Move over, iconic Manhattan skyscrapers: warehouses are becoming a big play for global investors, too.
It used to be that global investors focused on U.S. real estate investment were only interested in glitzy office towers in just a handful of high profile locations, like Manhattan, Los Angeles or Miami.
Now, those investors – hailing from locations as diverse as the Middle East, Germany, Singapore, China and Canada – are feeling pressure to achieve returns. To find opportunities in a competitive market, they are looking beyond tall towers to the more horizontal planes of the country’s strategic logistics corridors filled with enormous “big box” institutional-quality distribution centers.
And the investors are doing a lot more than just look. Last year brought not only a new record in U.S. industrial investment volumes, but also an increasingly globalized air to a sector which has traditionally been the domain of domestic investors.
Over the last five years, ownership of industrial real estate has been illustrated by a phenomenon of major investors building or aggregating large-scale portfolios across the country instead of taking on buildings one-by-one. Most notably, the 2015 acquisition of the Industrial Income Trust’s (IIT) 58 million-square-foot, $4.55 billion U.S. industrial portfolio made Singapore-based Global Logistics Properties (GLP) the second-largest owner of industrial property in the United States, second only to San Francisco-based Prologis. Additionally, the Abu Dhabi Investment Authority (ADIA) and PSP Investments of Canada purchased Exeter’s entire portfolio of industrial assets in December for $3.2 billion, comprising of roughly 58 million square feet.
These larger portfolios allow for greater debt and equity syndication – and as a result, more global investors have become partners in the capital stack. For example, Prologis partnered with Norges Bank Investment Management (NBIM) in its $6 billion acquisition of the KTR portfolio, consisting of 61 million square feet of industrial product. Additionally, China Life and GIC have joined in on the aforementioned GLP portfolios.
Industrial becomes the sector to watch
According to JLL research – and including portfolio syndications, 40.5 percent of U.S. industrial investors were based offshore in 2015—while less than 6 percent were based offshore in 2014. The nation’s industrial sector received $25.9 billion in cross-border capital investments from sovereign wealth funds, institutional advisors and insurance companies. For the first time ever, foreign investment into United States industrial properties has exceeded and outranked all other real estate sectors, including office.
Consider the newly-won allure of New Jersey, once a place where foreign buyers seeking tall towers would not consider as an investment destination. But today, New Jersey’s proximity to the New York City population, as well as availability of modern distribution and fulfillment center space for good credit tenants, earned New Jersey a place in the top-five hottest U.S. markets for offshore industrial investment.
Prices have followed the investors. “In 2015, rents and sale prices in many U.S. industrial property markets exceeded historical peak values last seen in 2007 and 2008,” explains Craig Meyer, President, Industrial Brokerage, JLL Americas. “Market conditions will remain strong and we see no sign of a change in the coming months. Instead, all indicators point to demand again outpacing supply in 2016 with a continuing drop in vacancy rates to new all-time lows.”
Striking a global chord
Historically, global investors have been focused on trophy office buildings, glamorous hotels, or high-end shopping centers. Now, the game has changed, and modern supply chain logistics has transformed the way industrial space is used and built.
In recent years, there has been a nascent restructuring of global supply chains that has added complexity, precipitated by changing consumer patterns and e-commerce, emerging markets moving into new phases of economic maturity and risk mitigation in logistics operations.
As a result, distribution and fulfillment centers have become far more sophisticated than ever before because of the convergence of the e-commerce boom and smart warehouse technology. High-tech features differentiate modern warehouses from basic “big-box” facilities.
In addition, many of the largest and most-sophisticated warehouses are occupied by high-credit national or multi-national corporations often on long-term leases that offer security and stability to investors and play a critical role in national and international logistics networks.
Supply and demand
Offshore investors may still swoon for prestigious landmark office towers, but the glut of investors competing for too few assets is compelling some to adopt a broader approach to their investment allocations. Once unable to allocate enough funds into individual industrial real estate, global investors are now competing for the best industrial deals across the country, as sizeable portfolios that have been built or aggregated over the last five years have traded hands.
Meanwhile, the need for modern warehouse facilities continues to outstrip availability. The fourth quarter of 2015 was the twenty-third consecutive quarter of warehouse demand outstripping supply, and leasing activity is expected to be steady in 2016, according to JLL research, suggesting a continuing influx of offshore investor dollars.
“Last year was a record year, and all forecasts predict that appetite for U.S. industrial real estate will continue to be strong overall in 2016 for investors and occupiers alike,” said Meyer.