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VOL. 127 | NO. 211 | Monday, October 29, 2012

Capital Influx

Industrial sector sees notable uptick in institutional buyers

By Sarah Baker

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Capital is finally being set free in the Memphis industrial market, with opportunities on both the buy and sale side of investment deals.

New York-based American Realty Capital Trust III Inc. paid $52.4 million for the Williams-Sonoma distribution center, just one example of real estate investment trusts (REITs) buying industrial properties. 

(Photo: Lance Murphey)

Nearly $200 million has been spent since June, as public and private institutional buyers alike make large plays.

“The institutional capital in this market really likes our industrial – the 32-foot clears, they like the SFR sprinkler systems, they like our tenant basis,” said Johnny Lamberson, executive vice president of CB Richard Ellis Memphis. “We’ve got good developers, we’ve got good market fundamentals with the rail service, the water, the air and FedEx obviously being here.”

Real estate investment trusts (REITs) have entered the Memphis industrial scene, as evidenced by this year’s largest and most recent deal, New York-based American Realty Capital Trust III Inc.’s $52.4 million purchase of the Williams-Sonoma distribution center in Olive Branch.

In addition, Denver-based Industrial Income Trust Inc. (IIT) bought various lots in Memphis Distribution Center for $24.3 million in July.

Lamberson called Memphis one of the “hotter markets in the country right now” compared to cities of similar size.

“We were very disciplined on any new developments, we allowed the market to catch back up and now we’re seeing the fruits of that,” Lamberson said. “We’re starting to see cap rates drop and price per square foots going up, and we see that trend continuing.”

Private equity funds are also active. Hillwood Investment Properties, in a joint venture with Brookfield Asset Management, bought five Class A buildings in Southpark Distribution Center for $37.3 million in July from TIAA Realty Inc.

“We were very disciplined on any new developments, we allowed the market to catch back up and now we’re seeing the fruits of that.”

–Johnny Lamberson, executive vice president of CBRE

The deal came on the heels of the Dallas-based Hillwood’s acquisition of Pilot Distribution Center warehouse for $7.5 million, as well as its $13.5 million purchase of the former Mazda North America Inc. distribution center in Olive Branch earlier this year.

Meanwhile, New York-based DRA Advisors LLC in June bought Southpoint I and II on Shelby Drive for $12.3 million, as part of a larger portfolio purchase from Houston-based Weingarten Realty Investors. Prior to that acquisition, DRA had only owned office and multifamily properties in Memphis.

One of the main drivers of this influx of capital into Memphis’ industrial facilities is because commercial real estate is becoming a larger piece of investors’ portfolios, said Kemp Conrad, principal of Cushman & Wakefield/Commercial Advisors LLC. He projects asset allocations by investment managers to increase from historical levels of 5 to 10 percent of total portfolio size to 25 percent.

“Real estate is now seen as more of a mainstream investment,” Conrad said. “Instead of investing in large cap stocks or international companies, they’re shifting almost a quarter of a total allocation of a portfolio … into riskier asset classes where there’s yield and where you can get a little bit better of a return.”

Another private equity firm expanding its local industrial presence is Pennsylvania-based Exeter Property Group, which in June bought 10 Memphis-area industrial buildings from Prologis Inc. for $40 million.

The deal was part of a larger $80 million asset shedding from Prologis, allowing the San Francisco-based REIT to reallocate funds to core markets. Since the disposition, Prologis’ local portfolio is fully leased.

“All the time, you have companies that are changing strategies,” Conrad said. “While you have some institutions or owners who have been here for several years, now they may have realized their return, leased their product up. They’re ready to take those gains, redeploy that asset, and now, you have buyers that want to buy fully occupied buildings.”

To that end, the deal provided Exeter with some 2 million square feet in Class B properties at an attractive price point.

“The B market has definitely picked up and been strong for some owners,” said Andy Cates, executive vice president brokerage for Colliers International Memphis.

What’s more, cap rate compression in coastal and major markets have resulted in buyers transitioning more capital to secondary markets like Memphis.

“The fundamentals of our market have allowed people to come in, find some good buys, and made it very competitive,” Cates said.

More capital appears to be on its way. Exeter and IIT are reportedly in the process of buying more.

Lamberson said Exeter and IIT “may be two of the largest players industrial-wise in the country right now.”

PROPERTY SALES 36 154 6,546
MORTGAGES 34 94 4,129
BANKRUPTCIES 43 126 3,396