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Is 2025 the Best Time to Buy Industrial Real Estate? · Industrial Advisors

• 0:00
  I like to say it that it's like the risk pendulum swings back and forth
• 0:03
  and right now I think it's kinda way out here and everything is all.
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  Most investors are overpricing risk, and so that's actually, if you can actually
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  buy now and you can find a seller in today's market, I really think it's
• 0:16
  a good time to buy because that risk pendulum will swing back and the herd
• 0:19
  mentality will come back and then it'll snap back faster than people think.
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  Welcome to our Industrial Advisors podcast.
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  You have Bill Condon and Matt McGregor.
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  And, uh, we have Mike Kendall joining us today.
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  It's always one of our most listened to podcasts.
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  Uh, Mike runs our industrial West Coast investment team, so as active
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  as anyone on the West coast when it comes to selling industrial property.
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  So Mike, great to have you on with us again today.
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  So thanks for joining us.
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  Uh, thanks for having me.
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  I always enjoy being on this.
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  This is a great, great, uh, yeah, it's an interesting time, you know, in the,
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  in the capital markets world right now.
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  So let's talk a little bit about what you've seen, kind of first
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  half of 2025, just in general.
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  You know, where, where the market is.
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  I would say activity volume is off.
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  I don't have the exact figures, but I know that nationally, regionally investment
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  sale activity is, is off of, of the pace from last year, and last year was
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  off, you know, from the year before.
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  So we started out of the gates in January, February, very strong post-election.
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  A lot of optimism.
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  And so there was, you know, real actually getting really good pricing
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  and engagement January, February, and then liberation day happened and
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  you know, all the tariff uncertainty and volatility just kind of pushed a
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  lot of people back to the sidelines.
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  So activity Q2, very light Q3, I think will be a little bit better in Q4.
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  I think we're gonna slowly start to see activity, pick up some of the themes
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  that we're seeing, you know, the.
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  Deals that align directly within a strategy, like a true value add deal or
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  a true core plus deal that checks all the boxes for that profile are still
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  pricing, well, getting good engagement.
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  But if, if you can't check all the boxes, for instance, if you have everything
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  about a core plus deal, but you have, you know, three years of term or two years of
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  term core plus really needs four or more.
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  It drops to a value add and then you drop, obviously the value drops, and
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  usually the seller is not a seller at a, a different profile number.
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  So a core plus deal, the prices value add aren't transacting
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  today, they're just getting pulled.
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  But the ones that check all the boxes, we're still seeing good reception, good
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  pricing, good activity, just albeit with a, a smaller, thinner buyer pool.
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  But we're still seeing trades happen and it, it's kind of back
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  to basis, you know, again, real estate 1 0 1 credit matters again.
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  Mm-hmm.
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  Functionality matters again.
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  Location basis.
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  All the things that we all grew up with mattering that kind of went out the window
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  in, in, you know, three or four years ago.
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  It's important again.
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  So you have two deals in a market and one of them has really good credit
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  and the other one has marginal credit.
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  You could see a 50 basis point swing in in cap.
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  Space only on credit, which again, you had maybe five basis
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  points difference three years ago.
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  So yeah, I like to say it that it's like the risk pendulum swings back and
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  forth and right now I think it's kinda way out here and everything is all.
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  Most investors are overpricing risk.
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  And so that's actually, if you can actually buy now and you can find a
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  seller in today's market, I really think it's a good time to buy because that
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  risk pendulum will swing back and the herd mentality will come back and then
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  it'll snap back faster than people think.
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  Yeah, we are seeing some unbelievable basis buys in in
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  our market right now, right?
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  Where you look at the price per pound, like, you know, if you
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  would've said that pricing would've been there a couple years ago, we
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  wouldn't have believed it, you know?
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  So.
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  I agree with that.
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  We're seeing that.
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  Uh, but at the same time, and I'm curious, Mike, if you're seeing this up and down
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  the Western region on our land sales and other people land sales, some of the
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  developers, I would say maybe all the developers are having a hard time finding
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  partners to go spec on stuff right now.
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  Are you seeing that up and down the Western region?
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  We are.
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  I mean, we're working on a couple of equity raises right now.
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  One in Vegas, one in the Central Valley.
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  It's not easy.
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  I mean it's, and these are deals that solve to north of a seven
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  UNT trended return on cost, which is kind of where you have to be.
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  And even with that, it's thin.
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  And what's interesting is some of the most prolific established developers are
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  reaching out to us and others saying, Hey, we need help raising equity.
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  And then.
