What Is Driving Institutional Industrial Rates?
LOS ANGELES—In the past 12 months, industrial rental rates for institutional product have climbed by as much as 20% in some Los Angeles submarkets. This dramatic jump in rents is the result of a very tight market with limited supply—especially for larger buildings—and little room for new construction. However, because institutional owners have such a huge market share—in some markets there are one or two landlords—they are able to push rents even more to meet their proformas.
“Ten years ago, you had three big owners and then the next two down had enough product to stay competitive. Now, there are really only one or two landlords to choose from,” David Bales, a principal in Lee & Associates Long Beach office and an expert on the market, tells GlobeSt.com. “It is a combination of two things. First, there aren’t a lot of buildings available because of the pent up demand, and there are only one or two owners of these buildings, so they know where they need to be to make the deal.”
Mike Tingus, a principal and chairman of Lee & Associates L.A. North/ Ventura office and a market expert, agrees, saying that some institutional owners who have never been in his market before now have substantial portfolios. “We had not had Prologis in our market before, but in the last 12 months, Prologis has bought five buildings. The last two that they bought were 120,000-square-foot 30-year old buildings. They paid $130 per square foot, and that is a huge building,” he tells GlobeSt.com. “All of the deals have been all off market deals.”
Part of the reason that institutional investors have product to buy is because owner-users have been doing sale-leaseback transactions to tap into their equity. Tingus has seen a lot of these deals in his market. An institutional investor will then buy the property for the price that an owner-user would pay and then charge a higher rate to produce a decent yield. In a lot of cases, according to Tingus, that is 5% to 6%. “It is like a self-fulfilling prophecy,” adds Bales. “The vacancy is very low, and when institutional players are paying the same amount of money that an owner-user is paying, they are just growing bigger and bigger with more and more product.”
Both brokers agree, however, that without the very supply constrained market, institutional investors would never be able to push rents this much. “As much as institutional investors want to drive the market, rental increases have definitely been driven by huge pent-up demand and companies just needing space,” says Tingus. “Institutional investors are definitely trying to drive up their yield, but the pent up demand is allowing them to drive rental rates more.”
Link to full article on GlobeSt.com