There are no soaring skyscrapers and the architecture is far from sexy, but no asset class in the United States beckoned foreign investors more than industrial product in 2015.
According to JLL’s Q4 2015 Global Capital Flows report, a momentous shift took place in the U.S. commercial real estate investment environment last year. Cross-border capital participation not only set an overall volume record, but took a new direction in the asset destination source of capital deployed within the U.S. Whereas office product has long been the prime target of foreign investment, industrial assets muscled their way to the top of the list in 2015, surpassing office investment volumes by 34 percent.
“Immediately following the Global Financial Crisis (GCF), various investment vehicles began aggregating distressed industrial assets,” said John Huguenard, International Director and leader of the firm’s Industrial Capital Markets. “At the same time, more and more capital sources were eager to broaden their investment strategy, while also deploying capital at scale. This resulted in massive transactions involving IndCor, KTR and IIT, allowing investors to acquire entire portfolios in one fell swoop.”
Huguenard, who is based in Chicago, says the emergence of Asian-based capital played a huge part in the growth of cross-border dollars into industrial product in 2015. Taking full advantage of the evolving sophistication of the industrial capital market, Global Logistic Properties (GLP) executed two of the largest acquisitions in industrial history, acquiring the IndCor and IIT portfolios in February and November of 2015. The combined footprint of the two acquisitions was nearly 175,000,000 square feet, which equated to roughly 90 percent of all industrial completions for the year.
These massive acquisitions drove overall investment volumes for industrial product to new heights in 2016, pushing total transaction volumes to $64.4 billion in the U.S. JLL Research notes this sets a new peak for the asset class, pushing year-over-year growth to 55.3 percent. That exceeds the previous peak, set in 2007, by more than 20 percent.
What’s ahead in 2016?
Looking ahead, Huguenard expects the investment horizon for industrial product to diminish slightly in 2016 but not for lack of interest. “Given the magnitude of industrial investment in 2015, as well as the expanded role cross-border capital played in annual volumes, I predict we’ll see an overall drop in investment volumes,” he notes. “The long-term holds of most cross-border capital investments will create a scarcity of product coming to market. That will be the driving force for more sophisticated and creatively structured deals such as M&A solutions, development partnerships, syndications, etc. as investors seek new ways to participate in the industrial segment.”
In the year ahead, the investor base for industrial is expected to broaden even further as yields and the ability to deploy capital at-scale in diversified markets will continue to attract significant investment allocations, including among those new to the industrial market. And Huguenard says watch for an even more concentrated push to maximize rental growth potential in the tightest U.S. industrial markets as current rents hover at or slightly below past peak rates. A lack of supply could leave tenants with limited options.
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Head of Industrial Capital Markets, JLL, U.S.