The e-commerce industrial revolution

Investors and brokers say Blackstone’s nearly $19 billion warehouse bet marks a clear turning point for real estate and that the retail and industrial sectors may never be the same

Aug.August 01, 2019 10:00 AM

(Illustration by Tim Peacock)

It seems buying and selling e-commerce space these days can provide more value than an IPO — at least as far as Singapore’s GLP is concerned.

The massive logistics firm had been considering going public, according to a person familiar with the matter, but landed on a better way to feed its investors: selling a massive warehouse portfolio to Blackstone Group for $18.7 billion, one of the largest deals ever in industrial real estate.

Blackstone’s purchase of roughly 1,300 properties spanning 179 million square feet across at least nine states nearly doubled its U.S. industrial holdings in one fell swoop. And just a few days later, the New York-based private equity giant announced plans to pool $6.8 billion into a new urban warehouse company in Europe.

Of course, Blackstone has made plenty of other big industrial bets in recent years, including $1.8 billion for Canyon Industrial Portfolio’s last-mile properties across Chicago, Dallas and Baltimore, $2.6 billion for Canada’s Pure Industrial Real Estate Trust and $950 million for more than 100 warehouse assets, mostly concentrated in Southeastern states, from Harvard University’s endowment.

The scope of its deal with GLP, however, catapulted Blackstone to the lead spot in the burgeoning e-commerce property game in the U.S. — way ahead of other major players like Exeter Property Group, Clarion Partners and Duke Realty — and possibly around the world.

“This transaction fits perfectly with the strength of the Blackstone Real Estate franchise: large scale, high conviction, thematic investing,” Nadeem Meghji, the company’s head of real estate for the Americas, told The Real Deal in a statement. “We continue to be the largest investor globally in the logistics sector.”

A source with knowledge of GLP’s business strategy said the Singaporean firm still has major growth plans for North America’s e-commerce market, but the chance to sell a portfolio that cost it $8.1 billion in 2015 for more than double the price was just too good to pass up.

Others tapped into the “last-mile” warehouse market said Blackstone’s investments underscore the hard reality that a growing number of people would rather shop online than trek out to the store. And the faster they want those deliveries to arrive, many are betting, the more valuable warehouse space will become.

“Absent any economic shocks to the system, I don’t see warehouse demand going down,” said Innovo Property Group’s Andrew Chung, who has invested roughly $1 billion in industrial properties in New York City.

But some commercial real estate brokers say they’re already seeing a pullback from clients looking to buy and lease warehouse space due to the limited supply of tenants willing to pay the price per square foot they would want. And concerns about oversupply are starting to creep into places where land is cheaper and more readily available than New York.

“[My] instinct, having been in the business for 35 years, is when is the music going to stop, and lenders are starting to ask those questions,” said Joel Bergstein, whose Lincoln Equities real estate firm is working on multiple warehouse projects in the tri-state area. “But every day, demand continues.”

Close to home

While last-mile warehouse space might not be as alluring as the glistening spheres of Amazon’s Seattle headquarters, the seemingly endless e-commerce craze means one can’t exist without the other.

Industrial space across the country had a slim 7 percent availability rate and 4.3 percent vacancy rate at the end of 2019’s first quarter, according to the global commercial brokerage CBRE. That marks the lowest availability rate since 2000’s fourth quarter and the lowest vacancy rate since at least 2002.

The report also found that the U.S. saw just 33.2 million square feet of new industrial supply in the first quarter — a 20.5 percent drop year over year and a sign that demand could continue to rise.

Meanwhile, asking rents for industrial space throughout the country have been steadily increasing since 2011, according to Cushman & Wakefield, hitting an average high of $6.31 a square foot last year.

CBRE’s Brad Cohen, who focuses on landlord and tenant advisory services, said that with more online shoppers expecting their products to arrive in just a few hours max, warehouse space needs to be that much closer to bustling residential areas. Drone technology has offered hopes (and concerns) about those deliveries arriving from remote locations sooner, but that has yet to take hold in the U.S., especially in dense cities.

“The old model of having that distribution a few days’ drive away is no longer going to cut it when you want your product in an hour,” Cohen said. “Consumer buying behavior has changed dramatically.”

Blackstone’s not the only giant looking to capitalize on that.

Prologis spent $8.4 billion last year to buy rival logistics owner DCT Industrial Trust and expand its access to Seattle, South Florida and California, and Warren Buffett’s Berkshire Hathaway has been buying up shares of Amazon — disclosing this spring that it had purchased more than $860 million in stock at the end of March.

