Should You Invest in Class B Industrial?

MIAMI—With the industrial market in full swing, there are fewer class A industrial projects trading and some time to wait before new construction is completed. So should industrial investors eye class B and even class C in the meantime?

Not for the long term. At least that was the general consensus among panelists at RealShare Industrial in Miami on Tuesday.

Ralph Kittrell, a principal and investment officer at Exeter Property Group, says investors almost have to shift to B product to find industrial assets to buy when A product is not available. But his firm isn't going down that route in this cycle.

“We got burned on a lot of B product we purchased early on in our funds and this cycle is not good for B product long-term,” Kittrell says. “There's always a flight to quality as soon as the market starts going down.”

From Kittrell's perspective, the trend is heading toward new construction, particularly build-to-suits, and even spec construction in some markets. Miami is one of them and Orlando is following, but he expects to see this trend across many markets.

“Spec construction is finally coming back,” Kittrell says. “I think you have to look at a lot of opportunities and not stay too focus on one thing. We are probably going to put about 15 percent of our fund in office and 20% to 25% in spec or new construction.”

Rene Circ, director of Research at CoStar Group, says people are asking his firm where they should go next. He says there are two strategies to employ.

“We are still seeing significant discount to replacement costs on the smaller buildings because the rents fell so much,” Circ says. “There are new players in that space. The other strategy is class B and C space in submarkets. There are opportunities where you can still buy below replacement costs and where rents are just about take off and you are not paying these crazy prices. This is a good time to be an industrial investor ... but class B is not a good strategy for long-term portfolio holders."