Multi-Tenant Industrial is Poised for Growth

IRVINE, CA—Values have only started to increase in the past 12 months or so for value-add multi-tenant industrial properties, making this a product type on the upswing, BKM Capital Partners' CEO and co-founder Brian Malliet tells GlobeSt.com. We spoke exclusively with Malliet, whose firm is a fund manager and operator platform that targets these types of investments in the Western US and is currently raising its first commingled fund targeting $200 million by the end of 2015, about why the sector is performing so well and where the opportunities lie.

GlobeSt.com: What makes value-add multi-tenant industrial a strong investment in the current market?

Malliet: Values in this product type have lagged those of most property types in the current recovery. Multi-tenant industrial has not experienced the five-year run-up of multifamily housing or big-box industrial. Values have only started to increase in the past 12 months or so, resulting in prices averaging 40% below peak pricing/replacement cost. Part of this lag is due to multi-tenant industrial receiving a disproportionately low share of institutional-investor attention. The management intensity of the product type typically deters these investors, who are structured to handle fewer and larger tenants.

Another reason for the lag in recovery is that the economic recovery has been slow to reach the small businesses that make up the bulk of the tenant base for the product type. Only one in five small businesses consider themselves recovered from the recession; however, 72% expect to grow their business in the next 12 months. In an environment in which almost all asset classes have full valuations, this lag makes multi-tenant industrial stand out from the rest.

GlobeSt.com: What factors are driving investment demand in the multi-tenant industrial sector?

Malliet: Today's investors struggle to find investments that provide both upside potential and current yield. The performance of multi-tenant industrial satisfies both these criteria, driving investment in the sector. At this point, however, it remains an under-appreciated asset class. There are very few fund managers specializing in these properties as we do.

GlobeSt.com: Your firm is currently raising its first commingled fund. What types of investors are you attracting, and which investors are most suited for this investment product type?

Malliet: We are attracting interest from essentially all types of investors. Our early LP base was mostly high-net-worth individuals and family offices. As we near our first institutional close of capital, we are in late-stage discussions with several endowments and foundations and have also been talking extensively with public and private pensions across the US.

GlobeSt.com: Where are the best opportunities in the current multi-tenant industrial market, and where is your firm finding the highest yields?

Malliet: While core multi-tenant industrial assets remain attractive relative to single-tenant industrial product, BKM relies on its 20-plus years of experience as an owner-operator to seek outsized returns in the value-add space. We can offer 15%-plus IRRs to our investors, net of fees and carried interest, by creating a value-enhancement program and putting the right on-site management team in place. We pride ourselves in being the best at taking broken properties and transforming them to compete at the top of their competitive set.

GlobeSt.com: What are your market predictions for the next quarter?

Malliet: I see out-paced growth in the multi-tenant industrial sector continuing next quarter, but that's nothing new. Since 1990, multi-tenant business parks have increased rents at a pace three times greater than large big-box industrial assets. Currently, we are seeing pent-up demand from small business owners and a lack of new supply to satisfy it. While the modern supply chain is evolving to favor local distribution points, few are being built. Our segment now represents 69% of total industrial supply, but only accounts for 17% of new construction. With a lack of new supply and increasing demand, rents have nowhere to go but up.