And on the sell side, Tom Barrack’s Colony Capital has reportedly tapped Eastdil Secured and Morgan Stanley to market a portfolio of last-mile warehouses and logistics buildings for upwards of $5 billion. Brookfield Asset Management is one of the potential suitors for the properties, Bloomberg reported in July.

Zach Aarons, co-founder of the venture capital firm MetaProp NYC, said there’s been a paradigm shift in recent years between how investors value warehouse and retail space.

“In 20 or 30 years, it’s all going to be one thing,” he said, noting that the industry could soon see “a merger between a Simon Property Group and a Prologis.”

“It’s all going to be one category, and I believe you’re going to see fewer and fewer REITs that just do malls and fewer and fewer REITs that just do logistics,” Aarons added. “There’s going to be … some transformational deal like that that’s going to usher in a new era of thinking about these categories.”

Some say that shift could start to take place in assets that have gone from symbols of America’s obsession with shopping to symbols of brick-and-mortar retail’s decline: traditional shopping malls.

The issue of vacant malls even made its way into the 2020 presidential campaign thanks to Democratic candidate Andrew Yang, who included the American Mall Act as one of more than 100 policy ideas on his website. The proposal stresses that as malls grapple with the ongoing rise of online shopping, there’s a growing urgency to rethink the use of such properties.

“Offices, churches, indoor recreation spaces, anything we can do to keep these spaces vital and positive is an enormous win for the surrounding community,” the candidate wrote on his website.

Yang’s campaign did not respond to multiple requests for comment.

“The era of guaranteed 100 percent occupancy in the shopping mall is over,” Aarons said. “So what do you do with this fallow real estate? Warehouse space in malls might be a really interesting growth angle.”

Sealing deals

Blackstone’s plan, boiled down, is to capitalize on the growing number of retailers moving their supply chains closer to customers in urban markets, according to the company.

Central to its massive warehouse deal was the firm’s belief that e-commerce will continue to rise in popularity, Ken Caplan, Blackstone’s global co-head of real estate, said in a statement. Another company executive, who asked not to be named, also pointed to the limited supply of last-mile warehouse space in big cities.

Though commercial brokers differ on how much of a game changer Blackstone’s purchase is, there was almost universal agreement that it was a good move for the firm.

Alexander Cocoziello, managing director of capital markets and investment at New Jersey-based Advance Realty Investors, said warehouse space “has the longest runway of any real estate asset class, so I’m imagining [Blackstone] has been trying to do this for a while.”

Robert Kossar, a vice chairman at JLL, described the private equity firm’s recent purchase as a turning point for the real estate industry. Kossar, who was not involved in the deal, said there was “significant demand” for the properties from several players.

Other companies that reportedly bid for the GLP portfolio include Prologis, which did not respond to requests for comment, and Brookfield, which declined to comment.

“You have another behemoth in the market,” Kossar said about Blackstone’s growing presence in the e-commerce property business.

Blackstone wouldn’t disclose its plans for specific assets in the GLP portfolio but indicated that it may look to sell some of the properties and hold onto others. The private equity firm is already in talks to sell a chunk of the assets to Prologis for about $1 billion, according to Bloomberg.

For now, though, Blackstone will tuck the portfolio into its Link Industrial Properties arm, which manages about 180 million square feet of industrial space around the country.

John Reinertsen, one of CBRE’s top brokers in the outer boroughs, said it’s not unusual for companies to shed industrial properties after buying in bulk.

“When you buy portfolios, sometimes there’s stuff in there that doesn’t really fit, and you can get rid of that immediately. The other properties need to be leased,” he said. “So you lease it up and make it more attractive and then spin it off, one by one.”

Industry cities

Demand for e-commerce warehouse space has remained strong from coast to coast — even in a city more commonly known these days for its economic struggles than successes.

Detroit had the lowest availability rate for industrial and logistics space in the first quarter of 2019 at just 3.1 percent, CBRE’s data shows. That was followed by Salt Lake City at 4.2 percent, while Milwaukee and Portland, Oregon, tied for third at 4.3 percent.

Los Angeles had an availability rate of 4.5 percent, while Miami’s was 5.2 percent and Chicago’s was 5.4 percent. CBRE does not have statistics yet for New York City, as it just recently started to track the last-mile market more closely.

But the vacancy rate for industrial space remains relatively low in the outer boroughs, according to Cushman. As of 2019’s second quarter, it was at 5 percent in Brooklyn, 5.8 percent in the Bronx and 6.1 percent in Queens, but slightly higher at 10.3 percent in Staten Island.

