Prudent Investors Focus on Last-Mile Industrial, Not Large Distribution

KIMC is taking a cautious approach to investment during the pandemic, even for the most coveted asset classes. Industrial has been called the winner of the pandemic—thanks to the increase in online shopping—but even industrial assets require a critical eye during a market downturn, according to KIMC’s Jonathan Needell.

“In industrial, we are being very careful. That isn’t to say that we aren’t looking at deals, but we are being cautious on basis and the tenancy,” Needell, president and chief investment officer at KIMC, tells GlobeSt.com.

Tenancy is a key issue for Needell. Many investors are planning to secure ecommerce giants that pay top dollar rents, but this is unrealistic and risky from an investment standpoint. “If you have vacant space, you can’t just believe that you are going to get Amazon or FedEx or Walmart. That is a low probability play. So, we are being very careful about what we underwrite in industrial.”

KIMC is targeting infill last-mile logistics properties during the pandemic. Competition for large distribution facilities has driven prices beyond the firm’s comfort-level. “The distribution product is pricing out of control with institutions that we can’t even touch it,” says Needell. “We are focused on last-mile where there is some leasing risk is the only place where we have been able to at least approach these deals. Even then, it is difficult.”

The challenge for industrial all comes down to the tenancy. “Everyone is banking on getting tenants that are not a high probability. It just means that we are being tight and focusing on growth markets,” says Needell. However, market choice also plays a role. KIMC has focused on high-growth markets and is following the migration patterns away from the coast. It is targeting opportunities in Phoenix, Dallas, Austin and Houston.

On the retail side, KIMC has found similar limitations, and the firm has equally tightened its underwriting standards. However, the story around retail—just like industrial—is all about quality tenancy. “There is retail activity out there,” says Needell. “We have seen new retail leases get done, particularly among essential retailers like grocers. However, we won’t go into a retail deal unless you have credit and term.”