ElmTree Funds Looks for Opportunities in Industrial Turbulence

ElmTree Funds is looking to take advantage of opportunities in an industrial market that’s gone through some turbulence.

James Koman, CEO of the real estate firm, refers to it as a “falling” that’s tied to the Federal Reserve, which hiked interest rates 11 times over the last two and a half years.

“Over the 18 months, it seems a lot of things slowed down tremendously,” he told GlobeSt.

“A lot of the REITs were out of the marketplace. A lot of the foreign investors have been out of the marketplace. And these private buyers, large family offices, [are] looking to generate better yield opportunities for years to come for their high net worth families, etc.”

But still, that’s not scaring away ElmTree entirely. The St. Louis, Missouri-based company recently announced three industrial real estate purchases for a combined $242 million, located in the West Coast and Midwest markets.

Koman listed two reasons in particular why the opportunity in those regions made sense. One is the comfort from its corporate base, which identified those opportunities, and insight provided by local and regional developers that ElmTree works with.

“[Local and regional developers] bring up opportunities and there are markets that we feel have that investment criteria on the mission criticality, strategic importance, the corporation, and the real estate location, he said.

“It kind of, in a lot of ways, matches up those opportunities for us, and that’s where we look to transact.”

In the second quarter, it acquired another industrial space in the Midwest, amounting to 400,000 square feet. And in the first three months of the year, ElmTree added two other industrial properties to its portfolio, taking up another 870,000 square feet, collectively.

While the company did not reveal any specific cities in its acquisition announcements, Koman noted that it namely is focusing on areas including Denver, Austin, San Antonio, Houston, Salt Lake City, Portland, Seattle, and Phoenix.

But because cap rates have shot up, Koman admitted the company has shied away from California, even though there are opportunities.

ElmTree, which operates 249 properties in 35 states, has not seen big rent increases, with vacancies rising.

“Vacancy rates have ticked up due to all the construction starts,” Koman said, as he expects deliveries to continue into 2025.

But the executive is bullish going forward, and added that everything will be “slowly absorbed because the construction we believe in what our trends and our data points have shown over the last 12 months has remained low.”

As that happens, Koman thinks vacancy rates will drop in 2025. Plus, according to Koman, leasing demand should be strong.

That will allow the company to explore more opportunities in the marketplace, he added.

Particularly, ElmTree is seeing a need from tenants for build-to-suit facilities. Koman attributes this to consumer demand, especially from last-mile delivery.

“We think that growth in e-commerce-based food delivery is driving a lot of that, and also where people are starting to specialize and want to maintain and control their inventory in better fashions due to the increased automation,” he said.

Additionally, ElmTree wants to expand in the data center sector. In 2024, Koman projects that his private equity firm will have completed more than $1 billion worth of transactions.