06/01/2011

Soaring Demand Spurs Big Industrial Listings

The number of bidders for industrial properties has exploded this year, fueling big offerings, driving up pricing and pushing opportunistic investors toward off-market deals.

Nontraded REITs have been among the most-aggressive new investors in the sector, but several big private equity firms are also kicking the tires. At the same time, traditional buyers have come off the sidelines after sitting out the downturn. The upshot: Offerings that might have attracted three bids a year ago are now luring two dozen.

“It feels like 2006 again,” said one industrial investor in Southern California, the sector’s hottest industrial market, where capitalization rates have dropped to 5%.

Last year, a few traditional industrial players, including Cabot Properties of Boston and KTR Capital of New York, were active, scooping up properties at depressed prices following the downturn. But one major new buyer also stormed into the sector: fund shop Blackstone, which closed on three portfolios totaling $1.7 billion late last year.

Other private equity firms are now seeking to follow its example, in what one industrial pro called the “Blackstone halo effect.” Two of them — TPG of Fort Worth, Texas, and Brookfield Asset Management of Toronto — have bid on major industrial portfolios currently on the block, including a 7.8 million-square-foot package that Eastdil Secured is shopping for Ridge Property, a private industrial REIT capitalized by Prudential Real Estate Investors. That package is valued at about $500 million.

Another bidder on a piece that offering was Industrial Income Trust, which also exemplifies the expansion of the buyer pool. Since being launched last year, the nontraded REIT, an affiliate of Denver-based Dividend Capital, has emerged as one of the most-aggressive buyers, agreeing to buy $324 million of properties. The REIT is run by an industrial veteran, chief executive Dwight Merriman, who previously served as the investment chief for Stockbridge Capital of San Francisco.

Cole Real Estate, traditionally an office and retail player, has also emerged as an active bidder via a nontraded REIT, Cole Credit Property Trust 3. The Phoenix firm last year said the vehicle had raised $2 billion of fresh equity and planned to increase its focus on core industrial properties because industrial capitalization rates were 1 to 2.25 percentage points higher than those for office properties. The firm has since acquired $134 million of industrial properties, according to Real Capital Analytics, and continues to be among the most-aggressive bidders.

In February, another nontraded REIT, KBS REIT 2, bought a portfolio for the first time since the downturn. The Newport Beach, Calif., company paid $90 million to Mericle Commercial Real Estate of Wilkes-Barre, Pa., for a 1.6 million-sf Pennsylvania portfolio.

The strong demand is motivating the listing of large portfolios. One broker in Chicago, where cap rates are hovering at 6%, said that “2011 is the year that the big deal opened up — deal sizes are increasingly larger.”

At least a half-dozen industrial portfolios currently on the block are valued at $200 million or more. Those portfolios, which encompass 31 million sf valued at some $2 billion, are being shopped by AIC Ventures of Austin, Texas, AMB Property of San Francisco, Ridge Property of Chicago, TA Associates of Boston, UBS and Washington REIT.

At least four other portfolios valued at more than $100 million have been listed in recent weeks. Those packages, which total 12.4 million sf and are valued at about $515 million, are being shopped by Equity Industrial of Needham, Mass., Industrial Developments International of Atlanta, an Ohio State Teachers partnership and STAG Capital of Boston.

But there’s no sign that the growing supply is tempering the run-up in prices. Complained one high-yield-fund operator: “The new money has pushed pricing up beyond where it ought to be.”

That’s forcing some opportunistic investors to bypass large listings and instead look to snatch up one or two properties at lower prices via off-market deals.

“The buyers have come back, so we’re out of the bid business,” said another fund operator, noting that opportunistic investors are becoming more willing to go down the quality curve and up the risk curve in search of higher yields.

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