Tag Archive for: pandemic impact

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Industrial outdoor storage has gone from being a niche in the industrial sector often owned by small private investors and mom-and-pop operators to a market estimated at $200 billion.

During the past three years, IOS has been growing dramatically and increasingly attracting the attention of—and significant outlays—from institutional investors and private equity firms.

“There is a lot of institutional capital chasing deals right now in the IOS space and it’s happened very quickly. I have two or three new groups calling me every week that I previously didn’t know about,” Zach Harris, a director at Stan Johnson Co. based in Tulsa, Okla., told Commercial Property Executive. “They’ve got committed capital and they’re ready to spend it. There’s definitely a rush to acquire product as quickly as possible.”

The demand for industrial storage space increased during the pandemic as e-commerce exploded and continues to be a significant part of the supply chain as more businesses seek locations for last-mile delivery and also want to be near ports and major industrial corridors. This hot commercial property type is mainly used for truck terminals, trailer storage, container storage, pallet storage and construction or heavy equipment yards. Trucking and truck parking are the heaviest users, particularly by third-party logistics companies.

Some of the biggest players in the IOS subsector include J.P. Morgan Global Alternatives and Zenith IOS, which formed a $700 million joint venture in February to create a national IOS storage platform and are aiming to build a portfolio worth $1 billion within the next two years. They kicked off their joint venture with the acquisition of four facilities in Dallas, including a nearly 27-acre property at 2118 California Crossing about 1 mile from Interstate 35 and 10 miles from Dallas Fort Worth International Airport.

Alterra Property Group closed its Alterra IOS Venture II LP fund in March with $524 million in total commitments, well beyond its original fundraising goal of $400 million. Limited partners in the fund included public and private pensions, endowments and foundations, asset managers, family offices and high-net-worth individuals. Alterra was an early entrant in the IOS market, launching its strategy in 2016.

Also in March, investor and developer Criterion Group and Columbia Pacific Advisors formed a joint venture aimed at deploying more than $2 billion in capital in IOS properties across the U.S. by late 2023. The joint venture’s first acquisition was a 41-property portfolio covering 520 acres across 11 states valued at $360 million. In June, Criterion Group announced the acquisition of eight IOS properties totaling 151 acres for an aggregate purchase price of $45.3 million. Criterion’s IOS portfolio now has 50 properties in 13 states valued at $550 million, including its first purchases in North Carolina and Virginia.

In June, Iconic Equities, a Miami-based real estate investment and development firm focused on industrial assets, and Leste Real Estate U.S., the real estate investment strategy of alternative investment manager Leste Group, formed a programmatic joint venture backed by about $150 million in institutional capital to acquire $400 million of industrial outdoor storage facilities across the U.S.

Iconic Equities—formed about 18 months ago—made IOS investments a core focus within the last six to nine months after focusing initially on more traditional industrial acquisitions and development in markets like Charleston, S.C., and Phoenix, according to Founder & CEO Tim Bishop. In Phoenix, the firm is set to break ground on approximately 1.2 million square feet and acquiring an additional 110,000 square feet in a forward takeout structure, .

The joint venture partners are looking for sites ranging from 5 to 15 acres in top U.S. logistics markets including New Jersey; Atlanta, Dallas, Los Angeles; the Bay Area; the Inland Empire; Nashville, Tenn.; Columbus, Ohio; Savannah, Ga., and South and Central Florida.

Their first acquisition was the $9.5 million acquisition of Garnett Storage, a 5-acre storage site in Coral Springs, Fla., which is leased to nearly 300 tenants seeking outdoor storage for boats, trailers, motor homes and commercial vehicles. The joint venture recently acquired a 6-acre IOS site in Fontana, Calif., in the Inland Empire and has deals in contract in the Inland Empire, Los Angeles and Columbus.

“Warehouse development in super infill locations near ports and in the major MSAs that typically sacrifice parking spark demand for IOS sites that can provide parking for trucks as well as storage for containers and pallets,” Bishop told CPE.

The Iconic team uncovers the opportunities for the joint venture, establishes the deal flow and structures the deal flow while Leste focuses on the capital market side of the transactions.

“From an institutional capital perspective, the reason this has become such an interesting niche over the last six months and really the last several years is it’s under penetrated by the institutions.” Leste Managing Director Josh Patinkin told CPE. “That coupled with really strong fundamentals in rent growth and tenant demand for these types of assets has come together to create a growing niche.”

Chasing Yield

There’s another important reason IOS has become increasingly popular with institutional investors. They are chasing higher yield.

“This strategy affords institutional capital the opportunity for higher yielding investments when their two biggest apprehensions right now are cap rate expansion and interest rate risk,” Bishop said. “When you get higher yield, you’re kind of insulated from that.”

