The small-bay light industrial real estate sector has seen almost no new supply in over 40 years and demand for the sector is booming, causing the market to outperform, attracting dealmakers.
According to Brett Turner, a senior managing director of acquisitions and dispositions at Newport Beach, Calif.-based BKM Capital Partners, which is an institutional fund manager and operator of small bay light industrial assets in the U.S., there has been almost no new supply since the 1980s and none coming online for the foreseeable future. This is because it doesn’t make economic sense to build them due to all of the store fronts, demising walls and bathrooms, and they are being sold at about 60 percent to 70 percent of replacement costs. “It’s a horribly inefficient use of land,” he notes.
On the plus side, there has been robust economic growth propelled by advanced manufacturing and reshoring that have caused the tenant base in the light industrial sector to explode.
The industrial real estate market is expected to grow at a CAGR rate of 6.9 percent by 2033, according to data from Grand View Research.
There are three industrial real estate sectors including, big box bulk distribution, which are typically over 500,000 square feet; mid-bay space, which is 15,000 to 75,000 square foot spaces; and the small-bay space, which are units below 15,000 square foot spaces and are business parks with 20 to 200 tenants.
Tenants in these assets are very diversified, and the spaces are typically used as warehouses, assembly, and manufacturing. Industrial finish is defined as the portion of space within light industrial buildings that is dedicated to storage, assembly, distribution, and manufacturing.
“This niche has outperformed any other segment of the market,” Turner says.
The industry is highly fragmented, and deals have been happening.
Earlier this week, BKM acquired a 429,000-square-foot multi-tenant light industrial 11-building campus, Carson Industrial Center, in Carson, Calif., for $95 million.
In March, Matterhorn Venture Partners, a Chicago-based private real estate investment firm focused on acquiring and managing industrial assets, purchased a 75,310 square foot, two-building industrial small-bay complex situated on 3.9 acres in Arlington Heights, IL.
In January, Brennan Investment Group, a private real estate investment firm that acquires, develops, and operates industrial facilities, acquired of an 801,728 square foot industrial portfolio located across the Chicagoland and Milwaukee markets that is comprised of 13 shallow-bay industrial buildings.
BKM and Kayne Anderson Real Estate, the real estate investment arm of alternative investment management firm Kayne Anderson, formed a $1.5 billion joint venture partnership to acquire high-growth light industrial real estate last year. The JV is focused on middle-market properties with below-market rents, high vacancy, and operational inefficiencies that can be acquired at a discount to replacement cost and well below peak pricing.
Earlier in June, the JV acquired an 8.5-million-square-foot portfolio of light industrial assets from Link Logistics for $1.81 billion. The acquisition makes the joint venture one of the largest owner-operators of multi-tenant light industrial assets in the U.S., with approximately 15 million square feet under management, according to the two firms.
Reach Turner at: [email protected]
