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Changes On The Way For Industrial Investment Market

CHICAGO—It’s well-known that the extended rise of the US industrial market keeps attracting more investors into the sector. That growing popularity has put downward pressure on cap rates and pushed up prices, as well as drawn buyers into smaller, secondary markets. But behind all of the statistics, other factors are also having an influence on the direction of the market for investment.

Georgia-Pacific’s facility in University Park, IL, was recently sold to an investor.

“Many of the largest institutional investors are under allocated in this sector,” Kenneth J. Szady, national director for Marcus & Millichap | Institutional Property Advisors, tells GlobeSt.com. Pension funds, insurance companies and other significant investors have bought up many of the nation’s top office properties, some of which can soak up hundreds of millions, causing buyers to now say, “‘we’ve got to diversify.’ That’s another primary reason cap rates are so low.”

As reported in GlobeSt.com, Marcus & Millichap just released its 2018 North American Investment Forecast. Company researchers found that “average industrial cap rates have dropped to the low-7% range over the last three years, with a yield spread above the 10-year Treasury between 430 and 470 bps.

Another source of pressure on cap rates is that when many of these big institutional investors secure a property, they don’t want to let go, Szady adds. Most of the current sellers are merchant developers that have leased up properties to certain levels and now want an exit.

The scarcity of new class A properties, at least relative to demand, has had some surprising effects. On potential deals like this, Szady says its not unusual to see about half of the institutional investors get priced out. “These are big, brand names we’re talking about,” but the properties on offer simply aren’t expected to generate the necessary internal rate of return. Many of the big players, for example, want a 6.5% return over ten years, but the best properties in top markets like Southern CA, Chicago and NJ frequently offer less than 6%.

This factor may start to change the buyers’ calculations, Szady adds. He expects that in 2018 some institutional investors will go to their committees and try to get the rules on returns relaxed a bit, at least for properties in the markets considered most liquid.

Another possibility is that investors will project that over the next decade such properties will see greater rent growth. Considering the strength of the industrial sector, and the likelihood that the e-commerce revolution will keep fueling growth, that does not seem like such a stretch. Szady believes this possibility is once again most likely in the core markets like Chicago, and especially in dense areas like that city’s O’Hare submarket, which has a historically low vacancy rate. “Investors will step up and make these deals.”

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BKM CAPITAL PARTNERS

 

Headquartered in Newport Beach, California, BKM Capital Partners is a real estate fund manager specializing in the acquisition and improvement of value-add multi-tenant industrial properties in metro areas across the Western U.S. Combining a deep knowledge of this niche industrial product type with in-house capabilities including on-site property management, asset management, and leasing to reposition and institutionalize light industrial assets, the firm continues to build on its proven track record, generating strong results with high levels of transparency and engagement for investors. 

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BKM MANAGEMENT COMPANY

 

BKM Management Company manages a portfolio of 8.6 million square feet of multi-tenant industrial properties for BKM Capital Partner’s private and institutional investors. With a focus on “boots on the ground” execution at the property level, BKM has in-house capabilities for both property management and leasing. The teams at the property level are focused on ensuring the tenants thrive and that the properties are managed in the most efficient way.

 

 

 

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