The IOS market is not quite as mature as other real estate asset classes. Many of the properties are still owned by mom-and-pop operators and deals can be off-market or represented by local brokers rather than national brokerage platforms, Patinkin said.

“It’s not a very liquid market,” Bishop added. “There’s a lot of inefficiency in pricing and in evaluating risk and return and it’s especially extenuated in IOS because they’re smaller opportunities, they tend to have less institutional ownership and less of a national brokerage presence.”

Bishop and Patinkin also noted there are high barriers to entry in IOS due to a limited supply and many municipalities frown on these kinds of properties and are not likely to approve new uses in their communities.

“It’s one of the very few strategies where you can say supply is decreasing because a lot of these sites are very infill and tend to get redeveloped into other uses like traditional warehouse and there’s only so many of these permits that are out there,” Bishop said.

The IOS submarket in the Denver region has been growing organically over the past three years with a focus on infill sites close to the city, according to Cushman & Wakefield director Joey Trinkle.

“It’s harder to find buildings with outside storage and lower coverage in a strategic location close to the urban core that is also close to major interstate access,” said Trinkle. “There is higher demand from both the end user and investor sides to finding locations closer in.”

Rising Rents

Similar to the industrial sector as a whole, rents have also been rising in the IOS space, where leasing is priced by the acre rather than square footage.

“A few years ago, we were seeing deals done for outside storage without a building on site for about $5,000 an acre,” Trinkle told CPE. “Now we see $6,000 per acre triple net, which really speaks to the value. Outside storage properties bring a unique mix of users, some are local trucking and transportation companies that are local to Denver. But we also see national credit corporations looking for strategic sites. That’s really who these investors are targeting.”

Trinkle and Managing Director Matt Trone are currently marketing a 27-acre industrial storage yard/trailer site at 409 W 66th Ave. in central Denver recently acquired by IG LogisticsImperium Capital’s industrial platform than owns and operates properties with large outdoor storage or transportation components, and Meadow Partners, an institutional middle-market real estate investor, for $19 million. IG Logistics launched last year with plans to invest $250 million in IOS properties and specializes in acquiring and developing infill assets in high barrier to entry, urban growth markets where demand for logistics real estate is driven by e-commerce, with a focus on last-mile facilities.

The central Denver property is a vacant lot that is zoned for outdoor storage and includes a 10,000-square-foot industrial building with about 6,500 square feet of office space, two drive-through service bays and 14 feet of clear height. It’s also situated near the confluences of I-76, I-25, I-270 and US 36 and near the BNSF Intermodal Facility and UP Intermodal Facility.

Trone described the former auto auction site as a “rare and very attractive piece of property” that can be divided down to three or four tenants, with options to share the building and office space, or some can just use the property for pure yard space.

In June, Trone and Trinkle and colleague Steve Hager represented a partnership of Biynah Industrial Partners and Platform Ventures in the $9.5 million acquisition of a 12.2-acre IOS property in central Denver from Prime Inc., in an off-market transaction. BIP, a Minneapolis-based private equity firm that invests in industrial real estate, and Platform, a Kansas City, Mo.,-based real estate investor and asset manager, plan to invest at least $150 million in IOS assets over the next two years.

The Cushman & Wakefield brokers are also marketing the property that has access to the major Denver highways and the two intermodal facilities.

“The previous owner was only using about 4 acres,”Trone said, “while the new owners plan to pave the unused land to maximize the space for interested tenants.”

They expect strong demand since development of infill locations over the past several years has displaced companies that need parking for trailers and heavy equipment.

“The renewal rate for tenants in the IOS sector is greater than traditional industrial properties,” Harris told CPE.

But they also tend to sign shorter leases, generally in the five- to seven-year range, which is attractive to institutional owners looking for value-add assets that will potentially see more frequent rent increases. With demand outpacing supply, owners also don’t need to worry about replacing tenants who leave. Triple net leases can often be found at IOS properties, where operating expenses in general are lower than traditional industrial properties.

Despite the increased investments in IOS in recent months, Leste’s Patinkin says the market is big enough to accommodate all the interested investors—at least for the next two or so years.

But Patinkin has advice for those considering investments in IOS: “You have to have really good access to capital because the credit markets are very young in IOS and there’s not a lot of participation yet. So, you have to navigate that. You have to be fairly deep pocketed and have support. You’re not going to get competitive individual small loans on an asset-by-asset basis. You have to know how to access the broader capital markets to navigate this strategy.”

 

Source: Commercial Property Executive

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A developer and warehouse operator won approval from the Pompano Beach City Commission to replace the Festival Flea Market Mall with about 470,000 square feet of warehouse space.

