Israeli Investor Using Proprietary Data, Software To Rapidly Assemble Last-Mile Logistics Portfolios Across U.S.
In the jam-packed industrial market, Israeli investment firm Faropoint believes it has found a way to dominate in a very specific niche.
Faropoint CEO Adir Levitas claims his company can leverage a combination of its own data and under-development software tools to rapidly aggregate portfolios of warehouses too small for large investors to buy individually.
With an average deal size of $5M and an average building size less than 100K SF, Faropoint managed to purchase the ninth-most industrial square footage in the U.S. through the first three quarters of 2020, just behind Prologis and Brookfield Asset Management, CoStar reported in September.
“With the software we use, we create billions of dollars of pipeline and manage multiple deals and negotiations at the same time, allowing us to close dozens of assets in a given year,” Levitas told Bisnow. “No other fund we know of purchases 100 to 200 of these assets per year.”
Faropoint is raising capital for its second private equity fund, with a goal of acquiring $1B worth of assets at a 60% debt-to-value ratio over the next three years. Its first fund closed $150M, and if deals close as planned, by the end of March, it will have acquired about $350M worth of assets.
Industrial real estate had been gaining in popularity as an investment asset class for years as Amazon led the rise of e-commerce, but as the coronavirus pandemic accelerated the adoption of e-commerce by several years, it did the same to demand for distribution centers. As hospitality, retail, office and urban multifamily have struggled to varying degrees, investors with capital to deploy have flocked to wherever they can find the prospect of reliable returns.
“I’ve been in the industrial market for over 25 years, and this is the first time I’ve felt like I’m hanging out with the cool kids,” Colliers National Director of Industrial Services Pete Quinn said.
The largest commercial real estate funds have more liquidity than sound investments to spend it on, which has created an atmosphere of “the bigger, the better” for transactions, Quinn and Duke Realty Chief Operating Officer Steve Schnur agreed.
“There’s certainly a premium to be paid for a larger deal size, because it takes the same time and amount of effort [as smaller deals],” Schnur said. “Historically, there was this sort of big portfolio discount, and now it’s flipped around to be a portfolio premium because it’s hard to aggregate size that’s meaningful for the bigger players.”
Smaller warehouses that are as close as possible to consumers are extremely valuable for e-commerce distribution networks, but that advantage necessarily comes on land that is more built-up, expensive and often preferred for other property types. The last-mile distribution centers getting built these days are nearly always larger than 100K SF, leaving a company with smaller requirements to choose between a multi-tenant facility and an older building with perhaps fewer modern touches.
The pool of such properties has probably the least potential among warehouse types to get any deeper in coming years, Quinn and Colliers Senior Vice President Brad Boone agreed.
In December, Faropoint closed on the sale of a 28-building portfolio based in the Memphis area to Plymouth Industrial REIT for $86M. Normally such a supply-constrained product in the most popular asset class would command low cap rates, but the lack of competition from institutional capital keeps capitalization rates fairly elevated, Levitas said. Doing the work to put together portfolios large enough to interest the big fish is where Faropoint creates value, and that's the reason why Levitas believes its software platform gives its strategy such a high ceiling.
Currently, Faropoint uses the AtlasX transaction pipeline management software, but with its own data gathering methods and inputs. Down the line, the company plans to develop its own software that automates parts of the process, from inputting data to more sophisticated, machine learning-based predictive analytics. For now, Faropoint believes it gains an advantage from the sheer amount of data and personal insights it gathers on every property it even considers. With each entry, the comparisons on which its offers rely become more nuanced.
Though the final decisions on which properties to buy rests with Faropoint, the fact that brokers and even potential sellers can have access to its platform to upload data and insights is what Levitas believes sets it apart from other companies’ due diligence teams or property search engines like CoStar.
“The uniqueness of this tool is that we are using it as a kind of one-buyer, multiple-seller marketplace,” Levitas said. “We’ve taken a known pipeline platform to a place where we have dozens of teammates, brokers and acquisition professionals linked together in a marketplace with more than $1B worth of acquisition pipeline to examine at any given time. So the strength is the community that grew into the platform.”
Founded in 2012, Faropoint spent its first few years acquiring assets in the Memphis, Tennessee, area, and has since expanded to Atlanta, Dallas, Houston, San Antonio and Cincinnati. Midway through last year, Faropoint began hunting for deals in the Philadelphia area, and in that time has acquired 10 properties in South Jersey and one warehouse in the King of Prussia submarket.
Philadelphia has appeal to Faropoint not just for its proximity to population density, but because the market has even less supply relative to, say, Atlanta or Dallas, Levitas said. Modern logistics development only started a couple of years ago within city limits, and aside from the notable exception of the former PES refinery site, looks like it will fill its available land just as quickly.
“If we build out every available parcel in the city, we’d still be behind other cities because we don’t have the land,” Boone said, though he noted that the refinery redevelopment could be a “game-changer.”
Faropoint intends to uncover opportunities in the Philly area by making what look like above-market offers to owners of off-market properties. Levitas said he is confident information from Faropoint’s platform justifies making such bold moves. But Faropoint isn’t alone in that strategy; as much as 30% of transactions these days come from direct solicitation of owners that may not have intended to sell, Schur said.
Faropoint could potentially stay ahead of that competition if it continues to move as quickly closing deals as it claims it will, but as the industrial market gets more crowded with investors, information advantages are becoming slimmer.
“Because the large institutional owners are looking at assets they hadn’t looked at in the past, it’s created such activity that agents are working on their behalf to uncover every building that is a rectangle with a roof and a parking lot,” Boone said. “And it will definitely be more democratized even 12 months from now.”
If Faropoint does maintain its claimed speed advantage and continues to roll up properties, it will certainly find interest from bigger players in portfolio sales. But the ultimate success of such deals hinges on the effectiveness of the system Faropoint touts in vetting properties.
“That sounds like an opportunity, if [Faropoint] can add value by rolling up properties into a portfolio to put them on the radar of companies like [Duke],” said Schnur, who has no connection to Faropoint. “But I do think the last-mile phenomenon has become a buzzword that anyone loves, so anything you have that is old, junky and in an infill location becomes ‘Wow, look at that last-mile [property].’ But go see how many Walmarts or Amazons lease those buildings.”