Foreign Wealth Funds Turn to Industrial Assets in New Jersey

Kevin Welsh, senior vice president, investment properties, CBRE (Steve Lubetkin Photo/StateBroadcastNews.com)

SADDLE BROOK, NJ— Thanks to negative interest rate environments in Europe and Asia and some of the lowest historical cap rates ever, foreign investment capital is flowing into industrial assets in the Garden State, according to Kevin Welsh , who leads capital markets activity for CBRE in New Jersey. Among the investors getting into the New Jersey industrial market are the Abu Dhabi Investment Authority, Global Logistic Properties from Singapore, and GIC , the Singapore government’s sovereign wealth fund, Welsh says. He spoke Monday at CBRE’ s first quarterly media briefing on commercial real estate activity in New Jersey. “When you look at negative interest rates in Europe and Asia, they are managing people’s money for the future, they’re probably underwriting six to eight percent, so what are they doing?” he asks. “They are going out and they’re buying real estate, but they’re only buying typically high quality real estate.” Sovereign wealth funds “are big in the industrial real estate space,” he says. Exeter , a private equity fund, recently sold a portfolio of industrial assets to a joint venture of ADIA and a Canadian pension fund. Similarly, IIT sold its portfolio to GLP last year. Conventional wisdom would expect foreign investors to be buying office and residential investments in gateway cities like New York and San Francisco, Welsh says. Many are doing just that, but they are also looking hard at New Jersey industrial space. “The highest quality properties are now industrial in New Jersey,” he says. “Land values have gone through the roof.” Welsh isn’t concerned about sovereign funds dominating the market and gaining control of a large number of assets, though. “Capital finds a home,” he says, noting that Prologis and Norges Bank Investment Fund , the Norwegian sovereign fund, did an industrial deal several years ago. “It lowered the cost of capital. I think it’s really more about the fundamentals of the market and logistics. I don’t really see that as an issue, I see it as continued interest in this market. Everyone wants to be in northern New Jersey in the industrial space.” Land values have reached $50-60 per square foot FAR in the port submarkets, he says. E-commerce “has added a component of demand that never existed before,” he says, noting that core cap rates for stabilized, fully leased properties, in well-located market areas, such as the Meadowlands, are currently in the 4.5 to 5 percent range. “Clearly this is a moment in time,” Welsh says. “It’s really unprecedented. It’s the lowest historical cap rates in New Jersey ever.” Investors are now willing to take on more risk and go into the development business with an operating partner, Welsh says, and look for a stabilized yield. “Instead of going in on a stabilized yield of 4.5, I’m now solvent on a six, and most importantly, I’ve got a new building,” he says. “Development yields are a direct correlation of core cap rates,” Welsh notes. “If you look at core cap rates at 4.5 and people are solving for a development yield of 5.75, we call that a 125 basis point premium. Now quite frankly, that seems to be not a whole lot of premium for the risk to build ground up, but having said that, if you look at New Jersey and the amount of development, they’re leasing up very quickly or they are pre-leased. So people are willing to take a lesser yield because they feel so strongly about the market. That to me is the New Jersey industrial market in general.”