North Miami-based IMC Equity, led by owner and CEO Yorham Izhak, is working with Atlanta-based IDI Logistics to demolish the Festival Flea Market Mall on the southeast corner of the Florida Turnpike and Sample Road, and redevelop the site as a warehouse complex with a 412,347-square-foot building and a 58,962-square-foot building.

The Pompano Beach City Commission just voted to rezone from “general business” (B-3) to “general industrial” (I-1) a 23.8-acre portion of the 37-acre Festival Flea Market site. The rest of the site, which is at the corner of Sample Road and Northwest 27 Avenue, remains a commercial outparcel for a proposed Racetrac Gas Station and Market.

The city commission also approved a text amendment and a map amendment to the local land use plan for the Festival Flea Market property. IDI Logistics filed the application for the land-use amendments, and a company controlled by IMC Equity applied for the rezoning.

In 2018, IMC Equity paid $25 million to acquire the Festival Flea Market Mall at 2900 West Sample Road and another $31 million for the mall business itself. The flea market rents space to tenants that sell apparel, shoes, bags, luggage, jewelry, and electronics, among other types of goods.

“It will be at least a year before the tenants would have to leave,” Dennis Mele, an attorney for IMC Equity, said at a June 14 meeting of city commissioners, who voted then to table their consideration of the warehouse project.

Mele said the Festival Flea Market project will be the fourth warehouse development that IDI Logistics has pursued in Pompano Beach. The Atlanta-based company owns and operates the Pompano M Business Center, the Pompano II Business Center, and the Rock Lake Business Center, which is just south of the Festival Flea Market Mall.

Commissioner Beverly Perkins said after the Festival Flea Market Mall is demolished, the city should assist tenants of the mall, including some who have leased space there for more than 20 years.

The trend toward online shopping, which the pandemic strengthened, is driving the industrial redevelopment of the Festival Flea Market Mall, according to the rezoning application filed by IMC Equity. The location of the mall also allows fast access to the Turnpike, I-95 and the Sawgrass Expressway.

“The impacts of COVID-19 will likely impact the way people shop well into the future, which will continue to reduce the need for brick-and-mortar stores as people continue to do much of their shopping online,” according to the rezoning application.

Industrial vacancy in Broward County plunged to 4.7 percent in the first quarter from 8.7 percent during the same period of last year, as tenants absorbed new warehouses and other types of industrial property, according to a report by Avison Young. The vacancy rate in the first quarter was 4.1 percent in Pompano Beach, which has 29.6 million square feet of industrial space, the largest inventory among seven sub-markets in Broward County, Avison Young reported. Industrial space under construction in the first quarter totaled 285,176 square feet in Pompano Beach, nearly 600,000 square feet in southeast Broward, and 1.6 million square feet county-wide, according to Avison Young.

Broward County had a 4.2 percent industrial vacancy rate in the first quarter, compared with 2.6 percent in Miami-Dade County and 4.5 percent in Palm Beach County, according to industrial market research by JLL.

 

Source: The Real Deal

Aerial photograph of forest and golf course with lake

The pandemic-driven surge in demand for e-commerce has attracted warehouse developers to an unlikely business prospect: turning old golf courses into distribution centers.

Since the mid-2000s, golf has been suffering from fewer players and more course closures. The pandemic has giving the sport a boost because it offers both outdoor entertainment and social distancing. But as other leisure activities resume, many expect the sport’s headwinds to pick up again.

That’s caught the attention of investors seeking to cash in on the warehouse boom. In New York, Tennessee, Pennsylvania and other states,warehouses are rising on parcels of land formerly occupied by golf courses. And among the tenants developers have drawn to these sites are Amazon and UPS.

Online shopping during the pandemic has made warehouses one of the hottest corners of commercial real estate. The industrial market had its strongest year on record in 2020, and big money managers like BlackstoneCerberus and KKR have all snapped up logistics centers since last March.

“Finally our asset class is the most popular in the world,” says Jack Fraker, head of industrial investments for CBRE.

Still, converting a golf course to a warehouse is no chip shot. Developers often have to contend with the rezoning process and the ire of nearby residents who oppose the increased traffic and noise.

But it can be tough for local leaders to say no when Amazon offers millions in investment and hundreds of jobs. In May, Onondaga County in New York announced the e-commerce giant would build a $350 million, 3.8-million-square-foot distribution center on land formerly occupied by a golf course in the town of Clay.

“With golf you’re just limited to the income of the ongoing business concern,” says Keith Cubba, national director of Colliers’ Golf Course Advisory Services. “There’s going to be a much higher yield on 200 acres of residential or commercial.”

 

Source: Bloomberg

American dollars grow from the ground

As the Covid pandemic begins to taper off, the CRE industry is ready to get back to work and take advantage of the underlying strong economy.

