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Tuesday, October 19, 2021

Bubble Watch: Warehouse investor doubles his money in 2 years – twice

“Bubble Watch” digs into trends that may indicate economic and/or real estate market troubles ahead.

Discussion: A large real estate investor earns lucrative, quick returns on warehouses, basically doubling their money in just two years. twice.

Source: The Cole Company, an Irvine real estate store that owns 4.8 million square feet of commercial real estate in the western US.

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Here is another example of how the pandemic affected the warehouse business. Cole announced that it sold two small industrial parks — one in Arizona and the other in Nevada — before they planned to cash out. In the process, the partners got almost double what they paid for the properties just two years ago.

amputation

Known as the “industrial” slice of commercial real estate, there is a wide array of amenities that, before the pandemic, were by no means a sexy property.

This is usually worldly-looking real estate, to be kind, that is usually located on the outskirts of the city (unless you live in an inland kingdom where it’s closer to homes than many residents). It can be huge warehouses to move or store large quantities of goods that stock traditional stores or online retailers. It can be factories, big or small. Or it could be far more modest facilities, like the one Cole currently favors, meeting the storage and manufacturing needs of small businesses.

When the coronavirus outbreak broke out in early 2020, all of a sudden there was a need to deliver even more goods – immediately. At the same time, it became difficult to find some goods. Shortages of those supplies lead to shortages in storage facilities.

Traders, manufacturers and importers of all sizes needed more space to acquire, store, and ship. So “logistics” and “supply chain” became everyday terms. Warehouses became real estate gold.

“It’s so easy to look good as a salesperson,” says Scott Meserv, a principal at Cole’s. “But being a buyer is hard.”

Let’s consider Cole’s ownership of the AmPac Industrial Park in Henderson, Nevada.

In 2019 Cole and partners paid $21.2 million for seven buildings with 175,818 square feet of rented space outside Las Vegas. At the time, about one-sixth of the park was vacant and half of the tenants were on month-to-month lease.

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The recent $42 million sale saw converting the space into long-term leases with some physical touch-ups. Yes, some smarts were involved. But Meserv acknowledges that the fast and strong need for the logistics space has made ownership quicker and relatively easier.

Now, consider Broadway Industrial Park in Tempe, Arizona, not far from Phoenix. Cole bought the two-building complex in 2019 for $7.47 million with 58,000 square feet of space.

Cole liked his long-term potential near Arizona State University. But after renewing the leases for the site’s two tenants, “we thought we’d keep it for a long time, but it was too forced to sell.”

Compelling as the sale price of $14 million.

These investments were not an obvious slam-dunk in spring 2020 in the early days of the pandemic. Meserv says there was a lot of concern to know how COVID-19 would play out. Could the tenants pay the rent? Would anyone want to own commercial real estate as a whole? How about the broader economy?

Yet the growing demand for these industrial spaces meant that Cole’s tenants were as willing to agree to leases at higher rents as there were few other options.

“The market worked for us,” Meserve says.

another view

Note that Cole’s success is by no means rare. According to an industrial property index by Green Street, prices across the country are up 41% from pre-pandemic levels – the best of 11 commercial real estate shows reflecting the firm track.

how bubbly?

On a scale from zero bubbles (no bubbles here) to five bubbles (five-alarm alert)… a bubble!

In all the real estate madness in the era of the pandemic, warehouses may have the best argument to back up their rising prices — lest that enthusiasm won’t lead to some silly deals.

I’ll give Meserve the last word on how long this warehouse wildness can last: “It still has some runway…

Jonathan Lancer is business columnist for Southern California Newsgroup. He can be contacted at [email protected]

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