By Taylor Williams
The decision by Institutional Property Advisors (IPA), a division of Marcus & Millichap, to recently bring its investment sales services for the Dallas-Fort Worth (DFW) industrial market not only represents an opportunity to gain share of a booming market, but also to capitalize on a pronounced shift in buying patterns.
COVID-19 has drastically accelerated demand for e-commerce services and industrial space on the leasing front. As investors that put new acquisitions on hold early in the pandemic regain their aggressiveness and as more capital sources diversify into the asset class, the line between requirements for institutional and private investors is growing blurrier.
Ultimately, the shift in investment philosophy for industrial product in major markets boils down to private buyers targeting assets that have typically been considered institutional quality. This trend is a factor of several marketplace tendencies: the cautiousness with which institutional capital proceeds, the willingness of private investors to accept lower returns and the general mixing up of the Tier 1 industrial buyer pool.
Like demand for industrial product from both tenants and the capital markets, the creeping of private buyers into the institutional space was taking place before the pandemic. But the overlap has become too visible to ignore. So institutional investors looking to compete aggressively for deals in 202 must be prepared f to engage in fierce bidding contests with private buyers.
For a large brokerage firm like Marcus & Millichap, addressing this new investment pattern means growing and diversifying its range of services and, perhaps more importantly, leveraging the company’s existing platform to reach a broader network of buyers and sellers.
It’s a move that stems equally from necessity and opportunity. Competition is strong across the spectrum of industrial buyers, particularly for properties occupied by marquee tenants on long-term deals. As such, being able to effectively and equally serve all types of investors is of critical importance.
Adam Abushagur, Institutional Property Advisors
Texas Real Estate Business recently caught up with Adam Abushagur, senior managing director investments at Marcus & Millichap’s Dallas office, who will be leading IPA’s industrial expansion in Texas; and Tim Speck, senior vice president and division manager of the Texas offices, to learn more about why the launch makes sense for the firm(s) and the needs of the market.
Texas Real Estate Business: Can you elaborate on the changing needs of the market that make this an ideal time to expand IPA’s industrial services?
Adam Abushagur: As we’ve grown and broadened our reach within the private client market, we’ve naturally flown into the airspace of larger deals, particularly over the last 24 months. As that’s happened, we’ve noticed a natural bridge being created between the private and institutional worlds —institutional-owned buildings may not necessarily be very attractive to certain institutional buyers, whereas they’re very attractive to the private investors. In order to best serve sellers under those conditions, we have to tap into both the Marcus & Millichap and IPA platforms to find the buyer that is the best fit for our client.
Tim Speck, Marcus & Millichap
Tim Speck: The investments of choice are still completely weighted in the multifamily and industrial segments. So for industrial deals with attractive size, market, tenant credit, etc., we see these buyers moving down to the space that has traditionally been private investment or quasi-institutional investor, meaning a private buyer backed by institutional capital. When COVID hit, institutions went pencils down. Private investors didn’t really do that, or if they did, it was for a much shorter period of time. It’s easy to sell an institutional-quality building or seller on private capital that will buy the deal, and those buyers are outbidding institutional capital sources by accepting lower returns.
TREB: From an internal standpoint, why is this a logical next step?
AA: It really is a natural progression — we’re not turning the lights off and on in a different business. We’re already helping clients in this world, so we’re just intentionally electing to grow that institutional business by focusing on it, rebranding it and making sure it’s a separate system with procedures that are comparable to do what we do under the Marcus & Millichap platform.
We’re marketing a building now in El Paso that is 2000s construction with a good- tenant on a new, 10-year triple-net lease, in a market that institutions are very interested in right now. Taking that to market, we anticipated institutional interest. But because half the building is manufacturing, and because some of the institutions in El Paso don’t have scale in that market, the property didn’t necessarily check all the boxes for funds and institutional buyers. But we ended up getting five offers from private buyers and are now about to enter escrow with a 1031 investor that’s toured the property and is ready to close in 30 days. We were only able to do that by helping our client tap into both the Marcus & Millichap and IPA buckets, not just one or the other.
TS: From our perspective, this move is a means of better serving institutional clients that are moving down in terms of the size of their transactions to diversify their holdings. This expansion allows us to move into that space as those clients move downstream. We can service the spectrum of clients, including our traditional high-net-worth individual investors, and move up into the historically private capital space knowing that there will be balance as we ascend.
TREB: What challenges and expectations do you anticipate as you expand your range of services under two different brands?
AA: In terms of velocity of industrial deals, we’ve consistently grown our team’s revenue by 40 to 50 percent year-over-year, including in 2020. We had the uncertainty last year, especially in March and April, when deals really slowed down, so we have to be sure to apply more coverage and internal growth and touch more clients to continue that growth trajectory. Adding team members and partners to grow the institutional arm of our business is top of mind right now.
TS: In terms of industrial, the entirety of this product type is going to have significant investor demand for the foreseeable future as buyers from all tranches look to diversify and put more capital into that space. Our platform functions as an exchange in facilitating capital flows and increasing the liquidity of high-net-worth investors. But a lot of institutions are looking to grow right now, so the challenge we face involves how to close sales to institutional buyers when a large portion of our primary business is willing to outbid them.