For more than a year, the U.S. industrial investment landscape has been dominated by multi-billion-dollar mega deals. However, fewer portfolio listings caused a shift during 2016’s second quarter that flip-flopped activity to the single asset acquisition strategy. As of mid-year, smaller trades are outpacing portfolio activity by 3 to 1.
“Last year was all about the national portfolio business, but that inventory has dwindled during the first six months of 2016, leading investors to act increasingly on a single asset basis,” said John Huguenard, JLL International Director and Head of the Americas Industrial Capital Markets platform. “Single asset transactions are exceptional investments but require buyers to complete considerably more transactions to place the same amount of capital.”
According to JLL’s latest U.S. Industrial Investment Outlook, 26 percent of transactions year-to-date are from portfolio deals. The rest is single asset activity. And these small deals are getting smaller, down to the 200,000-square-foot mark and below for most Q2 trades. The buyer profile has also shifted from a field of cross-border investors to more domestic institutional entities, including private equity and REITs.
“Foreign capital is still active. With lingering global economic concerns, topped off last month by Brexit, international investors are still eager to place capital in the largely unflappable U.S. industrial market,” said Huguenard. “We simply need more portfolios of the scale and size during the back half of 2016 as we’ve had in the past to meet demand.”
Whether capital is foreign or domestic, most of today’s industrial buyers are seeking out gateway opportunities – from New Jersey and South Florida to Atlanta, Los Angeles and Dallas – as a hedge against volatility. In these markets, buyers can still capture the benefit of modest rent and value growth, capitalizing on leasing strength but also remaining relatively liquid in a sector where cap rates compressed by another 50 basis points this year, and industrial pricing is more expensive than ever. A smaller buyer segment is active in high-growth secondary markets, but without the luxury of being able to exit at will. In both cases, the upside in the market has investors continuing to seek out deals, and that keeps driving pricing. This puts even greater pressure on the U.S. to produce portfolio opportunities.
While year-over-year U.S. industrial investment volumes are tracking lower, they still sit above long-term annual averages. According to Huguenard, the second half of this year is shaping up to deliver a new collection of for-sale portfolios that, in his eyes, could have us flip-flopping again.
One example: Global Logistics Properties, who is now under contract to purchase a 15 million-square-foot portfolio from Hillwood. The 63-property portfolio features Class A assets in markets across the country.
“Owners are looking at the market and asking, ‘Can fundamentals get even better or should I take my chips off of the table before it’s too late?’” said Huguenard. “We could see more portfolios come to market, and likely get quickly snatched up. It wouldn’t replicate 2015’s transaction volume levels, but it would bring us back into the billion-dollar transaction size.
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International Director, JLL Capital Markets