Host of Factors Make Industrial Sector a Smart Investment, says AMB’s Robert Bransfield
Lower Operating Expenses, Short Development Cycles, and Projected Growth in Cargo Transport Cited as Key
Stable occupancy through economic cycles, low capital expenditures in the range of 10-15 percent of net operating income, and short development cycles are just a few of the many attributes that make the industrial market an increasingly promising investment opportunity, Robert Bransfield told MIT/CRE students and alumni on Thursday, September 29.
Bransfield, vice president and portfolio manager at global developer AMB Property Corporation, was the lead speaker for CRE’s 2005 Alumni Reunion Weekend. His talk launched a day of presentations on the theme of Theory vs. Practice, all focused largely on the industrial sector.
Tracing the history of the sector over the past 20 years, Bransfield noted that overbuilding, which contributed to the recession of the late 1980s and early 1990s, had long since been countered by high absorption rates during the 1990s. By 2001, with interest rates low, a great deal of build-to-suit construction was started; this wave of building continued well into 2003.
Currently, supply seems to be somewhat ahead of demand in many markets, with the exception of markets such as Los Angeles, which have experienced significant rental growth during the past year. However, Bransfield said investors in major markets can expect to benefit from highly diversified tenant bases and low volatility of total return in a sector where anticipated growth will call for more construction for the foreseeable future. Given the fall in cap rates, Bransfield also noted that cash returns are not currently very high and that the proper context for discussing cash returns would be either historical, or a comparison with other property types.
A major advantage of the industrial sector, Bransfield said, is that it is less service intensive. Many properties, in fact, require no manager on site. Consequently, investors enjoy operating expense rates—typically in the 20 to 25 percent range of revenues—that are decidedly lower than other sectors such as regional malls, office properties, and apartment complexes, where expenses run in the 35 to 40 percent range, and hotels, which top out around 60 percent.
Movement of Goods Portends Growth Opportunities
Discussing growth opportunities in both U.S. and foreign markets, Bransfield focused on movement of goods. Air, marine, rail, and truck cargo all promise to continue shaping the fortunes of cities, offering significant industrial sector investment opportunities for alert investors. With world air freight forecast to grow by over six percent for the next 20 years and container traffic growing at a 10 percent rate, movement of goods plays a significant role in AMB’s investment strategy, he said.
This strategy focuses on markets possessing a deep base of industrial inventory and that are also “in-fill” or land-constrained. For example, Los Angeles, whose airport is the world’s sixth largest freight hub, also benefits from the highest volume of marine cargo on the west coast. And, Bransfield said, the port of Los Angeles/Long Beach is expected to experience seven percent growth in shipping annually through 2015. Much of that growth is attributable to Wal-Mart, which currently imports $18 to $20 billion worth of goods from China, approximately 10 percent of all Chinese imports to the United States. Those goods alone account for eight percent of all U.S. retail sales.
Wal-Mart’s impact on LA/Long Beach notwithstanding, Bransfield also pointed to solid investment opportunities proximate to the Port of New York and New Jersey which, he said, “has had a real renaissance in the last few years,” and Savannah, Georgia, the fastest growing port in the United States, where many retailers have found adjacent land affordable. Los Angeles and New Jersey/New York benefit from locations at the west and east coast terminals of the nation’s most traveled rail corridor. Chicago, number 14 among international air cargo centers, is situated along that same corridor, which also corresponds to major U.S trucking routes.
Citing industrial capitalization rates that have been in freefall since 2002, Bransfield said that maturation of the real estate industry has helped to improve the overall picture for investment in the industrial sector now and for the foreseeable future. Contributing to that sanguine outlook has been the emergence of real estate investment trusts as pension fund advisors, and REIT asset class acceptance.
Bransfield’s presentation was complemented by Bill Wheaton’s class, which also explored the production and shipping themes. Later, the evening’s Real Deal presentation by Bruce Freedman, executive vice president of AMB, was a case study of AMB’s acquisition and development of 480 Arsenal Street in Watertown, Massachusetts.