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  If years past they didn't need any help, they had a, you know, backlog of, of
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  equity kind of waiting to invest with them, and now they're going through
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  all their existing relationships and needing to find new ones because a lot
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  of the capital, the traditional capital sources like the Clarion's of the world,
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  et cetera, are kind of a little bit.
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  Bearish on spec right now.
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  Yeah.
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  That's interesting.
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  'cause we just awarded a piece of land and for the first time i'd in my career,
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  we really honed in, you know, on who's got money and who's looking for money,
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  and then moved some guys up up the list, uh, that had, you know, had their own
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  internal funds and allocations as opposed to people that needed to get something
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  under contract and then go shop for that.
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  Yeah.
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  And even the, I mean, we're doing the same thing.
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  Even the groups that are, that the capital is at the table and says, yes, we agree.
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  There's still more risk that they're gonna change their mind during dd.
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  Yeah.
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  And so we're seeing a lot of land, I mean, not a lot of lands trading, but
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  of the stuff that's getting tied up, we're seeing a lot of it get dropped
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  because the capital backs away.
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  That's right.
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  And they go to committee initially and they have approval, and then they
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  go through DD and they go back to committee and they're like, oh, nope.
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  Just kidding.
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  We're out.
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  So Right.
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  The vertically integrated groups that have their own discretionary capital.
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  Definitely have a leg up right now.
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  No question about it.
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  Uh, let's talk about, you know, the Western region.
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  What markets are hot, what markets are not, uh, really related with
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  overall construction and, and the health of those markets.
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  It's interesting now, more than ever, you cannot paint a whole
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  market with the same brush.
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  There are.
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  Segments of every market that are really weak.
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  And there are segments that are very strong.
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  And so, as an example, Phoenix, you know, is on everyone's list today.
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  I mean, Phoenix over the last several years has really transitioned from a
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  secondary market to a primary market.
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  It's now 450 million square feet.
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  So that by itself means it should be considered a primary market.
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  Mm-hmm.
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  And you have some real, like the million foot story in Phoenix is
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  still very strong, very different from a lot of markets, but you
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  know, the a hundred to 300.
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  Which is strong in other markets is very soft in Phoenix.
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  And you go out to like Mesa Gilbert in the Southeast Valley
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  and it's in some side segments.
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  It's 40% vacant.
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  I mean it's a bloodbath, but in other parts like Sky Harbor, infill small
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  and mid Bay, it's sub 5% vacancy.
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  And so you can have very different world in the same market.
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  So I would say infill Phoenix is still very desirable.
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  Large Million Foot plus in Phoenix is still very desirable.
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  A lot of the other stuff is soft.
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  I would say Inland Empire similar, big is better.
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  Million Footer is still strong and there are several groups that are looking to
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  capitalize Million Foot Spec right now.
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  And we'll start to, I think we'll see at least one or two start a
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  construction in early next year.
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  But again, the, the commodity size, the a hundred to 300, especially in
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  the East, is really, really soft.
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  Orange County.
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  Is very desirable.
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  East Bay and San Francisco Bay Area, very desirable.
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  The fundamentals are much better there.
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  They didn't ramp up the rent growth like we did in SoCal, so they haven't
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  pulled back like they have down south.
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  So that's a market that everyone is under allocated in Portland
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  is, is been pretty challenging.
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  Even the best of the best in Portland is struggling.
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  There's been a lot of deals that have come to market.
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  Been pulled because they're just not getting to pricing.
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  Seattle.
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  I mean, you guys know Seattle better than anyone?
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  Seattle is is definitely right now much more desirable than Portland for sure.
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  It kind of makes sense.
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  Like in the, in the ramp up in the days, we're always more desirable than, yeah,
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  I would say, you know, in the post COVID run, runup, Portland
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  kind of caught up true to Seattle in a lot of the pricing metrics.
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  But now again, when the risk pendulum swings out, everyone's
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  like, if I have to pick one or the other, I'm gonna pick Seattle.
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  You know, it's more population, more constrained, blah, blah, blah.
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  So, yeah, it's not even close anymore.
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  You know, it used to be like the, the, that initial wave of investment went
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  to Portland when it was like, well, the fundamentals are pretty good and
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  you can buy it a little bit better than you can buy it, better than Seattle.
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  And then a bunch of demand went there, and then it's certainly softened.
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  What about, um, on the.
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  Demand side, you know, for, for so long it was value add funds that were really hot.
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  Everyone wanted the value add play.
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  Right.
