By Alex Kachris, research manager — Northeast industrial region, JLL
Industrial commercial real estate had its second-best year on record in 2020, with U.S. transaction volume nearing $96 billion. As competition among investors for industrial product remains strong in 2021, JLL Capital Markets Research isolated one sub-class that is gaining investor interest: multi-use logistics.
The multi-use logistics profile includes older, multi-tenant assets ranging from 20,000 to 100,000 square feet that have solid footprints within infill urban logistics markets. These assets, which often have diversified, local tenant bases, usually house a mix of distribution, flex showroom, industrial showroom, R&D, warehouse and/or manufacturing space.
Alex Kachris, JLL
Multi-use logistics assets boast compelling rent growth profiles and strong long-term outlooks. With new, yield-focused investors jumping into the industrial space, multi-use logistics product is desirable as an alternative to the bulk industrial market, which is getting tighter.
Given that multi-use logistics facilities are generally older properties, population centers have exploded around these assets, making not only almost impossible to replace but highly sought-after as last-mile logistics locations close to end users. Compounded by industry fundamentals that are driven by macroeconomic factors, including reshoring and acceleration of e-commerce adoption, the increased demand for these smaller, multi-tenant industrial assets has resulted in incredibly low vacancy rates nationwide. Nationally, the vacancy rate for this product type is currently under 9 percent.
JLL believes that this sub-class of industrial real estate has enormous potential in terms of rent growth, which is driven by low vacancy and limited new supply. Average multi-use logistics rents have grown more than 54 percent since 2010 and nearly 21 percent since 2017, outpacing the national average for the broader industrial market.
Based on historical five-year compounded annual growth rate (CAGR), JLL anticipates nationwide rent growth of 4.6 percent for triple-net-leased multi-use logistics between 2021 and 2024, compared to 3.8 percent for all U.S. multi-tenant industrial and 3.7 percent for the entire property sector. Yet this sub-class accounts for only 15 percent of overall industrial product inventory. For trades in 2020 of over $5 million, these properties only accounted for 1,973 transactions at $128 per square foot with an average cap rate of 6.62 percent (down from the five-year average of 6.72 percent), demonstrating their value.
For the New Jersey Industrial market, the sub-class accounts for 14 percent of the 751.3 million square feet of industrial inventory. This current multi-use logistics inventory of 105.2 million square feet has a low vacancy of 4.9 percent, which is down significantly from 11.7 percent in 2012, illustrating the growth in tenant demand for this space in the state.
According to Senior Managing Director Jose Cruz, who is co-head of the New Jersey capital markets office and leads investment sales in the suburban New York and New Jersey Industrial markets, “Both private and institutional investors continue to bid very aggressively for both infill, last-mile multi-tenant, as well as single-tenant assets in the suburban New York area and Northern and Central New Jersey. Cap rates continue to compress below 4 percent for best-of-the-best product and IRRs continue to drop.”
Adding to the advantages of multi-use logistics are a limited supply of existing product and lack of new construction. For the current cycle, construction activity for multi-use logistics properties is hovering nationally between 0.1 and 0.3 percent of the total existing inventory, which is significantly below the national average of 1.6 percent. With little new product entering the market and increasing pressure from rising land values to redevelop for other uses, tenants have limited options outside their current space, helping constrain vacancy not just in New Jersey, but across the country.
This is also an asset sub-class that is primarily owned by local or regional non-institutional investors, providing those capital sources with unique opportunities to build footprints from a large, decentralized set of owners. But it’s challenging for investors to amass scale of this sub-class, given the highly fragmented ownership within the sub-class.
For this reason, establishing partnerships with proven and trustworthy owner-operators that have consistently executed on transactions within the multi-use logistics asset class is vital for investors looking to gain exposure within this sub-class. However, these partnerships are increasingly being offered at premiums as consolidation of ownership within the multi-use logistics space trends upward within high-growth markets.
— This article originally appeared in the March/April issue of Northeast Real Estate Business magazine.