Institutional Investors Seek Partnerships on Speculative Industrial Development to Boost Returns

Institutional Investors Seek Partnerships on Speculative Industrial Development to Boost Returns

Institutional industrial investors unhappy with current low cap rates for existing class-A properties have instead begun to partner with developers on new speculative construction in anticipation of higher returns.

Bob Smietana, CEO of Chicago-based real estate services firm HSA Commercial, says industrial investors today want to put their money into riskier development plans. Pricing of current properties is just too high, he notes.

“What you’re seeing now is a number of pension funds, fund advisors and life insurance companies venturing out with established developers,” Smietana says. “They are able to find success with a horizon of three-to-five years, getting a building up and stabilized, riding some rent bumps, then selling it during a good marketplace, with the only downside if you can’t sell, you have a great class-A building in a good location. This is more profitable than buying an existing property at a 5 cap rate, 10-year-lease with an existing tenant.”

It’s already a well-known fact that after almost non-existent speculative development during the recession, building industrial projects without leases in place is now a trend that has taken hold in most major markets. E-commerce, traditional retail and logistic companies are now competing for new space supply that’s only at about half the normal annual production. Even the automotive industry is looking for space, as manufacturing gears up for growth again, Smietana says.

“Investors nationwide are looking for good partners, established developers who have both a track record and their own ability to invest in the venture,” he notes.

Go west

In the Midwest, such partnerships are chasing under-developed secondary markets, including St. Louis, which only has one spec project now under construction, according to Smietana. In Minneapolis, locally-based Opus Group recently announced plans for a 145,800-sq.-ft. warehouse facility in Brooklyn Park. Founders Properties LLC is the investment and ownership partner on the project, which will begin in May at the intersection of 85th Avenue and Wyoming Avenue North.

Commercial real estate services firm NAI Hiffman reports that today spec construction makes up about half of all the development in the regional Chicago and Southern Wisconsin markets, about seven million sq. ft., and institutional partnerships are a large part of the growth. For example, at Park 355 in Woodridge, Ill., HSA recently delivered a 180,000-sq.-ft. industrial facility in partnership with Denver-based Industrial Income Trust. In Waukegan, Ill. and Plainfield, Ind., HSA also delivered two 220,000-sq.-ft. speculative developments in partnership with Boston-based Great Point Investors LLC. The Plainfield buildings include the 220,000-sq.-ft. Gateway Industrial facility, which is 54 percent leased by tenants including logistics provider Kuehne + Nagel.

The areas around the nation’s ports are seeing the most activity. About 93 percent of warehouse construction in California’s Inland Empire is being built on spec, due to strong demand growth, extremely low vacancy and rising rents, according to Randy Lockhart, executive managing director with real estate services firm Newmark Grubb Knight Frank (NGKF).

For example, Goodman Birtcher has partnered with the Canada Pension Plan Investment Board to build $1.4 billion’s worth of spec industrial development in California, Pennsylvania and New Jersey, including 1.5 million sq. ft. in two buildings at the planned Goodman Logistics Center in Rancho Cucamonga, Calif. Construction has already begun on the first property, a 555,000-sq.-ft. facility.

Terry Reitz, executive managing director at NGKF, says just about everyone involved in the industrial sector is trying to find a property to build. Even the REITs are focusing on development, he notes.

“Institutional investors are getting as much money out as they can, and joint ventures are very popular vehicles,” Reitz says.

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