A Tight Market For Industrial Service Facilities Is About To Get Tighter And Investors Sense Opportunity

Glowing retro neon 'no vacancy' sign against cool blue wall background

Everyone is becoming more accustomed to seeing small trucks roam their neighborhoods, delivering goods ordered online.

But even as the coronavirus pandemic greatly intensified demand for these services, most municipalities are reluctant to approve proposals to develop new industrial service facilities where distributors and other businesses can store, maintain or dispatch vehicles, heavy equipment or bulk materials.

“Nobody wants to live next to a truck terminal,” JLL Senior Associate Kate Coxworth said. “That not-in-my-backyard, or NIMBY, attitude keeps new supply low, sending rental rates soaring for existing industrial service facilities in markets across the U.S.”

That’s helped in the past 12 months to draw in a new cadre of developers and investors who now see these facilities as an essential component of the rapidly expanding industrial sector.

“These facilities are the skeleton of the supply chain, and there are more people making the discovery that there are real opportunities here,” Industrial Outdoor Ventures CEO Tom Barbera said.

Barbera started Schaumburg, Illinois-based IOV about five years ago, and for most of that time, only three or four other firms specialized in acquiring and developing properties within the niche sector, he said. But things changed in 2021. A new group of six to eight firms is now out there and has made the market for industrial service facilities more competitive.

“And I think we’ll continue to see new folks get involved,” Barbera said.

National investment players have also joined the fray. IOV formed a joint venture in March with San Francisco-based Stockbridge, planning to make between $100M and $200M of acquisitions annually. IOV completed 24 acquisitions in its first four years, but thanks to the new joint venture, it has picked up the pace and has closed 16 new acquisitions since February.

That includes the 39K SF 1401 North Farnsworth Ave. in Aurora, Illinois, a Chicago suburb, and the 22K SF 4212 Perry Blvd. in Whitestown, Indiana, an Indianapolis suburb. Both are 100% occupied by MacQueen, a fire truck and emergency equipment provider that uses the properties for truck maintenance and repair.

“By the end of this year, IOV could close on another 20 properties and be in at least a dozen major metro areas, including South Florida, Atlanta, Chicago, Dallas and Houston,” Barbera said.

 

JLL also recognizes ISF’s growing importance as an asset class, and plans to establish a group of specialists that will handle such transactions, according to Coxworth, who helped represent IOV in the Aurora and Whitestown deals.

“JLL researchers have started tracking the nationwide vacancy rate among ISF properties,” Coxworth said.

It now stands at 3.1%, and with many municipalities expected to continue blocking new facilities, especially in dense residential areas now served by so many delivery trucks, investors can be confident the market will stay tight. In addition, ISF tenants promise steady returns.

“Almost all of the tenants are signing 10-year leases because they all understand that this is a hard commodity to find, and once you do, you better hold onto it,” Coxworth said.

These tenants have shown a willingness to pay much more in rent as the industrial boom continues, according to Timber Hill Group Managing Partner Cary Goldman, who founded the Chicago-based firm in 2018. The first truck parking facility he bought was near southwest suburban Stickney and Chicago’s Midway Airport, and tenants typically were paying about $135 per month for each space.

“But spaces in the same area now go for between $275 and $300,” Goldman said. “And spaces near Chicago’s O’Hare Airport can cost $375 and are trending toward $400. What other sector has seen its rental rates more than double in just a few years? Although that will certainly help bring in more investors, it’s a management-intensive business, and actually operating industrial service facilities will probably stay with specialists.”

Unlike the new distribution warehouses so popular with investors, ISFs sometimes have hundreds of tenants, each needing just one or a few truck spaces.

“It really is akin to self-storage,”  Goldman said. “And setting rental rates isn’t easy, as no one tracks the information needed to generate comps. There is no CoStar for truck parking places, The information is not easy to obtain and it takes a lot of real ground-level research. It’s also not a trophy asset,” he added. “It doesn’t look pretty on a brochure. It’s a lot of gravel behind a fence.”

Timber Hill Group now owns 16 assets, according to Goldman, and like IOV, plans to keep buying. It formed a joint venture in September with Chicago-based Champion Realty Advisors, and over the next 12 to 18 months the venture plans to acquire $150M of assets in infill locations near road interchanges and rail networks.

He said he expects that the market for ISFs will soon get even tighter in most metro areas. Not only is it tough to get the proper zoning and other approvals from cities for new truck parks and storage areas, but ISF owners can frequently score deals to transform existing spaces.

