Among the four main property types that are considered to be traditional real estate investments for institutional investors, Industrial and Logistic (I & L) properties have lived a shadowy existence. However, the industrial real estate market has been attracting high volumes of institutional capital across the world. This can be attributed to the superior risk-adjusted returns being generated from this particular property type due to the proliferation of e-commerce, global trade, and a shift in demographic trends towards urbanization.
There are three kinds of industrial properties: bulk distribution, which acts as a national distribution center and measures between 500,000 to 1 million+ sq. ft. Followed by R&D facilities, which tends to be flex office space that contains one or more large storage/manufacturing components. Last but not least, there are smaller multi-tenant warehouses, also known as a “high-flow-through” or "in-fill" facilities, which are the last link in the logistics chain for many businesses. Another nickname for this property type is the “last mile”, and I consider it be one of the best investment opportunities to date due to its high demand, low supply, and mission-critical characteristics. Last mile properties experience low to no vacancy in the "Top Metros", which for investors means there is room for rental growth.
Unlike its more glamorous property brethren (hotels, office, and retail) industrial and logistic properties have a positive correlation to technological advancement. For example, the hotel industry is battling airbnb's popularity and progression, and office properties have been forced to go on the Atkins diet, thanks to the cloud and a change in workforce culture. Also major retailers like Kmart, Sears, and Best Buy's brick and mortar stores are dying a slow death as the technological grim reaper disrupts their business model and profitability. In comparison, industrial properties benefit from advancement in technology an many industries like big pharma, supermarket chains, manufacturers, and home-builders are experiencing an increase in demand from online purchases as well as efficiency in their supply process due to automation. The industrial real estate market benefits because all of these industries require well-located warehouses as a part of their growing supply chain.
The old adage for real estate is “location, location, location”, and nowhere is that truer than in logistical and industrial real estate fundamentals. Other key terms that can be attributed to the success of I&L real estate are urbanization and globalization. Investors have taken note of this and are implementing a “gateway city strategy”, which encourages investments in well-located properties for their positive cash flow, liquidity, and good returns.
The year 2017 has been deemed as“the year of uncertainty”, and as a result foreign investors have also joined the "industrial property party" ("you down with IPP, yeah you know me!") as they look for capital preservation. From a macroeconomic standpoint, the oil industry has taken a major hit due to advancements in alternative forms of energy.
As a result, sovereign wealth funds from oil producing countries have been searching for a way to diversify their investments. Also, in times of uncertainity, many investors tend to prefer hard assets like real estate or gold. This translates into a positive cause and effect scenario for the commercial real estate industry. From a property level standpoint, industrial real estate will benefit tremendously. For example, buying stable long-term I&L properties in a prime metro like Northern New Jersey at a 6% cap rate is an attractive investment opportunity compared to a prime office property at a 4% cap rate, especially in this mature phase of the current real estate cycle. According to PEREnews.com, "value-add players, the best investment strategy has been obtaining mission critical, yet short-leased buildings with multiple tenants only to re-position the asset by restructuring leasing terms at expiration. Opportunistic players that have the right tenant relationships have been constructing pre-leased industrial real estate developments outside of large metropolitan cities like Chicago, LA, New York, Atlanta, and Dallas just to name a few".
I’ve recently become infatuated with industrial and logistic properties due to several factors. In my first career, I was a healthcare provider, and I've noticed that I&L real estate and healthcare properties have similar characteristics. For example, they both have long lease rental contracts, stable inflation-linked rents, favorable triple-net lease structures (NNN), and relatively low tenant replacement costs. However, I&L properties have the competitive edge because they are considered a strong play on globalization, and as a result have the potential of surpassing other real estate assets as a top performer.
Last year, I went to Mexico City for an international real estate study tour with a group of graduate students from NYU. Latin America is known for its fabulous hotels, high end retail stores, and condominiums for expats, yet the main theme I took away from my trip was that industrial properties are the life blood of the Mexican economy. Earlier this year, I went on the same trip, but this time I chose to go to London. We visited several private equity firms in the UK, and one of our best experiences was our meeting with the "real estate mafia", also known to the general public as Blackstone. I was surprised to hear a similar mantra as one of Blackstone’s managing directors gave us a presentation on how they entered the industrial market several years ago, and are currently trying to sell their Logicor business for $11 billion.
Lastly, I am originally from the great state of Pennsylvania, also referred to as “Inland Empire East", which is home to some of the biggest players within the industrial real estate market. For instance, the largest real estate investment management firm, Exeter Property Group, specializes in industrial real estate. Another major player in the real estate industry is Liberty Property Trust (ticker: LPT) the largest REIT in Pa, recently sold off the majority of their suburban office properties, and is currently over-weighting their portfolio in industrial real estate. Finally, the top brokerage team in Philadelphia is the CBRE National Partners Group co-founded by Mr. Michael Hines, who has been recently donned as Vice Chairman of CBRE Institutional Properties Group.
Top 10 Reasons you should love Logistics & Industrial Real Estate
1) Specialty property type with a bright future
2) Highly fragmented market
3) Concentrated occupier market
4) Relatively stable income-drivers
5) Strong tailwinds
6) Global market w/ common occupiers & operators
7) Not as many REITs dedicated to this market due to a lack of scalability in the past
8) E-commerce evolution...think Amazon & Alibaba
9) Under invested property type in serious need of an technological update
10) The most down to earth people of any property type work in industrial real estate
In conclusion, one of the best comments I've read about logistic and industrial properties came from my favorite real estate publications, PEREnews.com, where a portfolio manager was quoted saying “the industrial market behaves more like infrastructure rather than real estate because the volume of goods tend to be consistent in terms of trade from warehouses. If you are in a growth cycle people will buy expensive stuff and during a recessionary times people will buy cheaper stuff”. In translation, I&L properties are not just warehouses, they are access points to domestic consumption through e-commerce, which provides superior risk-adjusted returns in comparison to other real estate investments. So next time you drive past a warehouse, manufacturing plant, or storage facility don’t think of these buildings as an eye sore, instead gaze at them with appreciation. Long gone are the times where we have to wait 7 to 8 business days for an important package or stand in long lines at the store to purchase frivolous merchandise. Matter of fact, as you drive past these structures whisper the words “thank you” because at the end of the day industrial and logistic properties are saving everybody precious time and money with every purchase made online. Can I get an Amen?....Amen!
