Industrial Is the “Cool Kid” on the Block

NEW YORK CITY—Even at the “Balance and Flexibility: Capital Markets Update” panel at the RealShare New York 2018 conference, last mile distribution centers were the talk of the town. This was compounded with the conference falling on the date that New York Governor Andrew Cuomo and New York City Mayor Bill de Blasio jointly announced Amazon selected Long Island City, Queens as a new corporate headquarters.

William Silverman, managing director, group head at Hodges Ward Elliott, said at first there were three kinds of responses to multistory industrial properties. There were investors who said multistory would never happen. There was another group, which said multistory will happen but they wanted to wait and see others invest before making and move. Finally, there were those who said, “Game on.”

“In six months, we watched the market and obviously those who said, ‘Game on’ ruled the day,” said Silverman. “Several months later, when we were marketing a different site, everyone had shifted a category over.” The “That will never happen” group began to say, “I believe it’s starting to happen,” with all groups increasing in enthusiasm for the asset class.

Silverman described how every three or four years, there comes what is affectionately known as the “cool kid” in real estate. And everyone wants to be involved with such deals. He says now, industrial, distribution and last mile warehouses in New York City have become that thing.

Gary Bechtel, president of Money360; Michael Coen, in asset management at Procidia Funding; and John Harrington, founding partner at HKS Real Estate Advisors, also spoke on the panel. Matt Galligan, president, real estate finance at CIT moderated the discussion at the Yale Club in Midtown Manhattan.

“We go to a lot of cities around the country and industrial is the new multifamily,” said Bechtel. He pointed to Gateway cites and listed Seattle, Dallas, the Carolinas and New York. Referring to the capital’s interest he said, “It’s nuts what’s happening.”

The stacking boxes on the front porch are driving this phenomenon, said Silverman. “It’s about how to get more of that stuff moved to you faster.” He pointed to two ramifications to consider with this phenomenon: What will happen to industrial spaces in the city? What will happen to the infrastructure that’s needed to support these distribution centers? Being ahead of the game requires anticipating where capital will flow.

But is the other side of the hot industrial properties—the sibling who was left at home, and not going to the prom? If so, is a makeover due?

“The not so darling class is retail,” said Galligan. “I wonder if it’s oversold?” he asked. He opined that there are some good retail assets and solid opportunities in the heartland. He added there are equity investors getting great returns, although it’s making less sense for debt investors.

Panelists said investors were cautious with retail. Silverman referred to core investors who believe in a piece of real estate but just cannot commit to a retail deal now.

Harrington pointed out retail is getting more specialized, offering more experiential services, a different kind of retail that’s not addressed with e-Commerce. Coen agreed that people need to get out and interact with one another. Retail still provides that vehicle.

Will the next investment trend be in commercial real estate that brings people off their computers, away from delivered packages and out of their apartments?

“What will that something look like and how is it monetized?” asked Silverman. He added, “We’ll see a more dramatic separation of the wheat from the chaff than we’ve ever seen before.”