Top executives at Blackstone Group's real estate unit have said repeatedly that last-mile logistics real estate is the unit's "highest-conviction global investment themes." They backed up that claim on September 30 by paying $5.9 billion for the U.S. last-mile portfolio of Colony Industrial, the industrial unit of investment firm Colony Capital (NYSE: CLNY).
The transaction nets the Blackstone unit 465 so-called "light industrial" buildings with a total of more than 60 million square feet in 26 markets. The properties are concentrated in Atlanta, Dallas, Florida, California and northern New Jersey. The buildings range in size from 50,000 to 500,000 square feet and are designed to support last-mile deliveries to consumers and businesses.
The unit will also acquire Colony Industrial's majority stake in a 4-million square foot portfolio of bulk distribution facilities, another name for the larger traditional warehouse and distribution centers, as well as the operating platform that manages the assets of the bulk and light industrial portfolios.
The light industrial buildings are "infill" properties near densely populated residential and commerce centers. Urban facilities of less than 75,000 square feet are in very strong demand as e-commerce continues to grow, Colony said in a statement announcing the deal.
The move comes just four months after Blackstone spent $18.7 billion to acquire the U.S. logistics portfolio of Singapore-based GLP. Last week, the Blackstone unit launched Mileway, a company that will leverage the unit's pan-European industrial logistics real estate network to support last-mile operations across the continent.
It also comes six months after Colony Industrial's parent acquired 54 light and bulk industrial buildings from Dermody Properties Industrial Fund I, an affiliate of Dermody Properties, for $1.1 billion. The transaction marked Colony Industrial's first foray into the larger warehouse and distribution center category.
Colony Industrial will use the roughly $1.2 billion in net proceeds from the sale to Blackstone to expand into what one source called the "intersection of industrial property and digital infrastructure." As the name implies, digital real estate is defined as digital property – a domain and anything built on that domain. It is similar to physical real estate in various respects, but requires much lower financial barriers to entry. Digital infrastructure includes such assets as cell towers and data centers.
Logistics real estate values have been steadily rising for several years, thus compressing the so-called capitalization rate that is considered the most widely used measure for determining a property return on investment. For example, a property that is expected to generate $90,000 in annual rental income and incurs $20,000 in annual cost will have a 7% cap rate if it is valued at $1 million. The same characteristics applied to a property valued at $800,000 would have a cap rate of 8%.
Jack Rosenberg, national director, logistics and transportation for real estate investment firm Collier's, said that Colony Industrial might have bought properties in smaller bunches that carried a higher cap rate because of the smaller transaction sizes, and then had a big enough aggregation to sell to a larger company like Blackstone. It is also possible that the fund that owned the properties had reached a predetermined sell date for the properties and was required to return capital to its investors.
Rosenberg said Colony is poised to repeat the process by buying smaller chunks at a higher "cap rate" and build enough critical mass to sell a larger chunk at a lower rate down the road. Though logistics real estate demand and pricing has leveled off somewhat in 2019 after seven years of stellar gains, no one is ready to go out on a limb to forecast a trend reversal, particularly as e-commerce demand stays hot.
"Nobody knows when or if the market is going to slow down," said Rosenberg. "E-commerce changes and the increasing sophistication of supply chain leaders may continue to push absorption and new construction at higher rates."
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