A Dallas-based real estate investment firm known for its office properties throughout North Texas is revamping its real estate strategy to focus on the strength of the industrial market, in particular shallow-bay warehouses, with its first acquisition in this sector.
Sunwest Real Estate Group has teamed up with San Francisco-based AKRE Partners to acquire North Commercial Industrial Park, a 36,000-square-foot industrial warehouse at 1000-1008 N. Commercial Blvd. in Arlington, Texas, about 20 miles west of downtown Dallas. Terms of the off-market deal were undisclosed. The deal comes as Sunwest and AKRE have both turned their investment sights on shallow-bay industrial deals in the southwest United States.
The deal is a pivot from Sunwest’s prior real estate strategy reflected in its portfolio spanning dozens of North Texas office buildings as the firm, celebrating two decades of being in business this year, sees shallow-bay industrial space as emerging as a core investment play.
“The market knows us as being an office building owner that is focused on value-add acquisitions that take something tired and in need of a little work and stabilizing the occupancy,” Marc Grossfeld, founder and managing principal of Sunwest Real Estate, told CoStar News in an exclusive interview.
“There’s limited capital available for office building acquisitions,” Grossfeld added. “I do think there’s a trend of capital coming back into the office sector slowly, but they are spending their time evaluating office acquisitions” and that’s why Sunwest is “focusing on industrial, where we can play and leverage our team’s operational expertise on how best to improve the space and work to stabilize it.”
Sunwest Real Estate Group and AKRE Partners aren’t the only real estate investors making a big bet on the future of shallow-bay industrial space. Brookfield and Belgium investor Ackerman & Co. being among the groups putting their money on this part of the industrial sector.
Sunwest’s home base in the Dallas-Fort Worth region, the nation’s fourth-largest metropolitan area with more than 8.3 million residents, has seen continued industrial strength, with the area having 60 consecutive quarters of positive leasing velocity of every type of industrial space, including shallow-bay industrial warehouses.
Cody Gibbs, CoStar’s director of market analytics tracking industrial space in the Dallas-Fort Worth region, said rent growth is cited as a primary driver of investment interest.
“Unlike a lot of the larger properties on the market, there has been very little development of small-bay space, keeping those fundamentals tight and rent growth favorable for owners,” Gibbs said, adding that cumulative rent growth for small-bay space under 50,000 square feet was 41% since 2020.
For Sunwest, the search for value-add returns pushed the firm to focus on shallow-bay industrial warehouse space as office opportunities dried up, with occupancy rates headed in the wrong direction and interest rates remaining elevated, Grossfeld said.
“We have done a lot of soul-searching in the last five years as we move to evolve our businesses and make sure we are relevant,” Grossfeld said, adding that the firm’s capital markets partner, Libitzky Property Cos., stopped investing in the office sector in 2020.
“We realized it was important to build relationships with capital partners and that not every transaction fits the mold of our capital partner,” he added.
Industrial extension
With few office deals in the market, it helped push Grossfeld and his executive team to begin kicking around other options, with the potential of shallow-bay industrial warehouse investment initially popping up in 2021 and 2022, he said. That search was driven by Sunwest seeking the right opportunities with the right returns reflecting a value-add risk the firm has tailored its business around.
“This is an extension of our existing business,” Grossfeld said. “This isn’t us moving away from office, but the market dynamics of small-bay industrial warehouse space are extremely compelling.”
By acquiring existing properties rather than building ground-up construction projects, Grossfeld said there’s predictable costs and faster access to cash flow with a diverse tenant base ranging from e-commerce operators to heating-and-air-conditioning companies. In the newly purchased industrial park, a gymnastics and martial arts school are tenants.
Unlike some of the larger institutional players in this space, Grossfeld said his team is focused on middle-market properties with $5 million to $15 million equity raises leading to deal sizes of $10 million to $40 million. That sub-institutional range of funding is also a focus for Sunwest Real Estate on the office side of its investment business, he said.
This echoes AKRE Partners’ investment thesis, outlined on its website, where it focuses on sub-institutional properties of $25 million and under in high-growth U.S. markets. On its LinkedIn page, the firm said it is focused on industrial investment in the western and southwest United States.
The newly acquired industrial park represents “the type of strategic high-potential investment opportunity AKRE Partners prioritizes,” said Nadav Kariv and Harry Ashforth, executives at AKRE Partners, in a statement on the deal.
“The property’s flexible configuration and strong submarket fundamentals position us to deliver both operational improvements and attractive returns,” the executives added.
The newly purchased multitenant industrial park is expected to undergo an upgrade by the new ownership group. Initial plans include a new roof, pavement and painting, as well as renovating interior suites. The upgrades are expected to attract new tenants, with the property being nearly 67% occupied at the time of the acquisition, according to CoStar data.
“We are lucky to be in the Dallas-Fort Worth region, where we continue to see a lot of population growth, and we are logistically centrally located in the United States,” Grossfeld said. “Demand is outstripping supply, and this product has the biggest delta in terms of what you can buy it for and how much it would cost to build new.”