And the five boroughs saw 2.5 million square feet of industrial space leased overall last year, with 95 percent of those deals involving e-commerce and logistics tenants, according to JLL.

Innovo’s Chung is planning to build a roughly 840,000-square-foot warehouse on Bruckner Boulevard in the Bronx, and the company recently bought warehouses in Long Island City and Maspeth, Queens, for $114 million combined.

Other major New York warehouse projects include a four-story distribution center in Sunset Park, Brooklyn, which Dov Hertz’s DH Property Holdings is spearheading, and an industrial distribution center on the Red Hook waterfront that Joseph Sitt’s Thor Equities converted from a planned office project, as TRD previously reported.

At the same time, Amazon is planning to open a new distribution center on Staten Island that will span more than 850,000 square feet and still has its eyes on Brooklyn and Queens. The e-commerce giant is reportedly in talks to lease 1 million or more square feet near Industry City and is considering building a ground-up distribution facility in Maspeth, Crain’s reported late last month.

These days, Chung noted, even most big-box retailers deliver products to customers’ homes if they prefer. Walmart does not have a store in the five boroughs, but its e-commerce business has leased a roughly 200,000-square-foot warehouse in the Bronx. And while Best Buy has several stores in the city, its closest warehouse is in Piscataway, New Jersey.

“Even if you buy in a store now, there’s an expectation to be able to have it delivered rather than having to carry it home,” Chung said.

The ground-up game

Average asking rents for industrial space in Brooklyn are now at about $20 a square foot, per Cushman, and several investors say newly built and renovated warehouses in the city can achieve rents upwards of $30 a square foot — comparable to prices that outer-borough office landlords were seeking a few years ago.

Jeff Milanaik, a partner at the industrial development and acquisitions firm Bridge Development, said he doesn’t expect demand for warehouse space in and around New York to fade anytime soon.

“It’s all focused on that same last mile,” he said.

But there’s a limit to how many warehouses people want to see in their neighborhoods.

Stephen Preuss, an investment sales broker at Cushman based in Forest Hills, Queens, compared the potential for a glut of new industrial buildings to the flood of luxury condos in New York and other major cities in recent years.

“When the first 10,000 come through, obviously there’s absorption,” Preuss said. “It’s the next 10,000 [where] you really have to see how absorption and rental levels stabilize.”

Oversupply is less of a concern in the Big Apple than some other markets, according to local players, given the city’s strict spatial restraints. Zoning laws limit the number of places where warehouses can be built, and several parts of the city that were once geared toward industrial development have since been taken over by residential projects.

The city’s population has added about 1.5 million people since the early 1980s, RXR Realty’s Seth Pinsky noted. “A lot of the places where we’ve accommodated that growth has been on formerly industrial land,” he said. “So, now you’ve got demand [for industrial space] that’s continuing to increase and supply that’s fixed or even diminishing, and it makes it a pretty favorable market for landlords.”

Just outside the city, warehouse space is now about as solid a bet as new residential space, Lincoln Equities’ Bergstein argued. His firm had been working on a project in the Meadowlands that it originally planned to build as a mixed-use development until shifting course to make it a 360,000-square-foot industrial property.

MetaProp’s Aarons pointed to two main factors driving up the amount of money investors can now make from warehouse space: “You’re able to charge higher rent because the market is really competitive now,” he noted. “And you’re delivering a level of service that you would have never thought possible to deliver 10 years ago.”

Bergstein said he expects to see competition for industrial space heat up among New York landlords and commercial brokers as the state’s new rent laws make multifamily deals less attractive than other commercial property types.

Blackstone, after all, is the largest owner of rent-stabilized apartments in the city, according to the Department of Housing Preservation and Development, in large part due to its $5.3 billion purchase of Stuyvesant Town–Peter Cooper Village with Ivanhoé Cambridge in 2015. And the private equity giant recently halted all apartment upgrades and other planned work at the 11,000-unit complexes, citing the legislation signed by Gov. Andrew Cuomo in June.

A spokesperson for Blackstone maintained that the GLP deal had nothing to do with its plans for Stuy Town, and that the company had been investing in logistics long before changes to New York’s rent laws were a concern.

But Bergstein maintained that the booming last-mile warehouse sector would soon see more entrants from the multifamily world.

“I think right now, based on the new rent regulation laws in New York City, all those guys want to get into the e-commerce and industrial business,” he said.

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