Industrial has been the hot real estate asset class for the past few years, a bright spot for investors and owners throughout the pandemic. Fluctuations in interest rates and other market forces are cooling things down, yet that hasn’t slowed Meridian Capital Group’s ability to close a voluminous amount of deals.
What’s the secret ingredient to their success? Meridian has looked past market murkiness and drawn a crystal-clear connection between an asset class with diminishing inventory and consumer demand for convenience.
“Opportunity abounds,” said David Schechtman , senior executive managing director. “Industrial real estate is where there’s value creation and money to be made.”
In 2022, Meridian closed 14 industrial deals valued over $400 million, in New York, New Jersey, Massachusetts and Colorado. 2023 is off to the same roaring start.
We asked Schechtman how Meridian got to this enviable position, and what’s ahead.
Commercial Observer: What’s the trajectory of industrial real estate, pre-COVID to now?
David Schechtman: In the past, whether it’s a high-end city street or a neighborhood shopping mall, every investor wanted to be in retail real estate. By 2018, however, shopping for everything from cosmetics to vacuums to cars moved from retail store to computer.
That paradigm shift changed the real estate needed. It became more and more likely that products were in a warehouse, not a storefront. Accordingly, there’s been an astonishing uptick in interest in any space that isn’t strictly residential or retail.
Major retailers always needed large warehouses to store their products, as a point of contact for nationwide shipping. Now, in the world of online shopping and instant gratification, smaller warehouses, closer to greater populations, are equally if not more valuable.
This phenomenon is not limited to mass-produced items. Even high-end retailers with expensive stores in New York City are leasing warehouses. The baton has been passed. Industrial real estate is the new retail. Our team quickly saw this shifting trend and how we could deliver new value to our clients.
How did the COVID pandemic help keep industrial real estate hot?
Staying at home, then continued working from home, meant purchases of any and everything happened from a computer, enhancing the online shopping trend. To retain and capture customers, global and domestic retailers were pressured to compete: next-day delivery, same-day delivery, constantly having products in stock. These enticements require product storage close enough to consumers to honor advertised terms.
Warehouse owners on the East Coast, from south to north along Interstate 95, saw rents double, triple and even quadruple after the pandemic started.
Simultaneously, Amazon decreased its real estate purchasing, opting for long-term leases instead. The online giant made deals with warehouse landlords, offering twice or more what current tenants were paying, plus covering renovation, modernization, and committing to leases for 10 or 20 years. The value of industrial real estate across the country increased. Small tenants could not compete, and other big companies stepped in, leading to fervent bidding wars for warehouses throughout 2020 and early 2021.
The largest industrial REITS in the U.S. — Prologis, Blackstone, CenterPoint Properties, Rexford Industrial Realty — competed to buy warehouses with high ceilings, loading docks, access to major thoroughfares, and room for 50-plus-foot tractor-trailers.
At the end of 2021, following an extensive bidding war with many involved parties, Meridian sold a 4-acre industrial property to the biggest REIT, Prologis, for $48 million. In 2018, that same land was worth $30 million or less.
Sounds like a great way to ring in the new year. How did that transaction tell the story of your year to come?
It showed our clients the possibilities and confirmed what Meridian predicted years earlier. The need for industrial spaces was clearly increasing to meet shifting paradigms surrounding consumer trends and behavior.
We saw opportunity in spaces like 48-02 48th Street in Sunnyside, Queens, sold for $41.7 million, where institutional buyers demonstrated how two warehouses nearing 100 years old can be converted to world-class, efficient and clean buildings.
Another opportunity was found at 329 New Brunswick Avenue, Rahway, N.J. This 215,000-square-foot property in the suburbs sold for $62 million, illustrating how 50-year-old industrial and flex office space has a newfound value and life.
Correctly predicting the critical role industrial would play supporting modern shopping trends was vital to our success in 2022: My average deal was around $50 million; $494 million the largest.
How many of your 2023 deals will be in industrial? And will they be as big?
While it’s true that global forces, including the pandemic, the credit crunch and changes in regulations for residential, have us on a downward trajectory for value across real estate classes, industrial is still going to play a critical role in supporting modern consumerism. The effects of interest rate hikes will be felt nationally but will likely stabilize in late 2023. I expect declines to continue through 2024, eventually striking a new equilibrium later in the year.
2023 and the coming years remain attractive for industrial investors because technological and societal changes in how people shop have permanently changed. People shop online and demand immediate delivery. Warehouses and logistical centers of all sizes, located in close proximity to consumers, are required to meet that demand. Interest rate hikes alone cannot halt this momentum.
That said, the risk-return profile of the asset class has shifted, and so those who are buying industrial are seeking better value. But as more warehouses are strategically mapped out, more opportunities will arise. Meridian introduces more previously unknown buyers to the market than any other firm, and expects the $10 million to $50 million range to be the most lucrative.
I already have two deals in contract that will close in 2023, over $200 million each.
What is the future of industrial real estate?
Popular wisdom is: There are too few warehouses in the U.S. The future lies in the creation of warehouse space of varying sizes, accessible by bike messengers and mopeds, to meet the demand of instant gratification by storing and distributing products as close as possible to the buyer’s delivery address.
Many warehouses in New York City and elsewhere were converted to high-end residential and office as recently as 2018. Is anyone regretting that now?
I represent the owners in the sale of several office buildings in Long Island City. Some had been antiquated loft industrial buildings. The owners spent millions of dollars to renovate and upgrade everything, from high-end elevators to top-of-the-line HVAC. That’s what was necessary to make a sale for years. Now, for the first time in my career I have prospective buyers saying, “I wish the owners didn’t clean up this building because I’m seeking 100,000 square feet of industrial.”
Given the continuing demand for more warehouse space, we predict we will see some industrial buildings that had been converted to offices converted back to industrial.
Will industrial real estate be a good investment in 2023?
How everyone lives, works and plays is evolving. In addition to online shopping, the movement of people from cities to suburbs and beyond is significant for the industrial market. Years ago, a suburb was less than 20 miles out of a major commercial business district. Today people who technically work in cities are living 50 or 60 miles away.
In the past, companies needed warehouses adjacent to major urban airports and transportation hubs. Now they’re necessary in rural industrial parks everywhere in the U.S. to meet the demands of the redistributing population. That means warehouses need to be farther away from cities than ever before, and that’s great news for industrial investors.
Being in the path of a demographic shift is likely to bring strong growth, and being close to a city center will always be important for industrial investors. Pricing is in a massive decrescendo, and opportunity truly abounds. Success happens when you buy low, now, and wait to sell during a high.
We’re discovering deals for our clients, in the discount sense of the term. A lot of people will buy real estate in 2023. Then, hold on and wait. The future is looking up.