Why Private and Institutional Capital Are Joining Forces

Private and institutional capital sources have begun working together to acquire both large and small industrial deals in Southern California. To truly penetrate the industrial market—from big box deals to small infill sites in urban markets—the two capital sources need each other. But, it isn’t only industrial deals that have fueled this trend. Private capital has grown since 2003, accounting for 51% of all transactions last year. Newmark Knight Frank has hired Shin Kim as senior managing director of capital markets to expand its private capital business. We sat down with Kim to talk about the activity in the private capital sector and why institutional investors are partnering with smaller capital groups.

GlobeSt.com: Why is now a good time to grow the firm’s private capital business?

Shin Kim: We have seen a distinct trend with an increased amount of private capital transactions. Last year private capital accounted for 51% of all real estate purchases for all food groups. This activity has grown steadily since 2013 when they accounted for 39% of all sales. Private capital is clearly the dominant buyer for all product types including office and industrial and their market share has steadily been increasing. The private capital market space has been fragmented with a lack of cohesiveness and a general lack of institutional-quality processes on both the buy and sell side. Our West Coast team will be unique in that it’s so connected and not siloed.

GlobeSt.com: Why are private and institutional capital sources merging to peruse industrial investments? Tell me about this trend.

Kim: Industrial investment has been the darling of all the asset classes for the last two to three years. With historically low vacancies and high demand for industrial space we have witnessed double-digit rental growth year after year on the West Coast. E-commerce has changed the dynamics of how retail is serviced throughout the country. The need for infill industrial space to reach the “last mile” consumer has led this growing trend. Both private and institutional capital’s appetite is to pursue more industrial. Private capital is reaching for much larger acquisitions, which has historically been more institutional and the same with institutional capital pursuing smaller infill opportunities. This will be a common theme moving forward and we don’t see it diminishing.

GlobeSt.com: How has the merging of these capital sources changed the private capital business?

Kim: Private capital such as high-net worth individuals, family offices, and syndicators has become more aggressive to acquire industrial deals. In the past, private capital has been more conservative with their acquisition criteria, both from a monetary and geographic perspective, but they are changing their strategy to be more competitive. Private capital is now more nimble in a sense that they can execute quickly on decisions when some institutions can’t. GlobeSt.com: What types of deals are these capital sources pursuing?

Kim: Private capital has typically sought deals from $5 million to $25 million in total consideration. In a market where there is a shortage of supply and high demand, this sector is pursuing larger institutional-type deals but also going smaller than $5 million. They will acquire single tenant, multi-tenant, sale/leasebacks, and even some ground-up development deals.