Industrial sales volume has trended upward amid the COVID-19 pandemic, despite rising prices, low cap rates and limited product availability, according to WealthManagement.com. Industrial net lease assets have benefited from this trend in particular as buyers are doing whatever it takes to secure a bid for these properties.
Optimism for the future of the industrial sector is a main driver for increased investor activity in this sector, according to Jeff Chiate, vice chair of the industrial advisory group with real estate services firm Cushman & Wakefield.
“What started out as an Amazon story a year ago has translated into demand for anything industrial,” he told WealthManagement.com.
Right now, traditional industrial property buyers such as REITs, pension funds, life companies and private equity players are being followed by capital sources that are moving from office, retail and hospitality acquisitions and into the industrial sector, according to Chiate. Such capital sources include small private investors and family offices, according to Al Pontius, San Francisco-based senior vice president and national director for office, industrial and healthcare with real estate services firm Marcus & Millichap.
“All sizes and shapes (of industrial properties) are popular across the investor spectrum,” Pontius told WealthManagement.com.
Rise in industrial sales by the numbers
Domestic private buyers made up 42% of all industrial net lease sales during the first half of this year, according to net lease-focused brokerage firm Stan Johnson Co. That’s a 32% increase from the same period in 2020. Additionally, domestic institutional buyers increased their activity—they comprised a third of transactions versus 29% during the first half of last year. Meanwhile, domestic publicly traded REITs saw their activity represent just 10% of the transactions in 2021 versus 19% last year.
Single-tenant industrial sales meanwhile hit a five-year high at $12.9 billion during the fourth quarter of 2020, according to real estate data firm Real Capital Analytics. Those assets continued to set records during the second quarter of 2021—prices reached more than $126 per square foot nationally, with an average cap rate of 5.9%.
The appeal of industrial properties
During uncertain times, it’s the net lease assets with long-term leases and credit-worthy tenants that investors find most attractive. Especially investors who want risk-adjusted, recession-proof opportunities. It’s industrial net lease that appears to fit the bit the bill during this current real estate cycle, however. During the second quarter of 2021, industrial property trades comprised 47% of all net
sales at more than $8.4 billion, WealthManagement.com reports. The western part of the U.S. saw the largest share of these transactions at $2.47 billion. It’s not just market uncertainty that’s attracted investors to industrial properties, however, according to Marc Imrem, managing director of national net lease and sale leaseback group with real estate services firm Transwestern. They recognize how much online and physical retailers rely on these properties.
“Investors are attracted to this sector because manufacturing and distribution are essential to the supply chain for both bricks-and-mortar businesses and e-commerce, which has gone into overdrive since the start of the pandemic,” Imrem said. “This, combined with the low cost of capital, provides increasing momentum for industrial net lease.”
Additionally, industrial assets located near major coastal ports like New York, Miamian and Los Angeles are typically the most popular among investors, Imrem said. The bigger, modern distribution centers leased to major logistics companies have garnered the highest demand. Properties with a lot of outdoor storage or parking yards are also popular. Net lease investors also seek out last-mile distribution centers.
Low supply + high demand = competitive industrial property market
There currently aren’t a lot of quality industrial assets with long remaining lease terms available, making the quest for acquisitions quite competitive. Sellers are getting multiple offers at or above their asking price, with expedited timelines for due diligence and closing, according to Imren. Meanwhile a lot of these deals are being marketed without an asking price.
“It is not uncommon to have over 20 offers for better projects, and pricing continues to break records as yields have compressed dramatically on the back of strengthening fundamentals,” Chiate said.
Industrial asset bids remain plentiful, the amount often depends on the transaction, Pontius said. Pricing meanwhile exceeds initial guidance as well as the listing price as bidders anticipate strong rental growth as the e-commerce market continues to expand. Even sellers with lower quality assets in terms of credit rating and lease terms are benefitting from strong investor demand.
“This sector is white hot, so it has increased the liquidity for lower quality assets since ‘all boats rise’ in the current environment,” Pontius told WealthMangement.com.
Joe Dyton can be reached at firstname.lastname@example.org.