Industrial Continues Its Boom Times Ignoring a Few Looming Clouds

Blackstone REIT and LBA Logistics recently partnered to recapitalize industrial properties. BREIT acquired a 60% stake in two industrial portfolios owned by LBA in a deal valued at $1.6 billion. The two portfolios totaled 71 properties and 9.5 million square feet. 

While the properties are located in predominantly last mile locations in West Coast markets, specifically in Seattle and California, which are two top performing industrial markets in the country, the same strong fundamentals can be said for other regions of the country as well.

During the pandemic, several major institutions have increased exposure to the industrial sector, particularly in high-quality logistics and e-commerce markets. Brian Kim, head of acquisitions and capital markets for BREIT, said that logistics properties are the REIT’s top investment priorities globally. 

Duke Realty is another example of one developer who has continued to expand its pipeline this year as well. The developer has active projects in Chicago, San Francisco, Seattle, Atlanta, New Jersey and South Florida, and 3.1 million square feet under construction in Southern California alone. That includes a 1.2 million square foot industrial facility that broke ground this month.

There is good reason for the industry’s fervent bullishness on the industrial sector. Despite the pandemic and market downturn, industrial absorption has performed well in 2020. A recent report from Colliers International shows that industrial absorption outpaced new deliveries last year with US industrial inventory increasing by 2.4% in 2020, while national absorption rose 3.3%.

Strong industrial fundamentals have led to a slew of impressive industrial deals. This trend culminated at the end of last year, but has clearly continued into 2021. Some of the most notable recent transactions include KKR’s acquisition of an $800 million 100-property industrial portfolio; Crow Holdings partnership with Allianz Real Estate to acquire a 49% stake in a 19-asset, 6.1 million-square-foot US industrial portfolio developed by Crow Holdings; and Rexford Industrial Realty’s acquisition of an 18-asset industrial property portfolio for $154.6 million.

That pace is expected to continue. According to a recent GlobeSt.com article, global investors are optimistic the market will rebound in 2021, according to new research from Colliers International Group. Colliers’ new Global Capital Markets 2021 Investor Outlook anticipates investment activity will pick up by 50% in the second half of the year as vaccine rollouts continue, additional government stimulus funds begin flowing and confidence in property markets swells. Approximately 98% of investors across all regions globally are looking to expand their portfolios, with 60% seeking to increase by more than 10%. Around 88% of US investors polled plan to make their next investment as early as the first quarter of 2021.

Logistics and living sectors are among investors’ top three choices across all regions, the report adds. “Intense demand for these assets will require investors to broaden their geographic focus and build portfolios through joint venture platforms and local partnerships.” 

So what’s next for the sector/? Through the third quarter of 2020, industrial posted $55.4 billion in sales, according to JLL Research. That represents the second-highest tally for volume by sector through three quarters. Industrial pricing is up 7.4% year-over-year and 1.9% from Q2 to Q3 2020, according to Real Capital Analytics. Earlier this year, JLL predicted that demand for industrial real estate could reach an additional 1 billion square feet by 2025 as e-commerce sales continue to grab market share.

But it isn’t all roses ahead. There are two possible clouds on the horizon: overbuilding and tenants that are struggling with the pandemic. 

“We’re capable of overbuilding anything given enough time,” Peter Linneman, principal and founder, Linneman Associates said on CBRE’s “The Weekly Take” podcast. “No matter how strong demand is, we have proven we’re capable of overbuilding anything.” The second dark cloud on the horizon is something Linneman thinks a lot of people miss: While landlords that lease to the Amazons of the world are in great shape, ones with harder-hit tenants could struggle.