It's a mad, mad portfolio world: Aggregators drive pricey premiums
Portfolio sales are up 60 percent from one year ago as aggregators build scale. With demand for A-product outpacing supply by 4 to 1, pricing is extremely competitive and portfolio premiums are being had for large-scale, multi-city or primary market packages. These premiums well-exceed single asset prices.
Market fundamentals continue to support aggressive underwriting for industrial portfolios as 'aggregators' pursue opportunities to build scale. This is leading to big deals, which is escalating momentum: year-over-year portfolio transactions have increased more than 60 percent, with ten portfolios exceeding $100 million closed in the third quarter of 2013 alone. IndCor, Industrial Income Trust and Liberty Property Trust are among the recent aggregate-buyers.
Investor demand exceeds Class A supply by 4 to 1, creating an extremely competitive pricing environment, while the portfolio premium for a large-scale, multi-city or primary market package largely exceeds single asset prices.
Consistency rules: Transaction-sizing has been between $75-150 million, and is contingent on the functionality, size and occupancy of the assets. Most buyers want homogenous product, with the homogeneity applying to three facets of the offering:
Class A, single-product-type groupings are the most marketable and are easiest to finance with long-term debt. They can command a pricey premium of roughly 5-10 percent. Investors, in this cycle, are seeing immense value in the industrial asset class, which offers little risk, and – as market fundamentals continue to improve — notable gains.
Functional Class B portfolios in core markets can also fetch a slight premium of 3-5 percent, but typically experience higher variance in pricing due to investors searching for greater yields. Investors generally prefer Class A product in a secondary market over B or lower-grade assets in a primary market.
If a portfolio has several property types, investors will treat the offering as a menu of sorts – and sometimes cherry pick those properties most relevant to their acquisition synergies. Sellers, as a result, will have to be realistic with pricing and accept not all product may sell as a complete portfolio. This will require greater resources and creativity to finance and complete a deal.
Our take: The puzzle pieces may be worth the picture in 2014 as the number of desirable portfolio offerings narrows. Single property trades are expected to progressively increase.
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Industrial Sale Activity: Top U.S. National Sellers and Buyers (YTD 2013)
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