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Portfolio Sales of Smaller Industrial Properties Surging as Institutional Investors Jump On 'Last Mile' Logistics Bandwagon

Once Overlooked, Smaller Industrial Properties Finding New Value as Final Link in 'Need It Today' Supply Chains
February 16, 2017
Amazon opened this 203,000-square-foot sortation center in Swedesboro, NJ, in 2014.
Amazon opened this 203,000-square-foot sortation center in Swedesboro, NJ, in 2014.
In recent months, major investors have increasingly turned their focus on light industrial properties capable of serving as "last mile" conduits in the race to achieve same-day delivery by e-commerce firms.

Typically smaller, older and less efficient than their bulk warehouse counterparts, these buildings previously languished on the market. But thanks to recent outsized rent growth driven by strong demand from e-commerce and logistics providers, these formerly overlooked assets find themselves back in favor among investors in logistics hubs across the country.

Sales of large logistics portfolios dropped during much of 2016 as the market digested the multi-billion-dollar platforms purchased by Global Logistic Properties Ltd. (GLP), Prologis and others during a record-setting 2015 for investment sales.

However, investors have returned to the market since last fall with a series of more modest portfolio transactions, capped by DRA Advisors' $1.04 billion purchase last week of 184 mid- and small-sized warehouse, distribution and light-industrial properties in in 21 states from Cabot Properties.

Marketmaker Blackstone also re-entered the logistics market in the third quarter of 2016, buying 101 properties totaling roughly 12.5 million square feet from Irvine, CA-based LBA Realty for $1.4 billion. The smaller buildings, which average less than 125,000 square feet, are concentrated mostly in port and airport locations on the West Coast around Los Angeles, Oakland, San Francisco, San Diego and Seattle, with other properties scattered in regional hubs near Dallas, Denver, Phoenix and Las Vegas.

The smaller buildings acquired by DRA from Boston-based Cabot Properties include many infill properties with the coveted 'last-mile' potential, located near transportation corridors in densely populated areas where industrial land is expensive to develop, according to a person familiar with the Cabot portfolio.

"The last mile is on everybody's radar," this person said.

Rents for older light-industrial properties rose a whopping 10.4% in fourth-quarter 2016 from a year earlier, higher than the 6.4% quarterly rent growth in the broader industrial market, as demand tightened for Class B product closer to the urban core suitable for use as last-mile delivery points, according to CoStar Portfolio Strategy.

"These are infill locations, very difficult to replace, and they're going to be the interest of many investors going forward as companies like Amazon want to get closer and closer to their end consumers," said CoStar director of industrial research Rene Circ during the Fourth Quarter 2016 US Industrial Review and Forecast, presented along with managing consultant Shaw Lupton and consultant Justin Tochtermann.

"There are a lot of portfolios starting to trade, and funds are being raised on the potential to capture last-mile distribution," Circ added.

Last-mile buildings have become increasingly valuable to online retailers as e-commerce shifts from competing solely on the basis of cost to competing on the ever-shortening time it takes orders to reach consumers.

Based on criteria Amazon has used in selecting sites for its delivery stations and Amazon Prime Hub centers, CoStar Portfolio Strategy created a data series to identify and track the performance of smaller buildings that could potentially be used by occupiers for last-mile delivery.

"In our recent study, we identified more than 10,000 buildings across the US suitable for last-mile distribution, with rent growth of over 10% last year," Lupton said. "We’ve recently seen a great deal of interest in light industrial product that is suitable for last-mile distribution. Investors are right to be interested."

Amazon began adding bulk distribution fulfillment centers ranging from 500,000 to 1 million square feet or more as early as 1999. About 2009, Amazon began rolling out sortation centers averaging roughly 300,000 square feet in certain markets, followed in 2013 by delivery stations of roughly 100,000 square feet and Prime Now hubs of 50,000 square feet in major population centers.

The delivery stations and Prime Hubs have allowed the dominant e-tailer to replace third-party logistics providers in its supply chain, Lupton said.
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Average vacancies for potential last-mile buildings are about 3.5%, well below the broader US industrial vacancy rate of 6.7%.

"There is going to be an interesting battle for the last available space in these markets, and also new development trying to squeeze its way into these locations," Circ added. "Last mile was just a talking point for most players in 2016. We expect it will really take off this year and in 2018."

Sellers are capitalizing on the renewed interest in previously outmoded property from numerous investors ranging from private-equity to foreign sovereign wealth funds.

In South Florida, Genet Property Group recently hired Cushman & Wakefield to shop its 11-building, 366,000-square-foot small-bay industrial portfolio to potential buyers.

And CBRE is marketing what it calls a "Last-Mile Portfolio" comprised of more than 150 light-industrial assets totaling 16 million square feet in 18 major distribution markets across the US for an unidentified client. More than 85% of the buildings are 150,000 square feet or smaller and nearly 91% of the portfolio was leased to 370 tenants as of last August, according to a CBRE marketing circular.

CBRE is also offering a 55-building, multi-tenant industrial portfolio totaling 6 million square feet on behalf of Boston-based High Street Realty. The buildings are located in Atlanta, Orlando, Harrisburg, PA; Chicago, Dallas and Houston.

The brokerage firm's marketing materials reflect the newfound market value for such buildings, touting their "irreplaceable infill locations" and "immediate proximity to metro populations via major transportation arteries" which appeal to "rapidly growing e-commerce and last mile users."

Given how e-commerce has managed to reverse the fortune of these previously overlooked and under-valued warehouse properties, perhaps other down-and-out real estate can be repurposed.

Anyone interested in turning abandoned malls into drone delivery centers for flying packages to online shoppers in surrounding neighborhoods?

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