The world of big industrial has evolved with fewer and better capitalized buyers. It’s a core group of 15 or 20 nationwide owners that know the markets, have talented principals, and to the delight of most sellers, close for all cash. In contrast, the entrepreneurial developer who played such an important development role in past buying cycles has almost completely vanished from the scene. High Net Worth Funds, REITS, Pension Plans, and the Insurance Companies dominate the ranks of primary industrial investors. Occasionally, developer partners seek out capital from the large institutions, but control still reverts to the same dominant group of investors.
Outside of the core investors there are always a few users at any given time. Many are international in origin, have large personal wealth, and are only looking for one location to house their main business. Because there is no “backside” leasing in a user deal, the industry still favors investors, pricing being equal. Large corporations rarely purchase industrial space today except in cases of unique production facilities. Non-institutional and older buildings are more wide open but financing is still a limiting factor. Further, with the scarcity of Grade A properties, the definition of institutional grade has been widening to include older and smaller buildings. In other words, competition is still limited to the top-tier buyers.
This greater concentration of financial firepower is generally a good development for sellers of large industrial. There are enough buyers so no individual can control the market, but each one has strong closing capabilities. During the vetting, a few bidders often rise to the top for reasons particular to their immediate investment objectives. Unlike in past times, vacant buildings or short term leases are just as desirable as property with long term tenancies.
A limited set of well qualified buyers eases the sales process if the target buildings fit the mold. If the real estate doesn’t have any inherent title or environmental problems and the buildings can be categorized as “modern distribution,” a seller will be rewarded with many high quality offers. The relative simplicity of selling these larger properties is a stark contrast to the typical market transaction.
For instance, leasing is the hard work of the brokerage business. Where selling a quality building is a one-to-many relationship, leasing is one-to-one. Unless the building has some outstanding features, the broker’s work is to call one-by-one, over a long period of time. Even with all the effort, there have been some unusual recent disappointments with buildings that should have leased but are still empty a year or more later.
The sale of older buildings has its challenges but is made easier because there is not much for sale and many smaller and mid-size company owners desire to purchase for their own personal financial reasons. But this is a more free-wheeling part of the market than the top-tier, because banks play a more important role and there is a wider assortment of buyers from which to choose. Finally, older buildings often come with more design and structural problems that take time to correct.
A greater concentration of building owners is becoming the norm. The largest investment groups have already absorbed many of the most talented players in the business, mostly because funding flows to the largest organizations. As this trend continues, other categories of industrial will be absorbed by these growing entities. Re-positioning slightly outmoded product and rolling up smaller, multi-tenant is the next wave. For now, there are still a fair number of one-off property owners but their ranks are diminishing as the bigger entities grow their experience, relationships and financial resources.
What Do You Think?
Is the same consolidation trend occurring nationally and internationally?
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