Institutions Place (Hypothetical) Bets On Industrial

BY PAUL BUBNY

NEW YORK CITY—It’s not only the rise of e-commerce that’s pushing private equity and REITs to increase their allocations to industrial, Altus Group’s Chuck DiRocco tells GlobeSt.com.

Industrial is “a hard sector not to put the spotlight on,” says DiRocco.

NEW YORK CITY—Asked how they would invest a hypothetical billion dollars, C-Suite executives at leading institutional real estate firms expressed a clear preference: industrial. That’s among the key findings of Altus Group’s just-released 2017 Real Confidence Executive Index, which Altus produced in collaboration with NAREIT and the National Council of Real Estate Investment Fiduciaries.

“The survey results demonstrate a large overweight allocation to the industrial sector,” says Mike Miles, managing principal at Guggenheim Real Estate LLC, and survey respondent. “The potential issues with retail, apartments and office are real and very apparent. On the other hand, the potential issues with the industrial sector are less apparent at this time.” Along with Guggenheim, other firms participating included AEW, Berkshire Group, Clarion Partners, Kimco Realty Corp., MetLife and Weingarten Realty Investors.

“Industrial has just been a very hot market in the past year or two,” driven by the growth of e-commerce, Chuck DiRocco, director of research at Altus and author of the report, tells GlobeSt.com. “When you look at the ratio of e-commerce to brick-and-mortar retail, it’s only about 10%. But when you look at the growth from a year-over-year perspective, it’s just enormous by comparison.”

Not only e-commerce ranks as an important driver for the industrial sector. “When you look at president-elect Trump’s plans to bring manufacturing back to the US, that’s another sign,” says DiRocco. When our executives take these variables into account, it’s a hard sector not to put the spotlight on.”

And while other sectors have their attractions, the fact remains that when asked to invest that hypothetical $1 billion, survey respondents allocated a total of nearly $13.6 billion to industrial, more than a third of the $39.41 billion combined from REIT and public equity investors. That represented a Y-O-Y increase of 40% from the private equity side and a 61% increase from REITs when compared to last year’s survey results.

Apartments, which topped the rankings in 2016, came in a fairly distant second at $9.7 billion this year, followed by office at about $7.7 billion. However, the biggest gainer on an annual basis was infrastructure, where allocations were up 216%.

Here again, Altus attributes this to the new administration’s priorities; Trump has vowed to boost infrastructure spending. ““The US transition of government has prompted expectations in the industrial and infrastructure sectors and we’re seeing this impact in the survey results,” says Richard Kalvoda, EVP at Altus. “Anticipated tax cuts and increased spending from the new administration is expected to further strengthen the commercial real estate market in ‘17.”

While the rankings shifted in this year’s survey as industrial moved into the top slot, DiRocco points out that “the apartment sector didn’t actually decline; it remained stable, and that’s what we think will happen as we move into 2017. Obviously it’s been a dominant sector for years and it may be reaching its maturity. We’re starting to see a little bit more of an oversupply in luxury and class A. The rents continue to rise; some markets obviously are a little overpriced at this point. Yet when you look at the demographics, the move toward purchasing homes still hasn’t taken off.”

Looking at the other major property sectors, DiRocco points out, “This has been a long cycle—almost 10 years of this out-of-recession cycle. Many of these markets are fairly mature or are seeing changes to the environment. For hotels, obviously it would be the introduction of Airbnb. Jumping over to the office sector, it’s all about open-air design, density and smaller locations.” That being said, “the commercial real estate market has maintained control post-recession. I think that’s fantastic and has gotten us to where we are today.”