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Monday, April 14, 2014

Selling Non-Core Industrial Product: Strategy and Theme Required

By Erik Foster (Chicago)

Selling non-core industrial product can be a tricky proposition, but one that can be successful with the right strategy.

In 2013, many people predicted massive volumes of Class B industrial sales and the assumption was that activity would follow the path of the core, Class A product—where large portfolio sales are the norm. B product followed a different path, however, leading many people to assume the volume didn’t appear. The volume did appear, just not with the bold headlines received by the large national core portfolios.

Costar reports that dollar volume for industrial sales were $10.1B for A assets and $23.9B for B assets in 2012. In 2013, the volume jumped to $25.6B and $49.2B, respectively.  Both A and B saw significant gains, with B increasing almost 50%. Yet the overwhelming market perception is still the same—not many B assets traded. 

A deeper look reveals that the B sales were concentrated in one-off transactions, user sales and a very small number of portfolio sales.  Yet many B industrial portfolios were broken-up and sold through a painful and purposeful “restaurant menu” process that split up the assets. While this may be a way to sell some buildings, does it provide the best execution for the seller? In many cases, those portfolios were the victims of poor disposition design.

One key factor in positioning B product for sale is to have a cohesive theme that can create value for the investor. The B portfolios that have traded successfully have a level of congruence amongst the assets; they have a “theme”, such as, submarket location, similar building quality, similar tenant types that occupy the space, etc. 

There is little industrial product on the market, debt is inexpensive (but threatening to go higher) and equity sources are hungry for industrial assets. Adding to our bullish opinion about B sales are these improving fundamentals: space is being absorbed and rental rates across B (and A) industrial asset classes are improving. 

If a B portfolio has a theme, it will have a higher likelihood of transacting as a portfolio and sellers will not endure a scattered, time-consuming and expensive menu approach.  The portfolio will have congruent attributes, which will cause buyers to look at the offering not as a smattering of buildings haphazardly thrown together by a potentially desperate seller, but as a portfolio with interchangeable parts.  Sellers must choose a disposition strategy wisely for their B buildings, take time to understand how the assets work with one another, and make service providers think critically about the disposition strategies they are suggesting.  The end result? B portfolios with a theme translate into better execution and greater returns for the investors.

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