For 30 years we have considered industrial as a core component of our investment strategy. This commitment has taken us from our own backyard in San Diego all the way to Mexico City where we partnered to help build Vesta’s industrial platform, now a public company with one of the largest industrial portfolios in Mexico at over 31M square feet. Though an increasingly crowded and competitive playing field, we continue to believe in the long-term benefits of a thoughtfully constructed and complementary United States focused industrial portfolio. 

Demand drivers are unprecedented. The impacts of the COVID-19 pandemic rippled throughout the industrial sector, driving accelerated and incremental demand for industrial warehouse space. In 2020 alone, e-commerce sales in the United States increased by more than 30% as the shift to online shopping from brick & mortar retail accelerated dramatically.  The pandemic also highlighted supply chain vulnerability and reliance on Asia/China for manufacturing. Companies are increasingly expected to diversify by bringing some manufacturing back to North America. Growing labor costs in Asia, volatile exchange rates and tariffs are expected to result in more manufacturing in the United States and Mexico. We expect industrial’s trend of increasing demand to continue as all metrics point towards another record-setting year in 2021. 

Fundamentals support sustained rent growth. An estimated 80% of United States’ markets are expected to see positive rent growth in 2021 and most markets are expected to exceed historical averages over the next several years. Credit tenants are placing a premium on the most critically important logistics locations which is translating to a meaningful increase in rents especially in infill markets. Current asking and in-place rents in these high demand locations often undervalue the scarcity of quality options available for lease which will create a continued upswing in rents. The capital markets remain fully engaged in the industrial sector with attractive debt available from top tier lenders priced at interest rates at/or below 3.00% for the most compelling industrial opportunities. Though cap rates continue to compress, we anticipate ample room for revenue growth in high demand, low supply markets.  

Supply-constrained markets are best positioned for appreciation. Credit tenancy can often obscure the merits of location on a stand-alone basis. Infill locations have high barriers to new development with increasing land and construction costs and decreasing land availability. Los Angeles, for example, had just 1.7M square feet of new inventory added during 2020 on an existing inventory of 939M square feet, an increase of only 0.18%. Densely populated locations will also continue to benefit from increased demand from e-commerce driven last-mile facilities. Infill stays leased, attracts institutional quality demand (both tenants and future buyers), affords land use optionality as user needs evolve and commands a rent premium over time. Infill locations hold value. We don’t chase yield in tertiary markets.  

Value added execution is our bread and butter. Market fundamentals continue to inspire confidence in taking on development, repositioning, and leasing execution. We have long utilized our vertically integrated operating platform to source “off market” opportunities, reposition tired building and strategically lease vacant properties to stabilization. We target “value add” where the returns achieved via hands on execution compensate adequately for the additional risk. However, we have evaluated an increasing number of vacant buildings pricing at similar stabilized cap rates (without visibility into future tenant credit profile) as fully leased comps - additional risk without clarity on incremental reward. As a complement to our traditional value add strategy, we pursue “core” industrial opportunities which offer durable, long-term cash flow secured by a lease with a credit tenant at a material yield premium to the risk-free rate provided by treasuries and investment grade corporate bonds. We believe in a blended investment approach in achieving the best risk adjusted returns across our portfolio.  

We added a core industrial building to our portfolio. The asset, 100% leased for 10 years to Amazon, is a newly developed 142,000 square foot institutional-quality industrial building. Situated in one of San Diego’s strongest office submarkets, the property is surrounded by a growing list of world-class corporate neighbors including Apple, HP, Sony, Intel and Northrup Grumman. The property was sought after by credit tenants such as Apple and Home Depot prior to executing the lease with Amazon.  We believe the property’s infill location combined with the submarket’s continued demand growth will drive increasingly favorable supply-demand fundamentals as any remaining land is likely to be developed as Class A office. In addition, with entitlements for up to 400,000 SF of office, the site offers long-term optionality for redevelopment. Comparable industrial properties are now selling at or below 3.75% cap rates, a meaningful pricing premium to our recently closed acquisition.  

We are acquiring an off-market property in Los Angeles. We are under contract to acquire an industrial asset below replacement cost and at a discount to market pricing. The off-market transaction will be part of a sale-leaseback whereby the seller (and current owner-operator) will sign a new 10-year lease upon close of escrow. The property, which is made up of two industrial buildings totaling 75,000 SF, is situated in the San Gabriel Valley submarket in Los Angeles, California, one of the strongest industrial submarkets in the United States. The investment is anticipated to provide a uniquely compelling risk-adjusted return profile, particularly when compared to market, which has experienced significant downward pressure on returns due to investors’ increasing appetite for industrial properties. 

Targeting $500M of industrial investment. Although much has evolved in the industrial space over the years, we continue to believe strongly in the market fundamentals and are firmly committed to selectively growing our presence in the sector. We plan to acquire $500M of industrial product in infill locations throughout the Western United States over the next 5 years as a complementary component of our diversified portfolio.  

We look forward to continuing to partner with you all on this journey. 

Your Partner,
Doug Arthur and Team SENTRE