The North American industrial real estate market now has a monster in its midst.
Goodman Group, the Australian property giant with $20 billion in assets, has made its first foray into North America. The company, armed with a multi-billion dollar "war chest," is looking to fill its global portfolio gap by establishing a sizable footprint in the continent.
Sydney-based Goodman has entered into a deal with Irvine, Calif.-based Birtcher Development & Investments to form a company—called "Goodman Birtcher"—that will identify and develop industrial projects from the northern part of Canada to the Panama Canal. Goodman, along with an unnamed partner, will initially commit $800 million of equity to the partnership. The first "tranche," or portion, of the investment is expected to total $1.4 billion, an amount that is projected to grow to $5 billion in five years, Brandon Birtcher, Birtcher's president and CEO, says.
Goodman, considered one of the world's largest industrial property developer outside the United States, spent seven years studying the North American market before jumping in, Birtcher says. The company has already secured two development sites in California's "Inland Empire" east of Los Angeles, and one each in Oakland and eastern Pennsylvania's Lehigh Valley. The four sites combined make up nearly 10 million square feet and are expected to be valued at $700 million when the projects are completed, according to the property giant.
THE LURE OF THE U.S. MARKET
The time was ripe to end the U.S. market, according to Goodman. "[The U.S. market] remains highly fragmented with obvious capital constraints, making this an attractive time to enter key logistics and industrial locations," the company said in a statement.
Goodman and Birtcher believe there is significant opportunity to consolidate the U.S. industrial property segment. Even the world's largest industrial property developer, the combined company of ProLogis and AMB Property Management, only controls 6 percent of the U.S. industrial market, Birtcher estimates.
For this and other reasons, those involved in the deal say U.S. industrial property is becoming increasingly attractive to foreign investors seeking a safe location to park their growth-oriented capital. The U.S. is the largest, most liquid, and transparent real estate market in the world, and despite its many problems, the U.S. economy continues to expand, albeit modestly. For investors unsettled by the turmoil in Europe, continued stagnation in Japan, and the possible slowdown in China, the U.S. market looks increasingly appealing, they say.
Additionally, more companies are moving production and distribution closer to U.S. end markets to reduce overseas shipping costs and carbon emissions. As a result, U.S.-domiciled warehouse and distribution centers look like sound investments and are attracting foreign capital, sources say.
"Compared with other product types, industrial properties are less capital intensive, have not historically experienced the highs and lows in rental rates, and remain a stable and predictable asset class," says Mike Fowler, executive vice president at Jones Lang LaSalle Inc., the Chicago-based real estate and logistics firm that consulted on the Goodman deal. "The evolution of global economics and the global supply chain are transforming the U.S. industrial real estate landscape and attracting the attention of some major global players."
In 2011, sales of U.S. industrial property hit $35.1 billion, more than three times the low of $10.9 billion in the recession-plagued 2009. Sales should reach $40 billion to $45 billion in 2012, according to Jones Lang LaSalle projections. It is unclear how much of those totals were derived from foreign investment.
Most of the foreign investment in the U.S. market comes from Canada, Germany, Switzerland, and Great Britain, says Kevin McGowan, a director at the Wayne, Pa.-based commercial real estate firm of Newmark Knight Frank Smith Mack.
Although foreign investment has increased, the U.S. industrial vacancy rate sits at 9.1 percent, still well below pre-recession levels of 7.5 percent, Jones Lang LaSalle says.