Agile Financing Capabilities Essential for Industrial Construction

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Across the U.S. developers are chasing and absorbing industrial real estate as quickly as it can be built.

In a year where most development lagged, new development of industrial properties surged. There are currently 335 million square feet of industrial real estate in the construction pipeline in the U.S., with about half of that pre-leased, according to JLL

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The pandemic only heightened the desire for immediacy of goods. Industrial real estate’s ability to fulfill this desire has allowed it to retain the most value as an asset class during the pandemic. According to data from CBRE, industrial property was the only asset class to report appreciation in the first quarter of 2021, growing 9.3 percent in value.  

Looking ahead, industrial fundamentals continue to show positive signs. A recovering economy post-COVID, maturing global trade and accelerating development of e-commerce, fulfillment centers, last-mile facilities and bulk warehouses looks to reinforce demand over the coming years. U.S. net absorption is expected to exceed 200 million square feet in 2021 for the eighth consecutive year, which should extend through 2022, according to forecasts from Cushman & Wakefield.

By 2022, Cushman & Wakefield forecasts that Dallas-Ft. Worth, Chicago and Atlanta will be the top three markets for demand, achieving 47 million, 31.4 million and 30.2 million square feet on net absorption, respectively. Dallas-Ft. Worth and Chicago show up as the top two markets on the supply side as well, with 41.4 million and 34.3 million square feet of new deliveries, respectively. The Inland Empire is expected to be the third top market for supply in 2022, with 33.5 million square feet.

Tenants are investing heavily in warehouse automation as a means to lower supply chain costs and shipping times, which would create more room for rent growth, according to a recent analyst note by Morgan Stanley. “Specifically on cost, labor and transportation make up 75-85 percent of the supply chain and rent makes up only approximately 5 percent,” analysts wrote. “If automation can decrease the costs of labor and transportation, then the runway for rent growth could be higher than expected.”

Higher tenant investments in properties also result in a sticker tenant base, the analysts noted. With the economy reopening and increased vaccine rollouts, Morgan Stanley forecasts an improvement to supply chain bottlenecks and a growing need by tenants to increase inventory.

To meet sustained levels of high demand, investors need agile, quick-turnaround construction financing to stay competitive, particularly with the tight construction scheduling demanded by major tenants, such as Amazon. Those who can move quickly will take the lion’s share of deals during the recovery. 

“The logistics construction financing market has evolved dramatically over the past year, both pre-leased and speculative, driven by substantial liquidity in the capital markets and insatiable leasing demand,” said Greg Stampley, managing director at Eastdil Secured. Stampley has seen a bigger shift toward creative funding structures and flexibility for borrowers for these properties.

He adds, “These developments are backed by strong sponsors which enables lenders that get comfortable with features such as a land advance or pari-passu funding. This allows lenders to get their investment out quicker, which is mutually beneficial to developers as it delays their equity and boosts levered returns.”

Based on our experience at KKR, spec industrial is currently one of the most active areas for construction financing. In a market where agility is paramount, we have been focused on delivering faster underwriting by drawing on the experience and insights of our equity business, which owns a portfolio of nearly 36 million square feet of industrial property in strategic locations across major U.S. metropolitan areas. It is a competitive market right now, and we’ve benefitted by coupling speed and certainty of execution with KKR’s multiple pools of capital, which enable us to offer different financing solutions depending on each borrowers’ needs.

Overall demand for U.S. real estate is recovering alongside the economy and driving more robust deal volume, especially for industrial properties. Foreign investors are also rallying, as there is more than $300 billion in cross-border dry powder currently available for U.S. real estate investment. Against this competitive environment, the power of agile financing strategies for industrial real estate cannot be understated. 

Matt Salem is a partner and head of real estate credit at KKR. He also serves as CEO of KKR Real Estate Finance Trust. (The views expressed in this article are the personal views of Matt Salem and are not investment advice.)