One of the biggest changes to the commercial real estate industry over the last 15 years has been the increase in institutionalization within the asset class. The industry is now dominated by institutions that specialize in real estate investing.
At I.CON East 2019, the “Institutionalization of the Industrial Real Estate Industry” session explored the joint venture partnerships between operators, developers and institutional capital, and how institutional capital affects the markets in these JVs.
Robert Kossar, vice chairman of the Northeast Industrial Region for JLL, moderated the panel with David Greek, acquisitions director, Greek Development; Alex Klatskin, general partner, Forsgate Industrial Partners; and Clark Machemer, senior managing director, Crow Holdings Industrial.
Portfolio and entity-level transactions are shifting the balance of overall volume substantially. The two largest industrial owners dominate market share – Blackstone and Prologis’ combined market share will surge ahead of the next 10 largest owners combined after the closing of GLP’s platform in the third quarter.
While the investor pool remains deep and liquid, it is rapidly consolidating. Blackstone topped the active investor list in 2015, doubling totals by year-end with the acquisition of GLP. The top 15 foreign investors represent nearly 75% of all foreign industrial investment since 2015.
And institutional demand for industrial product has soared in the latter half of the cycle. Trailing 12 month quarterly Joint Venture transaction volumes are up 157.6% over the last five years.
Greek testified to that trend: “Institutions are out there hungry for industrial deals, so it makes all the sense in the world to us to take on multiple partners for these deals and be able to spread ourselves a little thinner across the space.”
“But what about that – do you lose some modicum of control, of full discretion?” Kossar asked.
“That’s certainly a part of it,” said Greek. “You have to have an exit to the investment. You can rarely ‘let it ride.’”
Kossar asked the panel what they look for when it comes to a joint partner.
“Financial terms are important, but not everything,” said Greek. “We look for a partner who can bring something other than just capital to the table, whether that’s financial connections, knowledge of the development process, or tenant relationships that will help us lease the building. And personality alignment. It sounds hokey, but it’s really important that everyone sees the world in a similar way. If you don’t, it can be disastrous for the partnership.”
Machemer agreed, adding: “If an institution isn’t familiar with the market and doesn’t understand your recommendations, it can slow things down. Understanding the market is a key piece.”
“Complete alignment of the vision, how you want the project to be executed and represented in the marketplace, too,” said Klaskin.
How does one go about finding and securing institutional investors? “We’re lucky to have a stable of partners we work with,” said Machemer. “It’s true that it’s all about relationships. We’ve had partners where we’ve met at events like [I.CON]. You meet someone and hit it off, and eventually there might be the right transaction that comes along.”
“For the most part, what I’ve seen with institutional partners is the building quality goes up,” added Greek. “I’m seeing better landscaping, technology and they bring in ideas from other asset classes like multifamily. I think institutions are driving specs even higher. There’s a lot of market change that has happened because of the number of institutions joining the market. Transparency is increasing – as these institutions require rent comps to invest.”
And while there’s a lot of capital out there, the panelists don’t see it as undisciplined.
“They’re still looking at the economics, the fundamentals, staying educated about the marketplace,” said Greek. “I don’t see the institutional side causing a recession. I see it coming from somewhere else.”