Private Equity Funds Shower Capital on Industrial Sector

Posted on September 8, 2011

Industrial real estate is becoming a new focus for private equity funds this year as they seek to raise $1.8 billion for the sector — the most since 2006. More than 70% of that capital, or $1.3 billion, is targeting industrial warehouses in the United States, according to a new report from research firm Preqin, which tracks private equity fundraising activity (see table).

Preqin research analyst Farhaz Miah notes that only two of the eight private equity funds raising capital this year are targeting mainly European markets, while one fund is targeting Asia and collectively the “rest of the world.”

Public and private pension funds are the primary investors in private equity real estate funds. The last time industrial-focused private equity funds raised anywhere close to this year’s goal was in 2007, when eight funds raised a total of $1.6 billion.

So why is industrial a favored investment class? It has much to do with the recovery in world trade.

“Both international and domestic demand for warehouse and distribution facilities are increasing, the former because of the recovery in international trade that commenced quickly after the [financial] collapse of 2009,” says Victor Calanog, director of research with New York-based researcher Reis.

According to the World Trade Organization, world trading volume grew by a record 14.5% in 2010 after falling by 12.5% in 2009. World trading volume grew an average of 6% annually from 1990 to 2008.

Calanog notes that a rise in online sales by retailers, including, also has led to increased demand for U.S. warehouse space. The veteran economist is quick to note one caveat regarding geography, however.

“Clearly, the private equity players believe they can cherry pick the better properties that face more sanguine prospects down the road, despite the tepid economic recovery. But they need to be very careful in assessing various markets and what could be called the ‘shadow inventory’ of fallow industrial space,” says Calanog,

Up and down

According to Preqin, private equity fundraising for industrial property worldwide has been on a roller-coaster ride since the mid-2000s. In 2006, the sector raised $800 million before volume spiked to $1.6 billion in 2007, and fundraising fell to $700 million in 2008.

Between 2005 and August 2011, 34 funds that focused exclusively on the industrial sector raised $9.3 billion in aggregate commitments from investors, says Miah.

The U.S. garnered the lion’s share of attention, with 17 funds focused on the domestic market raising $3.9 billion. Nine funds focused on Europe raised $1.2 billion, and eight focused on “Asia and Rest of World focused” funds raised $4.2 billion.

In 2007 alone, eight industrial real estate funds raised $1.6 billion. That topped the $800 million raised by the five industrial real estate funds that closed in 2006.

However, in 2008, there was a significant decline in both the amount of capital raised and the number of funds reaching a final close in comparison to previous years, as only three industrial funds closed, raising an aggregate $700 million in commitments. This demonstrated the adverse impact that the financial crisis had on the fundraising environment.

By 2009, there was a slight improvement in fundraising conditions, as four industrial-focused funds closed, raising an aggregate $1.3 billion. In 2010, three industrial real estate funds closed, raising an aggregate $800 million. So far in 2011, three industrial real estate funds have closed, raising an aggregate $800 million.

For now, many market analysts believe the prospects for industrial remain bright. Class-A logistics space will remain in strong demand in the future, as its primary driver, international trade, continues to grow at a multiple of the overall economy, according to new research from brokerage firm Grubb & Ellis.

Strong demand and minimal new construction have already lowered the national vacancy rate to 12.5%, but investors should be wary of overbuilding in the segment.

One of the nation’s largest industrial markets, metro Los Angeles, is seeing a broad-based recovery, according to global real estate services giant Jones Lang LaSalle. Fueled by growth in the eastern part of the Inland Empire, the Los Angeles market recorded 8.6 million sq. ft. in absorption in the second quarter of 2011, the most since 2006.

In terms of transactions, sales of industrial properties and portfolios year-to-date through July 2011 are up 46% over the same period a year ago, according to New York-based Real Capital Analytics (RCA).

Sellers continued to bring industrial property to the market in July, adding $3.8 billion in new offerings, the highest monthly total this year, reports RCA, suggesting that demand for industrial purchases remains strong.

By Ben Johnson, National Real Estate Investor