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A primary objective of investing in real estate
as an asset class is that it diversifies the total investment portfolio
and reduces risk. Each asset class should be further diversified among
the major property types. Research reveals that industrials comprise 15-25%
of the total market of investment grade real estate. This is further evidenced
by the proportion of industrials in the NCREIF Property Index (NPI) which
is in this same range. Many pension funds are underweighted in industrial.
We recommend that pension funds target 15-25% of their real estate investment
portfolio as industrials, mirroring the total market universe.
Total returns for warehouse property have exceeded all other property
types over the last fifteen years as indicated by NPI data. The income
component in most years has also outperformed other property types. Based
on the supply and demand factors projected over the next several years,
it is our opinion that industrials will outperform most other property
types on an income basis and only be exceeded by apartments on a total
return basis.
Our opinion is evidenced by acquisitions which we have made recently.
Kensington has acquired several million square feet of high-quality industrial
property. These assets have significantly outperformed the market indices.
The income return has averaged well over 10% and the total return in excess
of 12%. The appreciation component is based on independent appraisals
and actual purchase offers from buyers.
Industrial performance has been less volatile than most other property
types. This is evidenced by the NPI data and market experience. A stable
income component translates into reduced volatility and therefore lower
risk. The stability of the income stream is a result of:
- strong credit tenancy in many properties,
- minimal tenant improvement expenses,
- minimal capital improvement expenses, and
- a more efficient market.
Occupancy levels over the long-term have rarely dipped
below 90% for any significant time period. In contrast, office occupancy
levels have dipped to 80% or less in most major markets. Vacancy levels
within a sub-market rarely differ by more than 10% between specific industrials
properties, but can vary widely for office and retail. The shorter construction
cycle for warehouses as compared to other property types has a tendency
to result in a market which is in closer equilibrium.
Industrial space demand is closely linked to the overall domestic and global
economy. Over the past decade we have observed an improving national economy
which leads to increased production, inventories, and warehouse demand.
The high level of U.S. exports has had a positive impact on warehouse demand
and this is expected to continue. An improving, more global economy also
benefits industrial space demand.
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