Even as industry insiders have recently noted the possibility of new challenges for the U.S. industrial real estate market, Pontegadea Inmobiliaria, the family investment firm of Zara owner Amancio Ortega, has reached deals to acquire seven facilities from American distribution for almost a billion dollars. The transactions are part of a larger pattern of family office investors focusing on office properties in favor of logistics facilities.
“The uptrend of the industry as an asset class is very attractive to high net worth investors, family offices and institutional investors, and it continues to grow in private equity at the expense of other sectors, especially offices,” says San Francisco-based Al. Pontius, senior vice president, national director of offices, industry and healthcare at real estate services firm Marcus & Millichap.
Traditionally, family offices favored office towers, especially those located in the central business districts (CBDs) of major U.S. cities, Pontius notes. This was partly because these types of properties allowed investors to deploy large sums of capital in a single transaction, adds Adrian Ponsen, national director of U.S. industrial market analysis, based in Philadelphia, at CoStar Group, real estate data company.
However, the rise in companies adopting more remote work-friendly policies has weakened many investors’ long-term prospects for office rentals. “In response, many institutions are shifting capital that would previously have been invested in office buildings to industrial assets, which have seen their rental prospects improve dramatically due to the surge in e-commerce spending that has accompanied the pandemic,” notes Ponsen.
Strong tenant demand, low vacancy rates and healthy rental growth continue to make the industrial sector an attractive investment option, but in a context of significantly higher interest rates, transactions are not as lucrative than they were six months ago, when cap rates were compressing and interest rates were low, Pontius notes. Since then, the acceleration in rents has slowed and capitalization rates are rising.
According to the Spanish newspaper El País, Pontegadea paid $137.6 million for one million square feet. distribution center in Lehigh Valley in Pennsylvania, for example, which the seller of the asset acquired in May 2019 for $61.8 million. Pontegadea is unlikely to raise rents on the property anytime soon, as the tenant, Nestlé, still has six years left on its lease. That doesn’t mean, however, that Pontegadea is “late to the party” because expectations for rent and value growth still exist, according to Pontius. The difference is that industrial stocks simply won’t double every few years under current market conditions.
Due to higher interest rates, capitalization rates are rising on most real estate assets, except those with short-term leases, as new owners will be able to increase market rents in the short term. Still, Pontius points out that values and cap rates will vary widely based on each property’s unique makeup and location.
All of the logistics assets acquired by Pontegadea are massive facilities containing one to two million square feet, with long-term leases to quality tenants including Amazon, FedEx TJX, Home Depot, Marshalls and Nestle, and located in Texas, Pennsylvania, Wisconsin, South Carolina, Virginia and Tennessee markets.
Prior to the pandemic, Pontegadea’s U.S. acquisitions representative, Miami-based Ponte Gadia Compass, invested primarily in office assets in major U.S. markets and, to a lesser extent, in hotels and retail. In fact, from 2016 to 2019, Pontegadea invested $2.5 billion in office assets in the United States, including two office buildings in Seattle leased to Amazon acquired for $740 million and two office buildings in Miami. which cost Ortega nearly $887 million. Today, the company is diversifying into other sectors.
El País notes that logistics real estate is just one of the diversification strategies put in place by Ortega since the relocation of the office, hotel and retail sectors. For example, Pontegadea recently acquired a 64-story luxury apartment building in New York City for $500 million. The company also recently invested in alternative industrial sectors in Spain, a 40% share of Telxius Telecom, the telecommunications infrastructure arm of Spanish telecommunications operator Telefonica for €378.8.