Pacific Industrial has sold the Sierra Pacific Center, a 1.46 million square foot class-A industrial property in the Inland Empire, for $213.4 million to an unnamed institutional life insurance company. At a 3.68% cap rate, the sale is the largest industrial transaction in California in the last 24 months.
The property is fully leased to FedEx and LG, and is a one-of-a-kind development. Pacific Industrial development the property for a long-term hold, but decided to change strategies. “We decided to change track on this project because we thought that we could sell it below a 4% cap rate,” Dan Floriani, partner and co-founder at Pacific Industrial, tells GlobeSt.com. “My recommendation to my partners was that if we felt good we could achieve that, then we should monetize the asset. That is ultimately what got us on board to sell.”
Pacific Industrial's long-term hold strategy contributed to the quality and distinctiveness of the property, and ultimately drove the interest and strong value. “We build and design our buildings as if we are going to hold them for the rest of our lives, and we do that because we want it to be the best asset possible,” Floriani says. “In a really good market, that is an offensive strategy to command great rents and great tenants. When the market is at its worst, it is a defensive strategy. We want to know that we will have the best building in the market when the market is at its worst. As a result, we end up building a better project.”
Jeff Chiate, executive managing director at Cushman & Wakefield, represented Pacific Industrial in the deal, and received nearly 100 offering memorandums. “We new going into the process that there were only 10 to 12 groups plus-or-minus that actually had the financial capability to take down a $200 million-plus asset,” says Floriani. “It is a big take down in industrial real estate. This was huge result.”
While this was clearly a phenomenal deal for Pacific Industrial and a recent market record, Floriani says that the buyer also made a great deal. “They made a really good buy. These two buildings do not exist in the market, and when you look at it over a 30-year horizon, I think they made a smart buy,” he says. “This will be a safe asset and will likely be leased to a credit tenant for a long period of time. It was probably the best buy they could make in the market.”
In addition to the rarity of the asset and the strong tenancy, the Southern California industrial market has a long runway ahead. “With the push for ecommerce and the space needed to supply it, I don't se the market curbing anytime soon. For each $1 billion in ecommerce sales, there needs to be 1.2 million square feet of industrial space to supply it,” says Floriani. “Right now, ecommerce makes up 10% to 13% of all retail sales, but it is going to 20% and will likely exceed that. Here in Southern California, there are huge barriers to entry, two of the largest ports in the country side-by-side, and an affluent population base. I think that you are on a trajectory where you are going to continue to see upward pressure on rents. My opinion, there is going to be continued appetite to own those assets.”
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Kelsi Maree Borland
