When private equity firms that are lauded for their smart investment decisions target a specific property sector, the whole commercial real estate industry pays attention. And that’s exactly what’s happened as both The Blackstone Group and DRA Advisors have made significant investments in the industrial sector.
“One might argue that investors are able to acquire industrial assets at favorable pricing, but it’s still a very clear bet on the sector,” says Al Pontius, senior vice president and managing director at Marcus & Millichap Real Estate Investment Services, based in the firm’s San Francisco office. “They’re saying that industrial is a sector they like. And you have to think these big investments are a sign that they are confident in the sector’s future.”
Over the past six months, The Blackstone Group has amassed a national portfolio of 275 industrial properties totaling 45 million sq. ft. The New York City-based firm recently acquired $770 million worth of warehouses from Australian firm Dexus Property Group and is rumored to be hunting the former CalWest portfolio, which is valued at more than $2 billion.
Blackstone reportedly has been buying up the junior debt on the 23.5-million-sq.-ft., 95-building industrial portfolio. Chicago-based Walton Street Capital currently owns the portfolio, and sources close to the situation say the firm is close to defaulting on its mortgage.
Meanwhile, DRA Advisors LLC purchased 52 industrial properties from Weingarten Realty Investors. The firm paid $382.4 million for the 9.6 million-sq.-ft. portfolio, which is situated in Florida, Georgia, Tennessee, Texas and Virginia. The price represents a cap rate of about 8 percent.
“We’re opportunistic and value-added investors, and industrial is at the top of the opportunistic list,” says Paul McEvoy, a senior managing director with DRA Advisors. “We definitely think industrial is a place to look—it offers good value and has a positive story.”
Lack of supply boosts fundamentals
Like most property sectors, investment sales activity in the industrial sector has increased over the past 12 months. During the first quarter, roughly $5.7 billion worth of industrial assets changed hands at a cap rate of 7.8 percent, according to Real Capital Analytics. In 2011, sales volume reached $35.4 billion with an average cap rate of 7.9 percent compared to 2010’s $19.8 billion and an average cap rate of 8.4 percent.
“Industrial properties are increasingly attractive to investors,” notes Caulley Deringer, an executive vice president with Transwestern in Vienna, Va. The firm currently is marketing an industrial building in the Dulles submarket in the Washington, D.C. market, and Deringer says he expects the property to receive more than 20 offers before trading at a low-6 percent cap rate.
“When investors compare performance and the outlook for the sector to other commercial property types such as retail or office, industrial is stronger,” Deringer explains. “There’s been minimal speculative development, and increased absorption has taken space off the market.”
The first quarter 2012 marked the seventh consecutive quarter of positive growth in industrial demand, following seven prior quarters of deep contractions, according to most recent Industrial Space Demand Forecast. Published by NAIOP Research Foundation, the forecast is based on Purchasing Manager Index data provided by the Institute of Supply Management, Index of Manufacturing Output data provided by the Federal Reserve, and net absorption data provided by CBRE Econometric Advisors.
The current annualized rate of growth for first quarter 2012 came in at 1.11 percent, and the Foundation is forecasting demand for industrial space is expected grow at an annualized rate of 1.14 percent for second quarter 2012.
“Leasing activity was stronger than expected, a very positive sign in the first quarter, which is usually a soft leasing quarter,” Prologis Co-CEO and Chairman Hamid Moghadam said during the REIT’s first quarter earnings call on May 1. “And notably, rent change on rollover was strongest it’s been for many years.”
Moghadam said Prologis’ market rents surpassed its in-place rents for the first time in four years. “This improvement occurred earlier than our earlier forecast,” he noted. “We expect the going-forward trend to be similarly positive.”
Moghadam pointed out that global trade volumes remained well above peak and the current IMS forecast indicates additional growth in global trade of 4 percent this year and 5.6 percent next year. “Relative to consumption, retail sales remained strong, and container volumes are also above peak levels,” he explained.
Prologis is forecasting absorption at 160 million sq. ft. for 2012, up roughly 33 percent from last year. “This improvement in absorption, combined with continued record low new construction volumes, is driving the increases in rental rate in many of the global markets where Class A is scarce,” Moghadam noted.
Marcus & Millichap firm forecasts that the vacancy rate will fall to 11 percent by year end from 11.9 percent as forecast demand of 133 million sq. ft. overwhelms the nominal amount of new supply. Forecast completions of 45 million sq. ft. represent a 58 percent increase over 2011, but remain insufficient to meet anticipated demand.
“[Our business] looks terrific right now… All signals today from our business and our customers are fabulous… better than expectations,” Moghadam concluded.
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