July 30, 2018
On the state of the market for industrial property acquisitions, moderator Mark Glagola of Transwestern and his three panelists at the recent Connect Industrial were in complete agreement. “We want to be creative dealmakers,” said Laura Collins with Westmount Realty Capital. “It is very difficult to find deals in this marketplace with the way pricing has gone.”
With pricing on Class A, big-box distribution centers near or at all-time peaks, creative dealmaking often entails smaller, infill properties. While the basis going into the acquisition is frequently more attractive, the product itself may be older or even functionally obsolete. Glagola led a discussion titled “Growing Development & Changing Technology,” that focused in part on what to do with that product.
To Stockbridge’s Patrick Hackett, infill industrial generally means older Class B. “It has its place, and we’re big fans of it,” he said. “We like the shiny new stuff, but it comes with a lower going-in yield. When the B product meets the breadth of the market and a greater portion of overall tenant demand, and isn’t too high up on the basis, we’ve found that those assets perform very well, too. We’ve actually experienced as-good or better rent growth characteristics” compared to Class A.
Opportunities to add value on older industrial can arise from a creative approach to managing it. Take the eight-building, 955,000-square-foot Regent O’Hare Center in Elk Grove Village, IL, which Distribution Realty Group acquired in 2015.
“We thought it had been mismanaged,” the firm’s Curran Darling told the Connect Industrial audience. “The operating expenses had gotten out of whack and it was about 70% leased. We thought there was an opportunity, not just to push rents, but to tighten up the operating budget and focus on a gross rent for these tenants.” The park is now about 95% leased.
Westmount owns 44 industrial properties in and around Chicagoland, “ and of the 44, probably 37 are infill,” said Collins. The firm has invested in upgrades in order to make vacancies, where they exist, “look better than the competition.”
The upshot, Collins added, is that “we increased our occupancy dramatically this year,, and are getting to the mid-90s. We’re certainly looking to buy more infill because we feel that that’s where the opportunities are.”
Those opportunities may entail repurposing or redeveloping older product, such as a half-office, half-warehouse property that Distribution Realty acquired in Wood Dale, IL last year. “Getting creative, and understanding where the underlying value is, is very important for infill,” Darling said.
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