IMPENDING INDUSTRIAL INFLATION?
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|Could compressed cap rates on industrial properties be signaling the coming of inflation? It's a question that at least two panelists at yesterday's Bisnow Industrial Real Estate Summit pondered.|
|Pattillo Industrial's Larry Callahan (flanked by IDI's Jay Mitchell and Seefried Industrial's Ferdinand Seefried) says that low-interest rates on fixed-rate investments are feeling ?a tremendous hunger in the market for return.? In turn, real estate investors are bidding up value despite little change in market fundamentals. And with cap rates in the 6's or lower, investors may be betting that inflation ?gets unleashed? in the near future. Larry's comments came during Tuesday's Bisnow Breakfast & Schmooze at the Westin Buckhead where some of the biggest players in Atlanta's industrial real estate scene gathered to chat about the market.|
|A crowd of more than 200 gathered to hear Reznick Group's Tim Kemper, Panattoni's Greg Thurman, IDI's Jay Mitchell, Duke Realty's Sam O'Briant, Pattillo Industrial's Larry Callahan, and Seefried Industrial Properties' Ferdinand Seefried. IDI's Jay echoed the concerns about inflation, given the key difference in this recovery is the massive federal debt. ?It feels like this economy may be coming back, but the wild card is going to be how this debt overhang will affect job recovery,? he says. With the Federal Reserve undergoing Quantitative Easing 2 (QE2 for us, or is that a boat?) and yield curve actually declining instead of increasing, Tim says ?it's kind of hard to say it's not a precursor to inflation.? He also wonders if cap rate compression among industrial properties is in expectation of this.|
|Jay Mitchell hlds court. Sam O'Briant says Duke ?miscalculated? the acquisition market, offering an 8 cap on a property that ended up trading at a 6 cap. And that wasn't an isolated incident for Duke, which is focusing on increasing its industrial ownership stake across the country. ?What we're struggling with is what's the right number,? he says. ?If you're in the acquisitions game, you're really going to have to pay up.? And that means, for Duke, markets like Atlanta and Dallas won't be on its buy list because there's plenty of opportunity for competitors to build warehouses.|
|?It's been a long time since I've seen this much money chasing core deals,? Greg says. Instead of going after widely marketed properties, Panattoni has sought opportunity in what he calls ?friendly deals,? where banks are just unloading bad assets and already know which owners are still players and which are forever maimed. In turn, banks are wiping out the weak players, particularly as 2010 comes to a close. ?They've been told to just dump this stuff,? Greg says. The key is to be able to close on the transactions quickly. Panattoni has 15 deals coming down the pipe from banks. But Greg also cautions banks may not be so willing to aggressively sell assets after December.|
|Ferdinand says there are many issues affecting foreign investment in American real estate, including the volitility of our recent crash and exchange rates, politics, and even competition from other European countries. He says European banks are still ?suspicious? of US real estate markets after the CMBS meltdown. ?The losses were enormous. It will take a long time to heal the wounds.? But there's been interest in family money out of Europe, particularly with US industrial real estate, which is easier to understand and more transparent. ?They are our main source for build-to-suit capital,? Ferdinand says. Sam echoed that the public markets have helped Duke recapitalize itself after it raised $1.5B in 2009. And Larry says with rates so low, Pattillo has secured historically low interest-rate mortgages and locked-in money in a way they've not done in decades. ?This is a significant change for us,? Larry says.|
|We caught the two Jays before the event: IDI's Jay Mitchell and Jay Farris with Alston & Bird, a valued sponsor of our Breakfast & Schmooze. Jay M. mentioned during the panel discussion that IDI operates a fund used to chase after build-to-suit opportunities.|
|Bisnow's darling emcee Darla Bennett briefly chatted with TPA's Rick Bradshaw yesterday as well. Rick told the audience that TPA—another valued sponsor—has really taken to new technologies to market properties. Wanna try it out? Text ?TPA? to 99699 and you'll get some cool info on your phone (assuming you're not still on a rotary).|
|And Bisnow wants to give the final shoutout to Reznick Group's Tim Kemper, who did an amazing job of keeping the questions coming and the conversation flowing as moderator.|