Earlier this year, Rockpoint Group, a global real estate investment management firm, formed an exclusive strategic partnership with Benjamin Harris, an industrial sector veteran, to pursue industrial investment opportunities in infill, demand-driven markets on behalf of Rockpoint-sponsored funds. The partnership will focus on acquiring industrial facilities in high barrier to entry locations across the U.S. and will also selectively develop new product.
With more than 20 years as a real estate industry investor, Harris is the founder & CEO of Pinedale Capital, a privately held real estate investment management firm targeting industrial assets. He was most recently CEO of Link Logistics Real Estate, Blackstone’s U.S. industrial sector operating platform. During his tenure, Link became the second-largest industrial real estate manager in the U.S. Prior to joining Link, Harris was president of Gramercy Property Trust, a publicly traded industrial REIT.
In an interview with Commercial Property Executive, Harris discussed the future of the industrial real estate market.
What are the major factors to consider when making a new industrial investment or developing a new project in today’s highly competitive market?
Harris: Tenant requirements in the modern logistics industry have changed dramatically over the past 15 years as consumers have become more focused on speed of delivery. From the size and types of buildings that tenants need to the number of facilities and the locations that they require, we have seen a meaningful evolution across the entire logistics footprint over the last several cycles.
More than ever, it is critical to understand the requirements of today’s logistics user before investing in a property or developing a new project. We rely heavily on longstanding tenant and industry relationships—developed over more than two decades of investing in, developing and managing logistics assets—to understand the modern marketplace from the tenant’s perspective and to assemble a high-quality portfolio of assets most relevant to today’s users.
We focus on developing and owning assets in the markets and locations where sites are most in demand and where new supply is difficult to add. With each potential investment, we first try to understand how the asset competes in its local submarket, what attributes are most important to tenants in that market and what opportunities we can uncover to improve the utility and competitiveness of the asset.
Pressure to shorten delivery times has pushed tenant requirements closer to their end customers and it is important to understand key drivers across the entire supply chain when building a portfolio that can be responsive to tenant needs.
Is there a risk of oversupply in industrial and, if so, are some markets more susceptible than others?
Harris: Over the last 10 years, nearly every market across the U.S. has experienced growth in tenant demand for logistics space, driven by expansive growth in the e-commerce sector. In recent years, we have seen a significant uptick in new development, yet tenant demand has kept up and most markets remained tight, with low vacancy and growing rents.
Despite the recent outperformance across most markets, we continue to believe that certain markets will outperform while others moderate over the near term. It’s possible that development in many lower-barrier markets will catch up to, and in some markets, exceed tenant demand—a risk that is amplified this cycle given the volume of institutional capital seeking industrial product.
While we believe that both e-commerce and traditional drivers will continue to fuel tenant demand, overdevelopment in low-barrier markets and submarkets could lead to oversupply, placing downward pressure on rents and occupancy.
Industrial development has a relatively short construction timeline, which has historically allowed the asset class to correct relatively quickly when it becomes overbuilt, but the capital flow into new industrial development may mute that correction in those lower barrier markets. In light of this risk, we’re continuing to focus exclusively on higher-barrier, infill markets that are naturally insulated from the risks of oversupply.
We also believe many of these markets are experiencing the most significant demand from logistics users and that this structural imbalance between supply and demand will continue to drive rent growth for many years to come.
Are multilevel warehouses a solution for developing an industrial facility in a dense, urban location?
Harris: Multistory warehouses have historically been more prevalent in the large, densely populated cities in Asia. As tenant needs evolve, it’s possible these warehouses will play a bigger role in the U.S. logistics market in the future, though to date, we have seen multistory product emerging only in a small number of dense, urban markets including New York, San Francisco and Seattle.
While multistory buildings can increase the amount of usable warehouse square footage on a given site, the expense of construction, loss factor of ramps, elevators and other nonrentable space, and reduction in potential tenant users given the need for highly mechanized operations make the all-in cost per rentable foot prohibitively expensive in all but the most expensive and densely populated markets. We believe that this will continue to be a barrier to the development of multistory warehouses in most markets.
How much of a role will technology and automation play in the design of modern logistics assets?
Harris: We have seen tremendous innovation in the areas of robotics, racking and material handling equipment, inventory management and truck routing technology, which will allow tenants to maximize the utilization and efficiency of the warehouse and move goods more quickly and efficiently through their supply chains. These changes in how tenants use their space inside the warehouse have greatly expanded the efficiency and value of rentable square footage.
What are the challenges of finding infill sites that can be used for last-mile facilities?
Harris: As industrial demand pushes into urban and suburban locations, warehouse development has become a higher and better use for an array of potential conversion sites, including obsolete office and retail properties. These sites can make for compelling redevelopment opportunities but tend to have significant rezoning challenges that can make the process long and arduous.
Retail sites can be particularly challenging due to community pushback against increased truck traffic in locations that are often in close proximity to housing and amenities. As e-commerce continues to grow, the pressure to move goods into and around densely populated areas should continue to propel industrial demand into urban and suburban centers, driving continued interest in the conversion of obsolete properties into industrial sites.
Read the May 2021 issue of CPE.