Real Estate Investors Seek Rising Industrial Strength
Rising rents and low vacancies coupled with lagging new supply — and billions of dollars searching for assets — have ignited a booming trade of industrial properties around the U.S.
Despite the country’s moribund economic output in the first quarter, overseas buyers looking for safe havens are more aggressively targeting U.S. industrial assets, which include warehouses and “flex” buildings that typically feature offices or showroom areas in addition to warehouse, research and development, or manufacturing space.
Not only are buyers from Asia and Europe displacing Canada as the biggest group of foreign investors in U.S. industrial deals, but cross-border capital generally is also spreading more cash beyond primary and secondary markets, according to a recent report on foreign investment by Chicago-based commercial real estate services firm JLL (NYSE:JLL).
Even with the expected completion of 171 million square feet of new industrial space this year, following 142 million square feet built last year, supply is still below the annual average of 184 million from 2004 through 2008, says JLL.
Additionally, virtually no new industrial space was built from 2011 through 2013, says John Huguenard, international director and head of industrial capital markets for the Americas at JLL.
Building On Spec Returns
Speculative construction has generally composed about half of the new supply over the last several quarters and is concentrated in Dallas, Southern California’s Inland Empire and other markets that have a large industrial base, he adds. He estimates that companies are typically leasing 30% to 50% of the space while under construction.
“Developers are really trying to play catch-up more than anything else,” Huguenard said. “So we’re just not seeing a lot of perceived risk in the system from institutional investors.”
U.S. industrial property sales totaled $ 21 billion in the first quarter, a year-over-year increase of 97%, according to commercial real estate researcher Real Capital Analytics, which tracks individual property and portfolio transactions of $ 2.5 billion and greater.
New York-based Blackstone‘s (NYSE:BX) $ 8.1 billion sale of its IndCor Properties industrial platform to a joint venture between Singapore sovereign wealth fund GIC and Singapore logistics provider Global Logistics Partners was a key contributor to the dollar-volume spike. Blackstone built the 117-million-square-foot portfolio through 18 acquisitions over the last five years.
In April, a joint venture between San Francisco-based real estate investment trust (REIT) Prologis (NYSE:PLD) and equity partner Norges Bank Investment Management, Norway’s pension fund, reached an agreement to buy KTR Industrial for $ 5.9 billion. KTR’s portfolio encompasses 322 properties totaling 60 million square feet.