Direct foreign investment in U.S. industrial real estate dominated in a spectacular way in 2015: The amount of offshore capital placed in the sector increased tenfold compared against the 10 year average amount. Drawn to high yields compared to the 10-year treasury and a hedge against less-than-stable or even declining foreign currencies, the world’s largest investment entities sought to grow their industrial footprints quickly through a buy-up of mega portfolios. But can the U.S. market sustain that pace into 2016?
Industrial mega portfolios range from $150 million to multi-billion dollars, with assets located in primary and key secondary markets across the United States. According to JLL’s Q1 2016 U.S. Investment Outlook, 56.4 percent of 2015 industrial investment volume exceeded the $150+ million mark. Cross-border deals represented 40.5 percent of all activity, with deal sizes averaging more than $2.5 billion.
But the odds of the blockbuster portfolio sales continuing remain unlikely. Already, a lack of available options has pushed mega-portfolio volume down to $167.0 million during Q1 2016. Of that activity, 50.5 percent was from deals in the $20 to $150 million range. Only 5.3 percent of this activity was from cross-border investors.
“Entities from Asia, Europe, Canada and the Middle East still want to buy big, but it requires a strategy shift,” says JLL International Director John Huguenard. “With fewer single-transaction options, they will need help from domestic operating partners and funds. These entities can amass multiple regional portfolios that allow global groups to continue to efficiently deploy their capital in U.S. industrial space.”
JLL points to market-specific portfolios as a way for investors to build scale, particularly in regional secondary markets such Seattle-Bellevue, Washington, D.C., Boston, San Diego and Phoenix.
“The desire to place money through U.S. mega portfolios hasn’t gone away, but after last year’s run up, we face a challenge in finding the scale to absorb demand,” said JLL Managing Director Mark Detmer. “Nonetheless, the signs still point to a higher volume of deals in 2016 but at lower price points. The magic number right now is about $60 million. We have a bunch of these in the works, up and down the coast from Los Angeles to Fairfield to Portland.”
Read more in Globe St. by Brian Rogal