“Supply is actually coming off the market, because it’s being converted to other uses, an added bonus for ISF owners, Goldman said. “It provides good cash flow while you wait for great development opportunities.”

 

Source: Bisnow

 

ULI, PwC Identify Top Markets To Watch In 2022 As Real Estate Investment Powers Up

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Change is a major theme in this year’s Emerging Trends in Real Estate, an annual report by the Urban Land Institute and PricewaterhouseCoopers LLP, heading into 2022.

Housing affordability, soaring construction costs, climate change, proptech and the lasting impacts of remote versus in-office work are, unsurprisingly, some of the major topics and trends identified in this year’s installment. The report includes data, insights and survey responses from 1,700-plus real estate industry professionals.

While the economic recovery for the real estate industry has been better than expected since the pandemic, some adaptations and changes to the office, the way consumers shop and even how and where people live will be changed forever. The report’s survey found 47% of real estate professionals didn’t think changes implemented during the pandemic would revert back in 2022.

 “Long-term impacts from pandemic changes, such as the growing acceptance of work-from-home on the office market, are still unknown. But there’s a greater understanding that such shifts will impact commercial real estate,” said Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “A big lesson has been how things don’t have to change completely to have impact,” Kramer continued. “In the office sector, it’s not that everybody has to be working from home for changes to occur. The office sector is not dead but there will be a bit of a shift within it.”

She said when a fuller picture of how work-from-home will affect office emerges, that’ll prompt further questions: What happens to downtown businesses that rely on lunchtime crowds during the week, or older office buildings and retail centers that may be obsolete in a post-pandemic world?

Real estate investors’ capital war chests have been bolstered this year, but a disproportionate amount of money is flowing into a few sectors.

Tom Errath, managing director and head of research at Chicago-based Harrison Street Real Estate Capital LLC, said during a real estate economic forecast panel at ULI’s fall meeting this week that investors — some fairly new to real estate — are more recently wanting to understand alternative asset classes, which Harrison Street specializes in.

“We are seeing great interest from not only domestic capital but foreign capital,” Errath said. “These asset classes we focus on exist in other countries but they’re not as well developed there. If you want to access them in a meaningful way and take advantage of the transparency and liquidity that exists here, you have to be the in United States.”

Ben Breslau, Americas chief research officer at Jones Lang Lasalle Inc., also said foreign capital has been constrained during the pandemic because of travel restrictions and the inability to tour assets or markets. Once those restrictions lift, he said even more international capital will likely flow in to U.S. real estate.

Ken Rosen, chairman of Rosen Consulting Group of Berkeley, California, also said investors want to pile into the same few sectors. Disproportionately, industrial, multifamily and more niche sectors like life sciences are seeing the greatest competition from capital. The success of those sectors and more broad real estate fundamentals set the stage for more capital flowing in to commercial real estate in 2022.

But what about more traditional asset classes that have become less certain since Covid-19?

“Office remains a bifurcated sector,” said Breslau. “The flight-to-quality theme touted by many in the office space applies to investors, too. It’s not a rising tide lifting all boats but the best office space is seeing bidding wars from tenants. We have a lot of clients and investors who are getting incredibly frustrated, trying to deploy everything in two-and-a-half asset classes,” he continued, referring to industrial, apartments and alternative sectors.”That could propel savvy investors to find opportunities within sectors like office.”

“Properties are available to acquire now but investors may have to have more courage to buy what he called the more contrarian stuff,” Rosen said.

The ULI and PwC survey found most respondents felt there will be a year-over-year increase in availability of capital from lending sources, especially non-bank lending sources, in 2022 as compared to 2021. Sixty percent said they felt equity capital for real estate investing would be oversupplied in 2022.

Perhaps underscoring the continued optimism of the commercial real estate industry, 89% said they were confident about making long-term strategic real estate decisions in today’s environment, with 45% “strongly” agreeing with that statement.

ULI and PwC also identified several markets to watch in 2022.

“The scoring criteria is based on survey respondents’ scores on a city’s investment and development prospects, and other opportunities, said Kramer. “Smaller Sun Belt cities like Nashville, Tennessee, and Raleigh, North Carolina, are identified as supernova cities because of real estate fundamentals, in addition to having walkable downtowns and other factors.”

 

Source: SFBJ

 

This Asset Class Posted The Largest Price Growth In 2021

American dollars grow from the ground

In a surprising twist, suburban office achieved the greatest price growth at 14.8% of all CRE asset classes over the last year, besting investor favorites multifamily and industrial.

