According to Mollie Alteri of Stan Johnson Co., these assets feature a certain “stickiness” that differs from a traditional bulk warehouse or distribution facility.
Industrial manufacturing properties have always been viable options for private investors looking to purchase quality real estate. But historically, we have seen the manufacturing investment sales space dominated by institutional owners and private equity groups with a focus on sale-leasebacks. Late cycle, however, there’s been a significant uptick in private buyer activity, as this group hunts for yields they cannot find amid the deep competition for traditional bulk distribution and e-commerce fulfillment space. Not to say institutions have necessarily pulled back, but they’re certainly seeing more competition from the private market as they bid on manufacturing deals—especially as the volume increases for available manufacturing assets. But what’s driving the uptick in supply? Sale-leaseback activity is a leading cause.
First-generation sale-leaseback activity is strong in today’s market as corporate owners seek to monetize their real estate and free up capital to reinvest in their operations. These transactions are especially popular with private equity firms that often use sale-leasebacks as a financing tool for their acquisition of underlying tenant operations. But we’re also seeing a good number of second-generation former sale-leaseback opportunities come online as we near the end of this market cycle. These are sale-leaseback deals that were executed earlier in this cycle, with many of the owners now looking to capitalize on the extended momentum in today’s investment sales market. Now is the right time to sell while these deals still feature healthy remaining lease terms and the underlying credit is still performing well in-line with current market fundamentals. As long as conditions remain conducive, we expect to see continued strong activity in this space.?
OPPORTUNITIES FOR MIGRATING INVESTORS
Manufacturing assets feature a certain “stickiness” that differs from a traditional bulk warehouse or distribution facility. Manufacturing tenants are often heavily invested in their sites to the tune of 10s of millions of dollars, which makes it incredibly costly for the operator to replicate or relocate. We sometimes refer to this as a tenant’s “bolt down cost,” and it’s an attractive characteristic for investors. This quality overlaps with another favorite investment class in the net lease space—medical or healthcare. We have started to see a migration of medical buyers into the manufacturing space as medical cap rates reach historic lows. Manufacturing offers the comfort of a similarly invested tenant, but the opportunity to capture a better yield. As an example, a large automotive manufacturing facility in the Midwest recently sold to a small group of high net worth individuals who historically had only invested in medical properties. The multi-million-dollar investments on behalf of the tenant into their highly sophisticated and specialized manufacturing machinery provided comfort to the buyers, assuring them that the tenant was committed to the site for the long-term.
As we look to the future, it’s likely the recent interest rate cuts will hold us steady as we move through the final half of 2019. But we are undoubtedly facing significant headwinds as we push past the 10th year of this economic cycle, and August’s stock market dip along with the recent yield curve inversion have investors thinking about a recessionary environment. Perhaps most importantly, 2020 will be a very contentious election year, with a significant portion of Congress as well as the office of President up for re-election. We have seen the advancement of policy ideas that could have a significant effect on commercial real estate, and the economy as a whole. It’s possible this could push some investors to the sidelines as they wait out the uncertainty. However, investors have outstanding opportunities in today’s market. Before a downturn occurs, and before political or economic uncertainty takes a strong root, it’s time for investors to reevaluate their portfolios and investment strategies.