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  Have you seen that shift with the fundamentals that have
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  changed and, and core being where the mo, where the demand is?
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  It's interesting.
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  I mean, there's still by far the most capital on the sidelines and
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  waiting, waiting to invest is.
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  Value add.
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  There's still a lot more of that than any other category.
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  Value add is different to everyone, and so I really have to ask questions
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  about when someone says we have value add money, you have to ask.
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  Okay.
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  Tell me about that.
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  What are you solving for on a levered IRR basis?
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  What's your.
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  Requirements because what I consider value add, some people will say
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  that's core plus to them, but there's a lot of value add money.
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  But the difference is today because of the softness in leasing, you
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  really need to be bulletproof.
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  You have to know where your market rent are, and if the project that
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  you're selling still is below.
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  What I would call bulletproof supportable market rent.
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  Then there's, and you have two years of Walt, you have a lot of interest because
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  there, you know, yes, people don't like vacancy right now, but if you're truly
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  below market, there's some value there.
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  The problem is we, we've sold some stuff where the rents are above market,
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  and if you have above market rent, you do not want two or three years.
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  You want four plus years of Walt so that the markets have time to catch up.
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  Rents to grow so that when you roll those rents, you're not gonna roll down the NOI.
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  And then there, there's been more and more money raised for this, call it low
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  basis, low yield, longer Walt profile.
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  And that takes more of a family office approach, a longer term investor.
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  But there's been some really interesting basis buys by some of
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  these private groups because the, you know, the leases in place are locked
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  down with some fixed market options.
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  Like we sold a deal in Central Valley with Home Depot as a tenant, 900,000 foot
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  building, great building, but through their current lease and their fixed price
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  options, they could keep control of the rent below market for up to 20 years.
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  But a family office came in, in a trade and and paid $94 a foot
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  when a class A building, that market trading in the one 60.
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  But it was gonna be a sub five cap for 10 years plus.
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  So, you know, again, great basis, you have to have a long-term approach to
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  that capital to make it make sense.
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  And then the core side there is core capital, but it's
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  very selective on markets.
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  It's pretty much the Four Corners and Dow, so it's Seattle,
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  SoCal, or California in general.
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  South Florida, Northern New Jersey, and Dallas.
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  That's really where the core wants to be.
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  It's smaller check sizes than normal.
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  So if you have a 50 to a hundred million dollars deal, core
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  capital will be all over it.
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  But a two, $300 million deal, which in the past was easy to
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  capitalize with core, it's tough.
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  Right now they're, they're trying to get smaller checks out to balance out kind
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  of their portfolio management strategy.
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  And tell us maybe if you just took the Western region collectively, who
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  are the most aggressive buyers right now in each of those categories?
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  I would say the most active buyer nationally right now
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  is probably EQT Exeter.
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  Mm-hmm.
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  Uh, we disclosed a $264 million portfolio to them in the Central
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  Valley from Center Point.
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  They were a great buyer there.
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  We're hearing them pop up on a lot of our calls, national
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  calls as being quite active.
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  And then depending on the profile and the, and the pocket, BGO has been
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  pretty active on the buy side, both with their, you know, they have a couple
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  of separate accounts, a core money.
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  Al's been fairly active, uh, again, in pockets.
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  Uh, principal has started to invest again.
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  Nuveen, actually, yeah, outside of California.
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  California, they're kind of over allocated on industrial, but outside
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  of California, they've been quite aggressive lately, and their, their
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  core money, their teachers pension fund money has started to invest again.
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  They were on the sidelines for a couple years, but they're now investing and
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  they can get quite aggressive with that.
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  But that money, Cabot has been pretty active.
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  Nationally and regionally, LBA And then, uh, you know, kind of an emerging
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  category, which has been interesting to watch, are some of these large
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  national developers like North Point Development Logistics, property
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  company, to name a few, have both raised discretionary value add acquisition funds.
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  And so to level out their, the volatility of development, they're now.
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  Buying existing product, a lower replacement cost, and they like
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  that risk adjusted return profile.
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  And so they've been quite active.
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  We sold a $175 million deal to North Point in Vegas two months ago.
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  And so to see developers compete against institutional investors has
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  been interesting on existing product.
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  Yeah, it's, it's, it's been interesting to see just how things have shifted.
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  So generally right, the second half from a volume standpoint is.
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  Always stronger than the, the first half when it comes to, in, you
• 13:02
  know, investments in, in sales, typically the fourth quarter, right?
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  So how do you envision kinda the second half of 2025 playing
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  out on the investment side here?
