Although industrial real estate sales cooled during the recession, transactions have been making a comeback with an uptick last year that is expected to continue through 2013.

But this return from recessionary times marks how the industrial sales market has changed locally over the years.
Michael Mullis, a partner in Farnsworth Holdings, says a lot of industrial product in the Memphis market is now owned by out-of-state investors.

“What I do think is interesting is the lack of local guys buying stuff,” Michael Mullis, partner with Farnsworth Holdings, says.

Years ago, local development firms such as Farnsworth, Belz Investment Co. and Weston Cos. Inc. drove the industrial market.

“It was basically that group building warehouse buildings,” Mullis says.

Consequently, those were the firms that were buying and selling a lot of the industrial product.

“Then all the big guys came to town,” Mullis says. “The market totally flipped. The people who are buying stuff nowadays are out-of-town people.”

The “big guys” are national institutional firms such as Industrial Developments International, Panattoni Development Co. and Hillwood Investment Properties, among others.

Industrial Developments International, also known as IDI, has been particularly active lately.

Last year, it sold two buildings it developed in Olive Branch to Monmouth Real Estate Investment Corp., a publicly traded real estate investment trust.

A 615,305-square-foot building leased by Milwaukee Electric Tool Corp. fetched $28 million while a 234,666-square-foot building leased by Anda Pharmaceuticals Inc. brought $16.2 million.

IDI started as a merchant-build model, meaning the firm built industrial property, leased it and sold it. The Atlanta-based company originally wouldn’t hold buildings on a balance sheet for long, according to senior vice president Kurt Nelson. In the past seven years, IDI has started to hold more buildings longer.

The firm now sells about half of its developed properties, keeping the other half on its own balance sheet or through a joint venture.

“It comes down to more of managing our finances and our balance sheet and having the assets we want to have,” Nelson says.

A lot of sales activity is driven by what institutional investors are willing to pay versus the cost for a local group to develop a building, according to Mullis.

“The institutional guys are willing to take less than a guy who risks his own money for it,” Mullis says.

Larger companies are sometimes more willing to take a lower capitalization rate and charge less for rent.

Tenants don’t really care who owns the building and if they can rent space for less than the local guy, they often do it.

“Farnsworth has been fighting this battle since the big guys came to town,” Mullis says.

Local companies like Farnsworth would like to buy more industrial property, but are also hampered by stagnant rents in the Memphis market. That said, there are still several institutional buyers circling the market, often looking for more than one property.

Mullis says there are still a good amount of people interested in buying portfolios, possibly betting on rent increases or just looking for a stable return.

Hillwood Investment Properties acquired a 556,000-square-foot warehouse in Airways Distribution Center in Southaven this year as part of an overall portfolio purchase which spanned five markets.

Many of the companies looking to buy industrial real estate, locally or nationally, are thinking of slow and steady investments, according to Nelson.

“I think there is a lot of appetite on the buying side from pension funds and other institutional kinds of buyers,” he says.

It’s slowly getting back to pre-2008 levels, when activity was robust. After investors ran to the sidelines, capital dried up. The comeback has been slow.

“People weren’t going to sell property at a loss just because in the short term the underwriting and the market values had decreased,” Nelson says. “So I think capital came back to the market and so transaction volume started coming back in 2011 and 2012. That’s been the case everywhere across the country.”

Nelson expects more of the same this year. Moves by the Federal Reserve to lower interest rates will continue to spark investment in real estate, he says.

“As you move out of treasuries and government securities, you hit Class A core real estate pretty quickly as far as relatively low risk, especially for those who need to create income as opposed to buying stock they can sell in 10 years.”

Source: Memphis Business Journal. Written by

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