Industrial Sales, Takeovers Shatter Record
Industrial deals skyrocketed in 2015, as property trades and corporate acquisitions combined to double the peak volume of the last cycle.
Some $36.9 billion worth of large U.S. industrial properties changed hands last year — half via three blockbuster takeovers and the other half through single- property or portfolio sales.
CBRE closed more than half the brokered property sales, while Eastdil Secured had a role in all of the corporate-level deals.
Single-property and portfolio trades of at least $25 million, tracked by Real Estate Alert’s Deal Database, totaled $18.4 billion last year, up 31% from the previous year and eclipsing the record of $17.1 billion set in 2007. CBRE topped the broker ranking for the fifth consecutive year with $9.1 billion of sales, or 53.8% of the brokered total — the largest share of the market ever taken by one firm.
But what really set 2015 apart was three blockbuster corporate acquisitions totaling $18.6 billion — IndCor Properties ($8.1 billion), KTR Capital ($5.9 billion) and Industrial ($4.6 billion). Eastdil was an advisor on all three deals, while CBRE assisted on the Industrial Income effort.
The two powerhouse brokerages also shared the assignment on the biggest property trade of 2015: Exeter Property’s $3.1 billion sale of a 57.9 million-square-foot portfolio.
Last year’s giant deals were fueled by factors unlikely to be repeated this year. The sellers had painstakingly built up massive portfolios by scooping up properties during the lean years after the downturn. They moved to harvest their investments just as the industrial buyer pool was expanding dramatically, with major foreign investors entering the sector and domestic institutions seeking to scale up quickly.
“It has historically been a hard asset class for big institutional investors to buy something of scale,” said Jack Fraker, CBRE’s industrial chief. “Industrial real estate has low per-square-foot prices compared to other asset classes, and big institutional investors just aren’t designed to do one small deal at a time.” But companies that spent the past several years “knitting together” portfolios one building at a time “gave those investors the opportunity to deploy big dollars in one fell swoop.”
While there are several portfolios in the $1 billion range that could hit the block this year, it’s unlikely any would approach last year’s mega-deals. Investor demand and fundamentals remain strong, however, and market pros expect portfolio and property trading to remain robust.
In fact, while sales of office, retail and hotel properties slowed down in last year’s second half amid global market turmoil and economic concerns, the industrial sector steamrolled through. Some $11.9 billion of sales closed from July through December, topping the first half by 85%.
“It has really been a great time for the industrial market,” said Fraker. “The debt markets are favorable, we have the best fundamentals I’ve seen in my career, and the asset class is popular.” He added, “We expect big volume this year, but not as many mega-sized deals.”
Ward Fitzgerald, Exeter’s chief executive, echoed that sentiment. “Last year was peak,” he said. “I expect sales volume in 2016 to be off.” But, Fitzgerald added: “Industrial is still in vogue, along with multi-family, because it has the best long-term [leasing] demand profile, and demand always drives long-term performance. No amount of supply built can deter performance when strong demand exists over a series of years.”
Fitzgerald said industrial property values will continue to go up because rental growth will be “strong every year for the next 3-5 years.”
The trend toward e-commerce has been a major factor in transforming the industrial sector from a niche specialty to a major asset class. Along with the economic recovery and a rebound in U.S. manufacturing, it has helped fuel widespread improvement in fundamentals.
Nationally, the occupancy rate for warehouses climbed 50 bp last year to finish at 90.3%, while rents climbed 1.8% to $4.98/sf, according to REIS.
Meanwhile, of the 47 markets the New York research firm studied, 28 finished the year with occupancy gains. All 47 saw rent increases in the fourth quarter.
“The industrial market draws far less attention from investors and developers than other markets such as apartment and office, yet its consistency in demand and rent growth earns it top honor as the safest real estate investment,” Barbara Byrne Denham, a REIS economist, wrote in a Jan. 15 report. “We remain optimistic that the industrial market will continue to improve at the same steady rate going forward.”
Buyers hungry for yield continued to reach beyond major markets and seek value-added plays last year. The average capitalization rate nationally was 6.8% at yearend, down 10 bp from 2014, according to Real Capital Analytics, which includes entity-level mergers and deals as small as $2.5 million.
CBRE’s Fraker said that while demand is still most intense in top markets — such as Southern California, where yields have dipped to 4.5% — investors are increasingly interested in distribution hubs that are well- placed in the supply chain, where yields can be 100-200 bp higher. Examples are Memphis, where FedEx centers its operations, and Louisville, a major UPS hub.
“There was decent activity in every market last year,” Fraker said. “Many investors broadened their definitions of top-tier markets.”
In the brokerage sweepstakes, excluding mergers and acquisitions, Eastdil finished second with $2.1 billion of deals, down from $2.4 billion the previous year.
Cushman & Wakefield finished third, with $1.2 billion of sales. In September, DTZ acquired the old Cushman and retained the Cushman name for the merged firm. Its total represents sales brokered by DTZ before the merger plus the combined firm’s volume for the last four months of the year. The pre-merger Cushman had $986.6 million of industrial sales, good for fifth place. On a pro- forma basis, the merged firm had a total of $2.2 billion, or a 12.8% share of brokered sales, just above Eastdil’s 12.3%.
JLL finished fourth with $1 billion, a 4% increase over 2014, while sixth-place HFF saw a 68% jump in sales to $817 million.