Infill Industrial Is Becoming Institutionalized

Industrial assets have become the most sought-after product type in Los Angeles. With a largely vintage building stock, however, and little space for new development, there are few institutional-quality properties for investment. That obstacle hasn’t stopped institutional investors from being active players in the market. Instead, a new trend has emerged where institutions are paying top-dollar to owner-users for their properties, which are now becoming institutionalized.

“There is very limited inventory for institutional product in L.A. One trend that we are seeing in L.A. is that a lot of the quality infill product is becoming institutionalized,” Joe Dimola, a VP and industrial expert at JLL, tells GlobeSt.com. “A lot of owner-users or private investors are selling to the larger institutions because of the crazy pricing that these guys are willing to pay.”

Typically, owner-users have been willing to pay more for industrial space than an investor—largely because they aren’t looking for a return. With the surge in industrial activity, which has driven pricing to historical heights and driven the supply to historical lows—owner-users have had to compete with investors for properties, and they are losing. “Owner-users typically have to over pay to secure off or on-market options, and they are willing to do that,” adds Dimola. “They are putting down a majority of the purchase price, like 30% or 50%. It is tough because typically, the seller is going to choose the buyer that is the most cash heavy. We are definitely moving in the direction of cash-heavy transactions.”

Institutions have helped to fuel pricing upwards, and while they are a new buyer pool in the market, some private investors left the market in search of opportunities with better yields. “This has definitely limited the buyer pool. It has become so expensive, some buyers just can’t afford it,” says Dimola.

With some investors fleeing the market, it has begged the question: how much higher can prices rise? With interest rates likely to increase throughout the year, Dimola says that owner-users will have an even more difficult time competing with institutions. “It has removed owner-users from being a logical buyer a lot of times because they won’t be able to afford that mortgage payment,” Dimola explains. “Institutions are out paying users because often it is difficult for owners-users to tie up so much cash into real estate because they need the cash for other parts of their business.”