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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I read a cool article recently on the WSJ site about warehouses... It turns out that it’s never been trendier to be a warehouse!
Yep. Boring old warehouses are uber cool these days.
It’s primarily Internet shopping that is driving the demand. The article said that big warehouses, the size of 10 football fields or greater, are a really hot commodity. They’re being sought out by retail companies, which are trying to lock up warehouses for everything from garage doors to pasta. And they’re also being pursued by pension funds and other big investors who are scouring the planet for the rare opportunity for a safer return.
So while the prices of retail properties, industrial properties, and apartment buildings continue to rise into the stratosphere, one survey of 80 large investors and real estate firms by CBRE said that a little over 15% of those investors said warehouses are their preferred U.S. property sector in 2015. That’s up from 10% last year.
The article went on to speculate that the appetite for warehouses is probably larger, and that many investors are blocked out of the niche by the relatively low supply. A managing director at CBRE said that he thinks that there is as much as a 5-to-1 imbalance between investors wanting to buy industrial properties versus those up for sale.
Think about what that’s doing to prices!
In fact, warehouses are so hot right now that offices, retailers and hotels all saw a dip in investor attention.
It appears that big retailers like Target Corp., Home Depot Inc. and Wal-Mart Stores, Inc. are all moving more aggressively into online shopping, and that creates more tenant demand and higher rental prices for warehouses.
Another appealing factor about warehouse property is the existing contracts. They’re typically five years or so in length, and so many of the contracts in place now were signed during the post-crisis years, so they’re around 25% below market value. And now, with the economy really moving, those contracts are being renegotiated, which is offering owners a huge boost in rents and a really nice cash windfall at the bank.
Pension Funds Are Hungry for Returns
Public pensions, in particular, are on the search for assets that can generate yields as they wrestle with portfolios that project to produce modest returns. The long-term return among public pensions is just 5.99% on a roughly 10-year time horizon. But their investing targets during the same time frame is 7.65%. So warehouses represent a potential way to boost returns.
Sales of warehouses rose 7% to $36 billion in 2014 over the prior year. And sales have surged 41% in the past two years. The largest warehouse markets are Los Angeles, Chicago and north New Jersey.
CBRE says that they’re not concerned about a warehousing bubble. The reason? From 1987 to 2007, there was an average of 225 million square feet of warehouses developed each year. In recent years since the crash however, the total is around 140 million square feet.
So demand is increasing while supply remains flat as developers rush to meet it.
The biggest owner of warehouses owns 240.6 million square feet of warehouse space. The second owns 154.5 million square feet. The third place owner has 143.4 million square feet.
How hot is this niche? Well, one of the latest mega deals happened when Prologis Inc., a large warehouse owner that also invests for pensions and others, agreed to buy another large industrial property firm, KTR Capital Partners, for $5.9 billion. That deal came only a few months after a group of Singapore investors bought IndCor Properties, another large industrial landlord from Blackstone Group LP, the private equity firm.
So this niche is smoking hot. And it’s going to be quite some time before supply catches up with demand.
Whatcha Think?
Will you get in the warehouse game now? Lemme hear from you in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.