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Blackstone's GLP deal may signal top of frothy industrial market

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An Amazon Fulfillment Center under construction in Staten Island, N.Y., in 2018.
Source: Associated Press

Blackstone Group LP's big-ticket industrial play, and the commentary that attended it this week at Nareit's REITWeek in New York, confirm that the industrial segment remains the darling of the commercial real estate space.

Whether Blackstone's $18.7 billion portfolio purchase from GLP Pte Ltd. will turn out to have been, as one attendee said June 4 in the corridors of the New York Hilton Midtown, a marker of the top of a frothy market, or just another signpost on the growth highway, will only be determined in retrospect. Predictions about the likelihood of a near-term economic recession varied at the event.

Brookfield Property Partners LP CEO Brian Kingston called the Blackstone-GLP deal "a validation of investors' outlook on growth in the economy."

"Because you have to believe in growth if you're going to justify those prices," Kingston said of the deal, reported to be the largest private equity real estate transaction ever, during a lunch panel.

Others see continued upside in the space. Industrial company presentations on REITWeek's first day were well attended, and management of net-lease real estate investment trust VEREIT Inc. said it is aiming to increase its exposure to the segment. The company in May announced a joint venture deal with Korea Investment & Securities Co. Ltd. for a six-property, 4.8 million-square-foot industrial portfolio.

Paul McDowell, VEREIT's COO, said the company is targeting about 20% exposure to industrial as it looks to reduce its exposure to the office sector, even if industrial feels "a little overheated" at present. The segment represents about 17% of the company's portfolio at present.

"We like industrial, but we aren't the first ones. ... I think in a perfect world, we'd like office to be down near 15% and industrial up near 20%," McDowell said in an interview.

Joshua Harris, clinical assistant professor of real estate at New York University's Schack Institute of Real Estate, told S&P Global Market Intelligence that the industrial market is still undersupplied in light of present and future demand. He noted the "staggering" decline in industrial vacancy and the significant rent gains in the market in the last few years.

"We're still pretty early in this trend," Harris said.

Others are bullish long-term but less optimistic in the near term. John D'Angelo, managing director at Deloitte who leads the firm's U.S. real estate consulting practice, said the "golden age" the industrial market has experienced in the last five years will likely dim in the coming quarters. Deloitte predicted in a recent report a tempering of industrial space demand over the next three years as a result of a softening of the broader economy and the glut of new industrial supply hitting the market.

"We see maybe a tapping of the brakes for the next [roughly three] years," D'Angelo said in an interview.

Still, D'Angelo remains optimistic about industrial real estate's long-term prospects. Net absorption is unlikely to decline much, if at all. Growth will likely continue, but at a slower pace.

"In the mid- to long-term, I certainly wouldn't be betting against industrial real estate," he said.