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March 23, 2015

A combination of factors is making Industrial increasingly attractive to global investors

A deal is anticipated this year that will rock the industry: Blackstone Group LP is on schedule to sell its IndCor Properties Inc., a holder of over 110 million square feet of U.S. warehouses and distribution centers, for more than US$8 billion. The buyer is Singapore’s GIC Pte, which represents the government of Singapore’s sovereign wealth fund. IndCor was set to launch a public offering before the deal was struck.

The Blackstone deal underlines what JLL’s U.S. Logistics & Industrial Services team and International Capital Group are seeing through their contact with global investors in the asset class: Asian investor interest in American industrial real estate is clearly on the rise. “Since 2012, there has been a significant uptick in acquisitions by Asian and other global investors of U.S. office, residential and retail properties,” notes JLL Americas Head of Industrial Craig Meyer, “and now, they’re expanding their consideration into the logistics sector which really started in late 2013 through Brookfield’s acquisition of IDI Gazeley.”

Though foreign investment in U.S. industrial real estate still lags that of the office and retail sectors, 2014 volumes have grown five-fold from levels recorded ten years earlier to $2.6 billion. While Canadian investment contributed almost 50.0 percent of 2014 volumes, the pending closure of the GIC/IndCor deal plus potential 2015 trades being discussed will shift the momentum dramatically toward Asia. Growth is evidenced across all geographic segments, but most importantly, there is a strong focus on portfolio and entity-level transactions, which accounted for 59.0 percent of all foreign investment acquisitions since 2012, according to JLL Research.
Asian institutional investors are increasingly looking beyond their national borders for logistics and industrial acquisitions for a number of reasons including; Relative U.S macroeconomic strength; Domestic competition and high pricing in the Asia Pacific markets; Land constraints limiting development opportunities; Increased allocations from institutions and sovereign wealth funds; A general comfort with the sector – Logistics and industrial assets represent between 10.0 and 15.0 percent of all transaction activity.

U.S. industrial real estate, once obscured by higher-profile properties such as Trophy office buildings or high-street retail offerings, is now coming into its own as an alternative for Asian investors. Mega-warehouses and distribution centers coming on line have increased the appeal to foreign investors. These larger properties, often leased to recognizable multi-nationals with investment rated credit, create scalability to efficiently place capital into the logistics sector.

Driven by growth in e-commerce, tenants such as FedEx and Amazon have been some of the most active absorbers of logistics space. The newer product being delivered to market, such as the FedEx portfolio JLL is currently marketing, provides offshore capital with secure long-term weighted average lease terms—often in excess of 10 years. These lease rental increases act as a natural hedge against inflation and are typically structured on a triple net basis. This makes an attractive proposition for investors looking to remotely manage their portfolio while receiving a secure income stream during their hold period. Further, the industrial/logistics sector, with its lower tenant improvement allowances and minimal maintenance obligations, has proven to be a much less capital-intensive investment vehicle that has generated superior investment returns over time.

John Huguenard, JLL’s Industrial Capital Markets lead observes that, “the key challenge for many Asian investors interested in U.S. industrial real estate is their inexperience with this asset type and understanding the geographic spread of the market and the key distribution centers. However, this should change rapidly. Asian capital sources are some of the most sophisticated investors in the world, and we anticipate seeing them drive the dynamics of offshore capital flow into U.S. industrial markets in 2015.”

 

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