Commercial Investment Real Estate September/October 2017 | Page 30
Investors Strongly Support
Industrial Assets
by Beth Mattson-Teig
Data that shows a decline in industrial property sales may not be an
accurate barometer for the still-strong demand that exists in the mar-
ketplace.
After reaching a high of $78.3 billion in sales in 2015, sales dropped
to $60 billion in 2016, and appear to have slowed further this year with
year-to-date sales through May at $22.5 billion, according to Real
Capital Analytics.
However, the 2015 sales volume was boosted by a few large portfo-
lio deals. There weren’t as many of those portfolio sales in 2016, which
makes it appear — artificially — that demand has dropped off, accord-
ing to Ryan Severino, chief economist at JLL. In 2015, 45 percent of
sales were fueled by large-scale transactions greater than $150 million
as compared to 15 percent in 2016, according to JLL.
“There is still a lot of money that is interested in industrial, particu-
larly in individual deals,” Severino says.
Investors like the fundamentals, and the forecast is for strong
occupancies and rent growth to continue, even if there are some
signs of slowing. Also, buyer demand is broad-based — coming from
institutional and international capital — as well as owner-occupants
and value-add investors that are looking to acquire and upgrade
older assets.
Although single-asset deals represent the bulk of sales so far this
year, some bigger portfolio deals have transpired. Recent notable
sales included TA Realty’s sale of a 45-property portfolio of office
and industrial properties for a reported $854.5 million. The Hampshire
Companies also sold a 1.2-msf, six-building portfolio in New Jersey for
$146.9 million.
Despite concerns about rising interest rates, investors are still
willing to pay top dollar for industrial properties. Cap rates held firm
at 6.8 percent in 2015 and 2016. Rates have inched nominally higher to
6.9 percent in 2017. However, price per square foot has been climbing
since 2011. Year-to-date sale prices through May were averaging $83
psf compared to $79 in 2016, according to Real Capital Analytics.
Cap rates are getting close to the peak, but some industry ex-
perts believe there is still room for compression in many markets
nationwide.
“Quality industrial assets are trading at increasing price levels,” says
Loren M. DeFilippo, CCIM, director of research | Ohio for Colliers In-
ternational in Cincinnati. Pricing also is motivating investors to expand
strategies to consider new geographic markets.
As markets move closer to the peak, it is typical for investors on
both the East and West Coasts to start looking in the Midwest and
smaller secondary and tertiary markets where cap rates are higher,
according to DeFilippo. That has certainly been the case in Cincinnati
and Columbus, Ohio. “There are a lot of quality assets here and a lot of
interest from investors,” he adds.
28
September | October 2017
Zoning and land costs are two potential stum-
bling blocks. However, there are cases where
those conversions are moving forward success-
fully. For example, a shuttered Kmart was demol-
ished in Cincinnati and replaced by a build-to-
suit industrial building for a local supplier to the
trucking industry.
In Cleveland, an Atlanta-based developer is
looking at a vacant regional mall site on which
to construct a 600,000- to 700,000-sf distribu-
tion facility for an undisclosed national company,
DeFilippo notes.
Infill locations are attractive due to the high
demand and barriers to entry for new competition.
Historically, very few people worked in industrial
warehouse facilities. Today, many individuals oper-
ate in these fulfillment and distribution centers, and
they want to work in facilities that are close to ame-
nities and are not parked out in a greenfield in the
middle of nowhere.
“The employers, including Amazon, are going
to look at space much the way an office employer
does,” says Scott Crowe, chief investment strategist
and portfolio manager at CenterSquare Investment
Management in New York City. “How is this space
going to help me attract employees, hire people, and
keep them happy?”
For example, CenterSquare recently acquired
a former Quaker Oats facility just outside of
Harrisburg, Pa. The Class A industrial mar-
ket is situated on all of the major road arter-
ies, which make it very easy to reach the entire
northeast within a one-day drive, Crowe notes.
CenterSquare plans to completely gut the facility
and raise ceiling heights.
“The way to avoid competition is to add value by
accessing assets that need some form of transforma-
tion, active management, and capital investment,”
Crowe says.
Although the pace of growth may be slowing,
it appears that the stage is set for more expansion
ahead, with developers, investors, and space users
all remaining relatively active.
“I think we are years away from the end of the
cycle,” Crowe adds. “And I think we are going to
be surprised about how long the cycle lasts, because
it has been a very muted recovery, and risk aversion
due to the global financial crisis has forced a lot of
discipline into markets in general, including com-
mercial real estate.”
Beth Mattson-Teig is a business writer based in
Minneapolis.
COMMERCIAL INVESTMENT REAL ESTATE