Buyers can build scale and sellers can attract more bidders: that’s the thinking behind a wave of regional portfolio deals currently shaping the industrial sector.
Industrial portfolios range from $150 million to multi-billion dollars, many of which traded in 2015. The current darlings of industrial are regional portfolios, particularly those with assets located in key secondary markets across the United States such as Seattle-Bellevue, Washington, D.C., Boston, San Diego and Phoenix.
While prices are lower this year than last due to smaller assets being on the market, global investors still have an appetite for industrial product.
Investors hedge their bets
JLL figures from 2015 reveal that more than 56 percent of industrial investment involved deals worth more than $150 million. Cross-border deals accounted for more than 40.5 percent of all activity, with deal sizes averaging more than $2.5 billion.
Among these were the $5.9 billion KTR Capital Partners portfolio sale to a Prologis-Norges Bank joint venture, the $4.6 billion IIT portfolio sale to GLP, the $3.2 billion Exeter portfolio sale to an Abu Dhabi Investment Authority-PSP joint venture and Blackstone’s sale of IndCor to affiliates of GIC for $8.1 billion. Hillwood is also teeing up to sell their portfolio, worth more than $1 billion, this year.
For these investors, industrial real estate had a double draw: its high yields compared to the 10-year treasury and its position as a hedge against less-than-stable or even declining foreign currencies. Indeed, direct foreign investment in U.S. industrial real estate soared in 2015 with the amount of offshore capital placed in the sector increased tenfold compared against the 10-year average amount.
Changing investment landscape
However, as investors piled in, supply started to dry up. Already, a lack of available options has pushed mega-portfolio volume down to $167 million during the first three months of 2016. Of that activity, just over half was from deals in the $20 to $150 million range.
“Nonetheless, the signs still point to a higher volume of deals in 2016 but at lower price points,” says JLL Managing Director Bo Mills. “The magic number right now is about $60 million. We have a bunch of these in the works, up and down the coast from Los Angeles to Fairfield to Portland.”
Only 5.3 percent of activity between January and March was from cross-border investors. “Entities from Asia, Europe, Canada and the Middle East still want to buy big, but it requires a strategy shift,” says JLL International Director John Huguenard. “With fewer single-transaction options, they will need help from domestic operating partners and funds. These entities can amass multiple regional portfolios that allow global groups to continue to efficiently deploy their capital in U.S. industrial space.”
Strong returns ahead
The returns based on the income that U.S. industrial properties are expected to generate, remains strong. “With cap rates still in the high 5 to mid-6 percent range, the nation’s industrial market should continue to deliver yield expectations that are commensurate with most international investors’ risk thresholds,” Huguenard adds.
He points to market-specific portfolios as a way for investors to build scale, particularly in regional secondary markets such Seattle-Bellevue, Washington, D.C., Boston, San Diego and Phoenix.
Although the odds of the blockbuster portfolio sales picking up to reach 2015 levels remain unlikely, mega portfolios are certainly not out of the picture. Prologis remains an active seller and IPT plans to bring a multi-billion-dollar portfolio to market this year.
“With the U.S. economy still viewed as doing well and the dollar strong, these offerings will likely move quickly as valuable safe harbor buys,” concludes Huguenard.