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March 31, 2018

Domestic institutional buyers have been getting more aggressive in the industrial sector, eyeing deals that would have been outside of their comfort zone in the past.

Institutional investors spent US$11.2 billion on industrial assets in 2017 while REITs spent US$14.2 billion, a 53.8 and 120.1 percent increase over their respective 10-year average investment totals, according to JLL’s latest U.S. Investment Outlook.

The growth of e-commerce was a major driver of this change, says John Huguenard of JLL Industrial Capital Markets. The consumer demand for products delivered to their doorsteps gave traditionally conservative institutional investors more faith in the staying power of industrial assets.

“Industrial and logistics product used to be seen by REITs and institutional investors as a riskier class but, thanks to e-commerce, that is no longer the case and they have adjusted their underwriting accordingly,” he says.

REITs ramped up their activity in 2017. It accounted for a quarter of overall volumes, up from 15 percent in 2016.

Many of the most notable U.S. industrial transactions in the fourth quarter involved domestic REITs, including Blackstone’s purchase of the 4.6-million-square-foot Prologis portfolio for US$325 million.

Whether REITs will maintain these levels of capital deployment, however, is less certain.

Changes to the tax code have many REITs cautious in 2018, Huguenard said.

“When personal levels and corporate levels fall, it makes the REIT structure less attractive,” he says. “Many REITs are pausing to reconsider investments.”

But REITs were not the only players who got in on the industrial action last year. Financial institutions that were once conservative about the industrial sector made their presence known. Goldman Sachs Asset Management Private Real Estate (GSAM PRE), the real estate arm of the investment bank, teamed up with DH Property Holdings earlier this year to fund the development of one of North America’s first multi-level logistics and warehouse facilities. GSAM acquired 2.6 million square feet of industrial space in the last 18 months alone.

“We believe 640 Columbia is at the forefront of the next evolution of industrial development as growing e-commerce demand drives competition to deliver product faster and faster to the consumer,” says Joseph Gorin, Co-Head of GSAM PRE, in a prepared statement.

As e-commerce shows no signs of slowing, there appears to be plenty of runway left for the sector, even with REITs in a state of caution.

“We’re still seeing cap rates compress and continued absorption throughout the country, underscoring what we believe to be very healthy fundamentals for the industrial space,” says Huguenard.

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John Huguenard

Director, Industrial, JLL Capital Markets

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