July 17, 2017
By Dennis Kaiser
Connect Industrial’s inaugural conference in Chicago on June 28th included an investment panel discussion that included Heitman’s Brian Pieracci, Griffin Capital Co.’s Max Kaminsky, USAA Real Estate Company’s David Reahl and Talos Capital’s Brian Townsend that was moderated by Avison Young’s Erik Foster. The key takeaways from the conversation included:
Pieracci says Heitman’s focus is on five key markets only, and the fund’s capital partners have not asked them to deviate from that market investment approach. “They’re more looking to us to deliver stable cash flow around stable markets that have proven, path of goods, ports, not going anywhere,” returns. Occupier decisions are being driven by location, as they ask how close a facility is to the highway? How close is it to getting products to people? Heitman has been fortunate to experience robust rent growth across its portfolio, and at least for the next few years they don’t see anything that is expected to alter that growth expectation, says Pieracci.
Griffin Capital Co.’s Kaminsky says its two REITs focus on single tenant, long-term office and industrial investments. Industrial is attractive for them now, given the strong fundamentals and demand. But a compelling reason driving them toward more industrial is the fact that “on the office side, the long term rollover costs are increasing and tenant improvement, leasing commissions and amenities are increasing our basis.” The cost comparison for rollovers are about 10% for industrial, and can go as high as 30% or more for office, notes Kaminsky.
USAA Real Estate Company’s Reahl notes that secondary markets tended to be slower to respond to demand in putting up new buildings. He sees opportunities in secondary markets to deliver 150,000 to 350,000-square-foot, light industrial facilities, not big bulk warehouses now. A key consideration is having the ability to deliver just-in-time products in the secondary markets. Combined with the fact that, in most cases, the lack of efficiencies with the older buildings don’t work as well and functionally there is a drop off in older buildings in infill locations. Reahl does think there are opportunities popping up, and he sees “better risk adjusted returns in secondary markets, relative to these other markets” like Austin, Nashville, Charlotte-Raleigh-Durham, Boston and Portland, or the coastal markets.
Reahl thinks it is reasonable to believe that rent growth in the 4% to 5% range will continue for a couple of years, then level off. But an area of focus for USAA is on the assets’ physical components, such as cross docking capabilities, auto parking, how many ingress and egress points are there, ability to demise space, and a big key is clear heights. “The long term viability of the asset is taken into consideration. That really decides how aggressive we’re going to be on industrial investment,” he says. An interesting trend to watch is the level of portfolio accumulations underway. If they were to sell, it becomes a “problem of where to put the capital and can they redeploy back into industrial.” Reahl says, that becomes challenging since there’s fairly slim pickings” for industrial investment opportunities now.
Talos Capital’s Townsend says its investment strategy has changed. It now includes longer hold periods, which is different than Blackstone’s previous approach that was buy, fix, flip. Now it is an “almost forever hold.” He thinks the overall core and non-core sectors have tightened up in first and secondary markets. Secondary markets such as Charleston, SC are experiencing significant rent growth and since those markets tend to lag behind the rest of markets like NJ and L.A., there’s likely still “5-7% rent growth possibilities built in.” A concern is that as current pent-up demand fills up new facilities, there could be rent adjustments that follow if there’s not sufficient demand in some secondary markets. He expects to see a spike in rent growth, but then it should level off. He believes coastal markets can really push the numbers. They are expected to remain strong and see growth since there’s simply not enough land to build. Townsend says, the last mile is here, and he expects to to see repurposing of malls, and parking garages into ecommerce delivery for the last mile. Last mile has to be to the city population, notes Townsend.
For comments, questions or concerns, please contact Dennis Kaiser