Diverse Buyers Uncover Attractive Small-Balance Industrial Deals

September 6, 2011

The national economy isn't exactly humming along in recovery mode - and industrial real estate markets across the country for the most part won't be returning to their tight pre-recession occupancy rates any time soon. Nevertheless, a lot of small-cap CRE industrial investors, users and financiers apparently have regained sufficient confidence to jump headlong into property purchases while values remain relatively affordable.

Deals closing in and around numerous major markets during the second half of August alone hint at diverse buyer motivations: expansion-minded user purchases, leased investment transactions, and even a few opportunistic ventures in anticipation of further recovery of tenant demand. Family-owned industrial businesses and local entrepreneurial property pros are behind much of the musical chairs, but a few deep-pocketed national players are also jumping on attractive opportunities in the small-balance space.

In what's got to be welcome news locally, affiliates of a couple Midwest manufacturers just acquired expansion properties near their existing headquarters.

In Cleveland a buying entity controlled by the family of National Safety Apparel Co. CEO Charles Grossman bought the 92,500-square-foot property at 15825 Industrial Pkwy. for $2.68 million. The fourth-generation specialty apparel maker's new 1970-vintage complex is near its longtime headquarters - and Cleveland Hopkins International Airport as well.

Veteran local broker Terry Coyne at Grubb & Ellis, who represented the buyer, notes that strengthening of the manufacturing sector is helping Northern Ohio's industrial market "gradually" recover from the Great Recession. While overall industrial vacancy is still high at about 12 percent, modern buildings with 24-foot minimum clearance represent barely 2 percent of the available inventory, he continued, adding that the marketplace recorded positive absorption well exceeding 300,000 feet during the second quarter.

And in Madison Heights, Mich. just north of Detroit, an entity affiliated with the ownership of automotive-related computer hardware and software company Intrepid Control Systems acquired the 29,220-square-foot property at 31601 Research Park Dr. No price was disclosed.

Intrepid will expand into the property from its headquarters in nearby Sterling Heights.

Meanwhile in La Vergne, Tenn. southeast of Nashville, the internationally active noodle and fortune-cookie maker Wonton Foods paid Orix Capital Markets $3.6 million for a 184,434-square-foot building in the Interchange City Industrial Park that will become its Southeast regional manufacturing and distribution center.

Clearly, more expansion- and upgrade-minded users are taking advantage of buying opportunities rather than leasing. Through the first half of 2011, industrial property sales around the country came to about 70 million square feet - up a sharp 160 percent from the year-earlier figure, Cushman & Wakefield reports.

Capitalization rates in the industrial sector are averaging in the high 7 percent vicinity - notably above yields obtained by apartments generally and office properties in major markets.

Leasing activity also rebounded by more nearly 30 percent, amounting to a nationwide total of about 205 million square feet for the first half of the year, according to C&W. Vacancies nationwide are still hovering slightly into double-digit terrain, but at least rental rates are showing a bit of positive momentum in stronger markets.

According to research from Boxwood Means, Inc., rental growth in small-cap industrial markets is beginning to surface in various markets nationwide. Rents for small industrial properties in 21 of 100 markets tracked by the firm posted rental gains in second quarter led by Minneapolis, Toledo, Southern NJ and Milwaukee.

It helps that very little construction is under way - particularly of the speculative stripe - and in fact quite a few obsolete industrial facilities around the country are being demolished in favor of more viable uses. The outlook for rent growth is especially strong in markets active in international trade, including intermodal hubs.

Ambitious realty pros willing to take the risk of buying and improving vacant (or substantially empty) small-cap industrial properties also closed a couple noteworthy deals over August's latter weeks.

In Warrington, Penn. north of Philadelphia, toxic remediation and distressed property repositioning specialist Mnop Inc. out of nearby Yardley is taking its chances with the half-vacant 95,557-square-foot structure at 364 Valley Rd., within the Paul Valley Industrial Park.

Mnop, headed by CEO Anthony Cino, bought the former MeadWestvaco packaging plant including its nearly 7-acre site for $2.925 million.

And out west in the San Fernando Valley community of Van Nuys (city of Los Angeles), the latest investment vehicle affiliated with the high-powered Rexford Industrial operation bought a pair of adjacent - and completely vacant - buildings totaling about 30,000 square feet for $2.7 million.

The complex on 1.38 acres at 6701-6711 Odessa Ave. is barely a block south of the busy Van Nuys airport, where vacancy in the surrounding industrial submarkets is in low single-digits. L.A.-based Rexford's founders include the two seniormost executives of Arden Realty, a formerly public REIT that was privatized via a buyout by GE Real Estate a few years back.

And among players just closing leased investments of small-cap industrial properties is Torreno Realty, a public industrial REIT run by a pair of former C-suiters at AMB Property Corp., the giant REIT that just became ProLogis Inc. through the merger with its biggest peer company.

San Francisco-based Torreno, headed by Blake Baird and Michael Coke, bought an approximately 40,000-square-foot, fully leased building in Doral, Fla. northwest of Miami, for about $4.4 million. The company didn't disclose its newest tenant or the property's address, but indicated the price equates to a stabilized cap rate of 6.6 percent.

Lastly in Glendale, Wis. just north of Milwaukee, a group of Wisconsin investors operating as Hakaduli Properties paid $3.6 million for the multi-tenant, 93 percent leased complex known as Glendale Business Center.

The buyers including Whitefish Bay businessman Henry Schneider bought the three-building facility at 6575-6693 N. Sidney Place from The Cloverleaf Group, which had renovated the 1970's vintage development.

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