John Chang of Marcus & Millichap notes that the price growth in the sector reflects three factors: “a pricing bounce, a disproportionate share of well-leased properties in the sales data, and some investor speculation.”

Unlike the price gains notched in multifamily and industrial, suburban office appreciation is not well supported by rent growth, which was only up by 0.6% or vacancy rate change.

“Part of the gain is an anomaly,” Chang says. “Suburban office prices dipped last year in the early stages of the pandemic, so part of the gains are the property types simply recovering losses. Second, the sales market has been dominated by well-leased properties—high-quality tenants with long-term leases in place. The sales composition is a bit different and there were fewer weaker assets in the deal mix that would normally drag prices down.”

Chang also says investors are taking note of the widely-held belief that to facilitate employees’ return to the office, companies will have to open locations closer to people’s homes.

“A lot of workers, especially millennials relocated to the suburbs because of the pandemic, and a new trend is forming. Investors are positioning ahead of that curve buying low rise suburban buildings,” Chang says. “Investors are betting on history repeating itself. A significant portion of suburban office stock was built in the 80s when baby boomers migrated there. It looks like millennials are in the process of making that same move.”

The second fastest price growth, according to data from Real Capital Analytics, was in apartment properties, which came in at a 14.7% increase. These values are supported by a 90 basis point vacancy reduction through Q2, Chang says.  And again, investors have millennials to thank.

“Investors are pursuing multifamily properties because of demographics,” Chang says. “The aging millennials are now entering their thirties en masse, which is driving household formation up aggressively. Basically, there are so many millennials trying to move out on their own that there are simply not enough housing units to meet the demand. That trend is expected to run five years of longer, supporting the underlying thesis for multifamily investment.”

Industrial came in third, with price gains of 13.6% over the last year. That reflects average rent growth of 5.9% over the last year and a 30 basis point vacancy drop to 5% nationally, as well as cap rate compression of about 20 bps.

“Industrial properties have drawn increased investor attention over the last couple of years as e-commerce thrived during the pandemic,” Chang says. “The supply chain issues of recent months have also brought forth the importance of industrial property as businesses are stockpiling increased inventories to mitigate shipping and delivery risk. Industrial real estate has one of the strongest investment outlooks like investors penciling in aggressive rent gains into their valuation models.”

 

Source: GlobeSt

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US Economy Is Shifting But Changes Good for CRE

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Mark Zandi, the chief economist of Moody’s Analytics and founder of Economy.com told more than 1,000 attendees of NAIOP’s CRE Converge conference taking place in Miami Beach, that while the pandemic is altering the U.S. economy, changes in store bode well for commercial real estate.

On the positive side, the economy has recovered 17 million of the 22 million jobs that were lost due to the pandemic. The policy response on the part of the Federal Reserve, Congress and the White House, including maintaining low short- and long-term interest rates, the CARES Act and the American Rescue Plan, have collectively kept the economy from failing.

“I’m assuming that the pandemic is going to continue to wind down, and that with each new wave the disruptions to the economy will be less significant. Over the course of the next 18-24 months, the pandemic doesn’t go away but it largely fades away in terms of what it means in terms of our work and lives,” Zandi said.

Zandi noted that however it shakes out, the infrastructure spending packages will also be beneficial to the economy. And he said that with respect to monetary policy, the Fed will slowly take its foot off the monetary accelerator – raising short term interest rates by spring of 2023 and tapering the quantitative easing of buying bonds.

The pandemic has not only accelerated certain trends, it is causing permanent shifts. These include remote work, less domestic travel generally, less business travel and an increasing net migration from urban cores.

Prior to the pandemic, a net of 275,000 people on average were leaving urban cores in the U.S. to live in other locales; during the pandemic, that number jumped to more than 600,000.

Zandi also identified the risks inherent in the post-pandemic economy:

  • The Delta variant of COVID-19 has unnerved consumers and workers.
  • Fiscal policy is at risk with Congress threatening to not fund the government’s fiscal year, which begins Oct 1.
  • Housing prices are stretched and possibly primed for a correction as interest rates begin to increase.
  • Maybe not today, but at some point down the road, government debt and deficits will become a problem.
  • Supply chain shortages continue to make it difficult to obtain building supplies and consumer goods.

Meanwhile the pandemic has also fueled a significant rise in productivity.

“There are fundamental things going on in the economy that argue for stronger productivity growth. Businesses are investing in labor-saving software, baby boomers are retiring, and the workforce is becoming younger,” Zandi said. “That’s a big deal for the economy. It goes to profits, wages, and our ability to address our fiscal policies.”

 

Source: GlobeSt.