KKR's $560M Deal Confirms Strength of U.S Industrial Real Estate
It has acquired 50 industrial buildings from five separate buyers in high-growth, infill markets.
By Richard Berger
October 3, 2023 – Industrial is the safest asset class among the commercial real estate sectors, according to some CRE analysts, and the announcement this week that KKR has completed the sale of over 5 million square feet of industrial warehouse and distribution properties for a total aggregate value of over $560 million confirms its value.
The sales, primarily consisting of assets in KKR’s Real Estate Partners Americas II fund, included over 50 industrial buildings located in high-growth, infill markets across Atlanta, Dallas-Fort Worth, Chicago, the Lehigh Valley, and Central Pennsylvania.
The dispositions were completed through five discrete transactions with five separate buyers. The fifth and final sale closed on Sept. 29.
Doug Ressler, Manager, Business Intelligence, Commercial Edge, tells GlobeSt.com that the impressive run of new industrial supply is set to slow in 2024 and 2025, but long-term demand drivers will continue to fuel development in the sector for years to come.
A delivery slowdown is on the horizon, with starts falling sharply this year, according to CommericalEdge. Just 204.3 million square feet of industrial space have broken ground so far in 2023, down from 614.1 million last year and 586 million in 2021.
“A convergence of factors is leading to the slowdown: Demand for industrial space has normalized from the significant levels seen in previous years, and interest rate hikes and stricter lending standards have made construction financing more expensive and harder to come by.
“Spec development has become a riskier proposition due to inflation hitting material and labor costs as well as general economic uncertainty. Despite all these headwinds, the long-term industrial property outlook for development remains positive.
“Logistics demand has normalized, and e-commerce sales growth has returned to its pre-pandemic trendline, yet many of the responses to the health crisis and ensuing supply-chain issues are now deep-rooted within the economy.
He said to avoid disruption, many firms moved from just-in-time inventory management to just-in-case, which reduces exposure to supplier delays but requires more warehouse space.
Eric L. Enloe, senior managing director, Partner Valuation Advisors, tells GlobeSt.com that KKR has done a “great” job assembling a “really strong” industrial footprint nationally and that this is a “really significant” transaction given the current condition of the capital markets when you are dealing with a $500 million-plus transaction.
“That is a real number in this capital markets climate,” Enloe said. “Industrial asset values remain strong and are not at levels where they were a year ago, however, this type of transaction shows the strength in the market and clearly a buyer taking a positive long-term view of the logistics market.
Noel S. Liston, Managing Broker, Core Industrial Realty, tells GlobeSt.com that KKR in a significant sale of an industrial portfolio of more than half a billion dollars reinforces the resiliency of the industrial asset class in the US.
“Despite concerns with other asset classes in real estate, industrial continues to perform well and provides liquidity for owners who wish to monetize their assets,” Liston said.
“The sale is significant in as much as it shows there is continued interest in the asset class and an ability for buyers and sellers to meet on pricing requirements and execute a large transaction.”
Joe Santaularia, Senior Vice President and Managing Partner, Bradford Commercial Real Estate Services/CORFAC International, tells GlobeSt.com, “Industrial is the safest asset class among retail, office, and industrial.
“Driven by the demand of e-comm + 3PLs along with manufacturers are bringing back their operations from overseas,” Santaularia said.
“These users have seen a boom in client base over the past few years and are only moderately affected by the current systemic downturn.
“Due to this, a flood of institutional capital has come into industrial over the past decade, with a slight cooling of bulk assets due to Amazon putting a pause on its expansion efforts in 2022.
“This has put some developers at risk due to rising interest rates and less fervent absorption. Capital is ready at the sidelines to pick this product up as it is still seen as the lowest risk asset.”
Wil Ward, Partner at TwinFocus Real Estate Partners, tells GlobeSt.com that it is encouraging to see transactions like KKR’s – hopefully portending increased liquidity in commercial real estate.
“We continue to be optimistic about the industrial market, especially since we believe new construction starts over the past 12 months appear to have slowed given the Federal Reserve’s rate hikes’ impact on borrowing. We believe that over the next one to two years if demand reverts to the mean, industrial space will fare well.”