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  I think we're gonna see a modest uptick in transaction volume.
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  Uh, but I really don't see that.
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  Being significantly ticked up until next year.
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  Q1.
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  I expect Q1 to be actually quite strong because again, what's really
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  been delaying things has been the uncertainty around tariffs.
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  And obviously tenants have been pulling back on, you know, the large corporate.
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  Tenants have not really been in the markets.
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  It's been a lot of Asian three pls that have been leasing space, especially
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  on the west coast and until and, and those big corporates are kind
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  of waiting to have some certainty on their cost structure with tariffs.
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  So as these deals get made, which they're starting to get made, people
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  have kind of been here before and like, let's just wait and make
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  sure that they actually stick for.
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  Three to six months instead of we thought we had a deal and
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  then next month it goes away.
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  So they need some certainty on the cost side from a tenant standpoint,
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  and then that demand starts to come back and then that, you know,
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  gets into the investor sentiment.
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  So, you know, I, I think the deals that will transact the rest
• 14:08
  of this year are timing related funds, life related for investors.
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  They need to close 'em out, or their portfolio reallocation or merchant
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  build that are kind of running up against their construction loan.
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  They've executed the plan, they've leased up the buildings.
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  They wanna sell.
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  Those are the ones that are gonna happen this year.
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  The other ones where people say, I wanna sell in the next 12 months,
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  but I'm not in a hurry, I think those will get pushed into next year.
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  Yeah.
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  And what about cap?
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  Cap rates?
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  Is our, yeah.
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  Is our final question on, on cap rates, Mike, just again, Western region total,
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  uh, what's the most aggressive market?
• 14:40
  What's the least aggressive market?
• 14:42
  Uh, and maybe in, in, in each of the product types from a class
• 14:45
  A perspective, um, the infill.
• 14:48
  Coastal markets are still the strongest, the lowest.
• 14:51
  So, you know, LA Central and IE West are both, call it low to mid five cap if you
• 14:57
  have a truly at market rent class A uh, same thing with the East Bay, the eight
• 15:01
  80 corridor, if you can find it, that's gonna be kind of a low five cap as well.
• 15:05
  Uh, I would put the best of the best in Seattle in that same category.
• 15:09
  Then you start to go to some of the quote secondary markets.
• 15:11
  You know, Phoenix is transitioning Phoenix.
• 15:13
  So they just had a trade, a class, a deal with Puma as the tenant.
• 15:17
  Mm-hmm.
• 15:17
  At a 5, 3, 5 cap.
• 15:19
  So that's kind of right now the low cap for credit class A and they
• 15:23
  had another deal, uh, Asian, three pl, similar size, million footer.
• 15:26
  That was a five seven.
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  5, 6, 5, 5 7. So 30, 35 basis points spread between credit
• 15:33
  and non-credit in Phoenix.
• 15:35
  So, you know, call it a low five in Phoenix.
• 15:38
  I would say Vegas is, is 10 to 20 basis points above Phoenix now because there's
• 15:43
  just a, a little more slow down right now in in Vegas on leasing Central Valley.
• 15:47
  Similar, it's gonna be kind of a, a mid five, you know, salt
• 15:51
  Lake is an interesting market.
• 15:52
  It's, it's a small market, but it's actually really performing
• 15:55
  well and there's a lot of groups that wanna bulk up in Salt Lake.
• 15:57
  It's just hard to do that.
• 15:58
  So that's a market that I have my eye on and a lot of investors are looking
• 16:02
  to try to increase their presence there.
• 16:04
  Much more so actually than Denver.
• 16:05
  Denver, obviously Mountain states similar dynamics, but Salt Lake is.
• 16:09
  Closer to California, you can draft off of those markets.
• 16:12
  Denver's kind of a by itself, you know, regionally.
• 16:15
  So.
• 16:15
  Makes sense.
• 16:16
  Yeah.
• 16:16
  Well, as always, super insightful, especially now with
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  everything that's going on.
• 16:21
  So appreciate you joining us, uh, Mike, and sharing your
• 16:24
  insights and knowledge with us.
• 16:25
  Yeah, happy to be here.
• 16:26
  Thank you for having me on, and always good to catch up with you guys.
• 16:29
  Absolutely.
• 16:30
  Happy Friday.
• 16:31
  Thanks for your time.
• 16:31
  Happy Friday.
• 16:32
  Yeah, take care.
• 16:32
  Have good weekend.
• 16:33
  See you, Mike.
• 16:33
  Bye.
• 16:34
  Thank you.
• 16:34
  Bye.