The following are solely the opinions of Nordic Realty Partners and do not constitute financial advice or counsel. All investments involve risk. As always, please consult your investment advisor prior to making any investment decisions and carefully read the risk disclosures and forward looking statements in the Private Placement Memorandum for the applicable transaction prior to investing. This does not constitute an offer for the sale of any securities.
Nordic believes industrial real estate offers investors a number of potential competitive advantages
Industrial real estate encompasses a wide spectrum of property types, and includes warehouses, manufacturing buildings, and flex properties, among others. Investor interest is growing in industrial real estate due to current pricing, increased demand demand, and largely hands-off maintenance.
Defining Industrial CRE
Before exploring the investment upside of multi-tenant industrial, let’s take a look at the asset class. The National Association for Industrial and Office Parks (NAIOP) clarifies the issue by dividing the industrial asset class into three categories1:
Flex: smaller areas that can include office space
Warehouse/distribution: which focuses on storage and distribution
Manufacturing: facilities in which goods are produced
Nordic focuses primarily upon flex and warehouse/distribution space, with some “light” manufacturing.
Niche Asset Class - Unique Advantages
Attractive Risk/Return: Industrial real estate is not typically the sexiest type of investment – no glitzy skyrises or glamorous high-end apartments. In our view, this lack of “sexiness” reduces ego buying and limits investor interest compared to other property types and leads to more attractive pricing relative to yield. Moreover, the lower cost of ownership detailed below results in predictable cash flows..
Ease of Management: Industrial real estate is primarily leased on a triple net basis where the tenant pays its share of the property operating expenses and most of its interior maintenance costs. Additionally, industrial tenants generally do not require interior janitorial service and industrial properties rarely include interior common areas that need to be maintained by the landlord.
Lower Cost of Ownership: Industrial real estate is primarily leased on a triple net basis where the tenant pays its share of the property operating expenses and most of its interior maintenance costs. Additionally, industrial tenants generally do not require interior janitorial service and industrial properties rarely include interior common areas that need to be maintained by the landlord.
Industrial RE Is Flexible: Industrial properties come in a variety of shapes and sizes. There can be warehouse with little office, or space that’s heavy on office with some warehouse for distribution, warehouse area can be converted into biotech space or a baking facility… and so on. Given proper zoning, industrial real estate allows for far greater flexibility in accommodating tenants’ needs than other commercial property types.
Industrial RE Supply Is Shrinking: We are seeing an urbanization renaissance in the United States. Dilapidated industrial buildings are being turned into hip night clubs, chic lofts, apartments and “collaborative space” offices. At the same time, very little new industrial construction is occurring in the urban and suburban areas. As former industrial areas are being rezoned, there is less room for suppliers and distributors to access and store their inventories. From an investor’s supply/demand perspective, this means that industrial has the potential to become more valuable in these areas as businesses prefer to be closer to the cities they supply.
High Replacement Cost / Barriers-To-Entry: Which brings us to the primary expense driver of new industrial projects: the high cost of acquiring and entitling land. While industrial properties are typically single-story and not necessarily expensive to build, they do require far larger sites of land as opposed to vertical projects such as office, multifamily and hospitality. Generally speaking, developing new industrial sites does not offer municipalities the same tax revenue opportunities as retail, hospitality, housing or high-rise office. Thus, Nordic believes that the increasing demand for industrial space and the high cost of building new projects potentially places upward pressure on rental rates on existing projects, which may increase opportunities for appreciation in existing properties, especially those acquired below replacement cost.
Changing Nature of US Employment Market: Today, according to Small Business Association, 40% to 50% of all job growth in the country is driven by businesses with fewer than 50 employees, and this trend is expected to increase over the foreseeable future. Avistone LLC believes many of these businesses will seek to expand space they already occupy in multi-tenant industrial projects and business parks.
Growth of Internet Retail: According to the National Association of Industrial and Office Park Owners (NAIOP), e-commerce (product warehousing for shipping) now drives 30% to 40% of the industrial real estate business. As one of the fastest growing segments of the economy, ecommerce is expected to account for one-third of all retail sales in just 15 years; and shift more and more space from expensive brick and mortar retail stores to industrial properties – primarily warehouses and e-commerce fulfillment centers.
The Coming Revolution in 3D Printing: Forbes Magazine, The Economist and other leading business publications are calling 3D Printing “The Next Industrial Revolution.” Because most practical applications will extend beyond “home-use,” the explosive growth in this industry over the next 10-years will house itself primarily in industrial properties. Along with that, Avistone LLC believes the widely reported coming growth in industrial robotic manufacturing and assembly will directly impact industrial properties.
Home Building and Infrastructure Construction: Industrial properties are often home to businesses engaged in the construction industry. As a result, Nordic believes expanded activities in new residential/commercial construction, the oil and gas industry, and renovation of the nation’s aging infrastructure of roads, bridges and utilities will have a positive impact on industrial properties. Specifically, Avistone LLC targets industrial projects in regional markets exhibiting these strong economic drivers.
Large tenant bases and short lease terms smooth properties’ rent rollover profiles and consequently net operating incomes
Tenants for business parks come from many different industries, limiting property owners’ exposure to secular downturns in any one vertical
Faster lease turnover means quicker value capture in rising markets
Simple concrete tilt-up construction styles and universal layouts lead to lower tenant improvement costs and capital expenditures
These attributes combine to mitigate risks and allow expert owner/operators multiple value-creation levers even in uncertain economic environments. Additionally, a large proportion of these assets sit squarely in the middle market. Our target transaction size of $10 million to $25 million tends to be too large for individual investors and too small for institutional investors, limiting the scope and intensity of competition for deals. With current pricing for these assets well below market peak and rents on an upswing, fundamentals for multi-tenant business parks indicate favorably toward substantial growth in the near- and medium-term future.
Diversified Tenant Base
Multi-tenant business parks tend to attract small, entrepreneurial businesses from a wide range of industries. These businesses strongly prefer the short-term leases and inexpensive, flexible spaces offered by this asset class.
Because no single tenant occupies a majority of the square footage in a multi-tenant business park, the property’s rent rollover is more consistent than in traditional industrial properties housing only one or two tenants.
The diversified tenant base at a multi-tenant business park means:
Swifter adjustment for inflation and rent appreciation as leases come up for renewal more frequently.
Smoother rollover profile as an average of one-third of leases roll annually.
Far less concentration of industry risk as tenants tend to come from many different segments of the economy.
Multi-tenant business parks can also accommodate tenants as their businesses evolve. With staggered suite sizes, tenants can expand and contract within the same property at minimal cost to tenant and landlord, which often leads to higher tenant retention than other competing product types.
Value-Add Opportunities
Multi-tenant business parks present many opportunities to add value and provide investment returns not dependent on market conditions. Many buyers overlook these properties for factors that include:
Functional obsolescence
Deferred maintenance issues
Capital deficiencies
Overleveraged
High vacancy rate
Poor market reputation
One of Nordic’s core competencies is the ability to improve the operations of acquired properties. We actively seek assets considered “distressed” by the market. Post-acquisition, we systematically address deficiencies, making each property more attractive to the leasing community in its local market. These changes result in increased occupancy rates, justification for higher rents, and ultimately, improved exit value.
