The Long View: Can logistics deliver?
The boom in warehouse investment carries risks as long as
Commercial real estate investment may be heading for a downturn in 2017, but there is one exception: logistic warehouse properties.
“It’s hard not to be enthusiastic about logistics,” the Blackstone Group’s real estate head Jonathan Gray said at a conference last week.
Blackstone is one of the suitors vying for the $13 billion warehouse real estate investment trust Global Logistic Properties, competing with private equity firm Warburg Pincus and several Chinese institutions.
On Monday, Chinese conglomerate HNA Holdings offered $1 billion for the Singapore logistics firm CWT Group.
Meanwhile, by the end of 2016, the average sales price per square foot for New Jersey industrial properties (which are heavily made up of logistics facilities) rose to $71.67, the highest level since 2009, according to CBRE.
In other words: we are dealing with a logistics investment boom.
“Clearly, industrial real estate has become the investment darling for institutional investors,” said Kevin Welsh, a CBRE investment-sales broker based in Saddle Brook, N.J. “There isn’t an institution,” Welsh added, that hasn’t upped their bets on logistics properties.
Driving the boom is the rise of same-day delivery offerings by e-commerce stores. As firms like Amazon, Blue Apron and Jet expand express delivery services, they need accessible storage facilities close to hotspots like Manhattan. There aren’t too many of those around, which is why they are able to command swiftly rising rents, and investors are increasingly keen on owning them. The GLP portfolio, for example, includes 24 properties in Greater New York.
And in January, Bentall Kennedy paid a hefty $73 million, or $219 per square foot, for a warehouse in Carlstadt, NJ, according to Real Capital Analytics.
But this latest boom also carries real risks of a bust.
So far, many e-commerce firms are hemorrhaging money. Amazon, now valued at north of $370 billion, has been profitable only thanks to its non-retail business. That’s a problem because in the long run, commercial real estate values depend on the profitability of their users.
In Greater New York, there have been very few vacancies caused by e-commerce firms going out of business, said Mindy Lissner, an industrial leasing broker at CBRE. “For every one that goes out there’s going to be 10 more behind them,” she said. But what if that changes? Online retailer Nasty Gal’s November bankruptcy filing was a warning shot.
In February, the California-based company said it is shuttering its main logistics facility in Kentucky. New York-based beauty products delivery firm Birchbox also had a difficult year in 2016 with mass layoffs, although it recently became profitable again.
“We are at a potential inflection point,” said Michael Haas, who heads Jones Day’s real estate practice. “If online retailers decide to recoup more of the delivery costs (and charge for delivery or return), then the average consumer may simply just go to a store and purchase the item.”
Real estate investors are betting that e-commerce will eventually turn the corner and be profitable. But for that to happen, some firms will likely have to go out of business first. And that would spell trouble for their landlords.
“There are a lot of (online) retailers in the same space” competing for the same customers, said Lissner. While she is bullish on the future of online retail overall, she argued the the business could face a “correction” in the next two to three years.
Add to that a second threat: rising interest rates. Average cap rates for U.S. industrial properties fell to 4.8 percent at the end of 2016, according to JLL, and the spread between cap rates and 10-year Treasury yields fell to 2.36 percentage points. That’s higher than the 1.28 percentage point spread recorded in 2006, but still very low by historical standards. If interest rates and debt costs begin to rise in the coming years, as many observers predict, and if that coincides with an e-commerce market correction and falling or stagnating rents, plenty of landlords could be up against a wall. They would certainly have to pray that global uncertainty doesn’t push up the price of oil (a big cost factor in the logistics business).
For an idea of what may lie ahead, look to data centers. Like logistics, the asset class has been heavily dependent on internet companies and boomed during the dot-com bubble of the late 1990s. When the bubble popped, foreclosures spread and data center buildings “took a long time to absorb,” said Alan Razak of Philadelphia-based real estate services firm AthenianRazak. But the downturn proved temporary and over the past decade, the asset class boomed once more. Data center owner Digital Realty Trust, for example, has seen its market value grow by more than 900 percent since 2004. Data centers have been able to cash in on the high-frequency trading boom, famously depicted by Michael Lewis in “Flash Boys.”
All of the above means that investors who buy logistics properties with the wrong tenant at the wrong time stand to lose money. But hiccups aside, e-commerce seems poised to be around for the long haul. That distinguishes the field from street-level retail, where a recent rise in vacancies signals structural decline. In the real estate world of tomorrow, Teterboro, NJ could well carry the kind of Cache For Retailers Fifth Avenue has today.