There are of course distressed real estate sectors caused by the pandemic like hotels, struggling malls and blue city apartments and office buildings. However, this is an excellent time to invest in these and other areas of CRE to take advantage of the distressed assets with historically low prices and the potential for significant increases in occupancy, revenue, and cash flow.

Here are five post Covid investment strategies:

1. Acquire Deeply Discounted Hotels In Suburban Markets

The hotel market has been hurt more than any other property type, by the pandemic with significant declines in occupancy, RevPAR, and cash flow. Most hotels are operating at 40% occupancy and for an asset that has high fixed costs, this is unsustainable for long periods of time. Many hotels will close permanently like the New York Hilton in Times Square, while the majority will limp along or be foreclosed by the lender until the economy recovers. However, this represents a great opportunity for hotel owner/operators to acquire these hotels at deep discounts. It is recommended that investors focus on hotels in suburban markets with national franchises and close to airports that will benefit from the return of business travel. At 40% occupancy most hotels lose money, but, as the economy improves and the deferred demand from business and leisure travel kicks in, the properties should see tremendous increases in net operating income and cash flow.

2. Sell CRE Apartments And Office Buildings In Blue Cities; Reinvest In Red Cities

It is recommended that investors sell apartments and office buildings in these markets and reinvest the proceeds in red states and cities and in select suburban markets that surround blue cities. Per Real Capital Analytics, distressed sales of office and apartments during Q2-20 totaled 18 deals worth over $403 million. This will be just the tip of the iceberg as distressed sales will increase significantly during the next six to twelve months. It is expected that a diversified portfolio of CRE assets in red states and cities to outperform a similar portfolio in blue states during the next ten years.

3. Acquire Deeply Discounted Mall Assets For Repurposing

The distress in the retail sector has been amplified by the pandemic and many retail experts expect 15,000 stores to close in 2020. This is up from 10,000 closures in 2019. However, there is a burgeoning CRE industry in buying old, dilapidated, and distressed retail malls and repositioning them with hotels, industrial space, bowling alleys, food courts, pop-up drive inns, medical tenants (see the article on the growth of medical retail) and residential space. There have been numerous examples around the country of CRE firms acquiring old malls and power centers at deeply discounted prices of $20-$50 per square foot, closing 50% or more of the retail space and converting the vacant space to other uses as shown above. There are very few firms around the country that have the CRE investment and development expertise to complete these types of deals which require a change in the “highest and best use” of the asset. Although these projects have high risk and are difficult to finance, they can produce substantial investment returns.

4. Develop Suburban Office Buildings Around Blue Cities

The flight of individuals and businesses from blue cities is real and one of the prime beneficiaries will be suburban office markets that ring these blue urban locations. The suburban office building market nationally had been fairly anemic pre-Covid, with vacancy rates over 12% and slow rent growth. Many suburban markets are littered with 1980s and 1990s vintage office buildings that never attained an occupancy above 85%. However, in a post Covid world, this metric will turn around with a substantial increase in demand for suburban office product. Currently, the bright spot is suburban Class A office which saw an addition of 3.9 million square feet (aided largely by flight to quality and expansion into new campuses) and an increase of .3% in average rents to $32.15 per square foot. During the first half of 2020, the U.S. office market per Jones Lang Lasalle, recorded 14 million square feet of occupancy losses, bringing the net absorption to a negative 8.4 million square feet, or -0.2% of inventory. The blue cities of New York City and San Francisco, which have seen substantial out migration of companies and residents, were responsible for 26.7% of all net occupancy losses in the second quarter. Sublease space rose by 10.6% and 5.2 million square feet to a mammoth 61 million square feet nationally. Developers of office buildings should shift their focus to blue and red state suburban areas as demand for quality office space will surge.

5. Sell Urban High-Rise Apartment Buildings; Reinvest In Suburban Garden Apartments

The out-migration of renters from high priced blue cities that are technology centric is a permanent structural change for the rental markets in the U.S. According to Yardi Matrix, YoY rent growth through August 2020 has declined -5.5% in San Jose, -5.1% in San Francisco, -1.0% in Portland, -2.1% in Los Angeles and -1.8% in Washington D.C. Forecasted rent growth for these same cities for the rest of 2020 will decline further and substantially. If you are a millennial tech worker and can work from home, why would you spend $3,500 per month for a one-bedroom apartment in San Francisco, if you could rent an apartment in Lake Tahoe or Reno, NV, for $1,200 per month? Even though apartment metrics will further deteriorate in these urban wastelands, demand will surge in suburban markets that surround these areas. One of the most over-priced CRE assets during the last few years has been new urban high-rise apartments that were trading at sub-4.0% cap rates in many core markets. Owners of these assets should sell them before they fully realize a decline in net operating income and higher cap rates.

 

Source: GlobeSt.