemic or no pandemic, people need to live somewhere.
Offices remain a murky but I suspect they will rebound once countries achieve herd immunity and people feel safe to go to the office.
What remains unclear, however, is whether the future of work will be a hybrid between working from home and working at the office.
For example, lawyers, accountants and other professional services might be forced to share an office with a colleague every other day as companies look to trim costs.
But I'm pretty optimistic that once we achieve herd immunity and more and more people will be comfortable going back to the office (with all precautionary health measures), we will see activity pick up there.
So yes, industrial properties will remain hot but the risk is this sector overheats while investors ignore more traditional sectors like offices and even retail (yes, retail!).
I think the most important thing global investors have learned from the pandemic is they need to really drill down across their portfolios to ensure there is appropriate sector and geographic diversification.
Below, GLP’s Ralf Wessel is confident that e-commerce will continue to drive
demand and investment in logistic real estate after the company hit a
record leasing year in 2020.
Second, Jon Gray, President and COO of Blackstone, on the real estate industry’s
changing landscape from Goldman Sachs’ firm-wide virtual conference held last June.
Lastly, Bill Rudin, co-chairman and CEO of Rudin Management Company, joins "Squawk Box" to discuss the commercial real estate space and whether businesses will return to physical offices.
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