GLP's $4.55 billion buy of U.S. warehouse portfolio expands domestic presence, shrinks capitalization rates

Global Logistics Properties' $4.55 billion purchase of 200 U.S. warehouses and distribution centers from real-estate investment trust Industrial Income Trust (IIT) makes the Singapore-based company the second-largest logistics property owner and operator in the U.S. and reinforces the city-state's affinity for U.S. industrial space.

The acquisition also puts further downward pressure on what are known as capitalization—or cap—rates, which is the ratio of an industrial property's value to the operating income it generates. The higher the value, the more compressed the cap rate, as buyers pay more for roughly the same amount of income. GLP said the portfolio would be acquired at a 5.6-percent cap rate. The last time cap rates were this low was around 2006, before the start of the financial crisis and sharp recession that eventually drove down property values and boosted cap rates.

GLP's purchase of the 58-million-square-foot portfolio will increase the U.S. square footage under its management to 173 million, putting it behind only San Francisco-based ProLogis Inc. in the ranks of industrial property managers. After the transaction closes, GLP's global portfolio will consist of 500 million square feet valued at $33 billion. It is the largest logistics-facilities provider in China, Japan, and Brazil, it said.

It is also the second major transaction involving Singapore-related interests in the past seven months; last December, Singapore's sovereign wealth fund paid $8.1 billion to buy Chicago-based developer Indcor Properties Inc., which had 117 million square feet under management. That is the largest such transaction on record.

GLP will own the portfolio when the deal is scheduled to close in November. Over the ensuing five months, it will bring in large financial institutions as fellow investors. By next April, those institutions will own 90 percent of the portfolio, with GLP retaining a 10-percent stake and managing the portfolio on behalf of the other investors. GLP said that institutional demand for U.S. industrial real estate remains strong, and that it is in talks with new and existing capital partners.

The portfolio's largest markets are Los Angeles, Washington, D.C., and Pennsylvania, GLP said. Industrial properties account for 51 percent of Denver-based IIT's portfolio, according to information on IIT's web site. Office and retail space combined account for about 47 percent.

Peter Kroner, researcher for industrial investment at Chicago-based real estate and logistics-services firm JLL, said GLP is poised to assume a long-term position in the U.S. market, following the lead of other large buyers that are acquiring large-scale, multimarket portfolios and plan to hold their investments for 20 years or longer. These holding periods, three to seven times longer than in past cycles, will constrain supply as turnover dramatically lessens, Kroner said in an e-mail. "This fundamental shift in the investment environment of the segment will require investors to develop creative strategies to acquire industrial assets," he said.

Jack Rosenberg, national director, logistics and transportation, for Seattle-based Collier's International, which manages about 1.7 billion square feet worldwide, said U.S. industrial–real-estate demand is "unbelievably strong," with speculative construction, which had remained somewhat constrained in the wake of the so-called Great Recession, now starting to explode. The result, Rosenberg said, has been intense cap-rate compression, with more money chasing properties that can generate only so much income. He expects the industrial market to experience oversupply conditions sometime in 2017.

The conventional wisdom is that "we're in the ninth inning of cap-rate compression," Rosenberg said. But that wisdom may be misplaced, he said. "There are billions of dollars looking for placement, so cap-rate compression could continue, surprising everyone," he said.