In its latest high-conviction bet in Europe, New York-based Blackstone is aggregating investments in the space through its newest two opportunity funds in the region: Blackstone Real Estate Partners Europe V, which attracted €7.8 billion in 2017 and is almost all deployed, and Blackstone Real Estate Partners Europe VI, which, still in marketing, collected about the same amount in a first closing this summer.
The first approximately 1,000 properties that make up the portfolio of Mileway, a company representing Blackstone’s debut last-mile logistics bet to be wrapped in a corporate entity, are almost exclusively made up of transactions from BREP V. With BREP V now beyond 90 percent deployed, Mileway’s growth will come from BREP VI.
James Seppala, the firm’s head of real estate in Europe tells PERE: “Mileway is a natural evolution of our European logistics strategy, which is one of our highest conviction, long-term investment themes. Putting this business together has been very interesting for us as investors, but also time-intensive. Creating a business from scratch fits better in our closed-end vehicles, which we’ll ultimately exit if and when we feel we have scaled and stabilized the business.”
The aggregation strategy has fared well for Blackstone previously in big-box logistics real estate, accommodating the beginning of the distribution supply chain. At the turn of 2015, Blackstone’s sixth and seventh global BREP funds sold Indcor, a company representing 18 acquisitions in the US, to Singapore’s sovereign wealth fund GIC for $8.1 billion; that was followed in 2017 with the sale of Logicor, a European business made from more than 50 deals, again to a state investor, China Investment Corporation, for €12.25 billion.
But while the aggregation exercise is familiar, this is the firm’s first push to build a last-mile logistics business.
At the off, Blackstone has few detractors. Tony Smedley, head of European private equity at manager Heitman, says: “Clearly, the aggregation strategy has been undertaken by Blackstone before. I’ve no doubt they have the ability and brand to move the market here.”
Square feet under management: 97 million
Value of assets (reported): €8 billion
Square feet under management: 147 million
Price: $12.25 billion
Seppala says the methods to drive returns may be different to Indcor or Logicor. Repositioning – sometimes at the asset level, oftentimes at the occupational and leasing levels – will play a big part.
“What is interesting about these last-mile assets is that a number of things can happen: there may be alternative use potential, there may be occupancy pick-up potential and rents can move sometimes quite meaningfully. So while sometimes the current yield may be lower there may be significant reversion.”
Indeed, going in, yields of 2-3 percent can be agreed on properties rented significantly below market levels and these can hit 5 percent quickly given the property type’s typically short leases. “Lease terms are two to three years so step ups over time are possible,” says Seppala. Jeroen Verheijden, managing director of Clarion Partners, a US manager with exposure to European logistics, says the quality of the properties’ tenants will be important when investors assess an eventual exit.
“It’s no broad-brush that all these industrial assets will be great. And when you think of what tenants require: 12-meter vertical spaces, sprinkler systems, higher loading, broader decks, better access for trucks. There are so many old assets – these need to be reviewed in detail.”
But he agrees demand for last-mile logistics is only growing: “You can see the whole supply chain is developing in big steps. The big piece is same day delivery.”
Indeed, according to Real Capital Analytics, investment in logistics space under 10,000 square feet – the typical size of a last-mile logistics property – has risen 123 percent in the last decade. In that time average cap rates have compressed from 7.93 percent to 5.86 percent.
Room for Stateside expansion
What does this mean for Blackstone’s appetite for large distribution facilities? Seppala says the firm has not shifted toward last-mile at the expense of out of town distribution, but accepts these properties are increasingly better suited to lower risk-return capital: “The reality is we continue to buy big-box within our closed-end opportunistic fund business and also very significantly within our open-ended core-plus business [Blackstone Property Partners], which today has an asset base that is more than 50 percent logistics.”
Blackstone’s $18.7 billion investment in GLP’s US logistics portfolio – the largest real estate deal of the year so far – was made by both the BREP and BPP series.
“But as we’ve grown and created Mileway, the focus in the context of that particular company is on pure-play, urban, last-mile assets,” he says.
It would be a decent bet that a similar entity appears stateside, too. Last month, the firm announced it had acquired 465 US urban logistics properties, comprising 60 million square feet, from manager Colony Capital for $5.9 billion.
For now, Mileway is the first large-scale dedicated player in the space. Nick Cook, chief executive at UK logistics developer Gazeley, says other large logistics firms, such as Prologis or GLP, have the portfolios to create rivals in time, as does his own business. But today, Mileway is the litmus test: “Is this the most notable, standalone, distinctly-branded urban logistics play? Yes. At €8 billion, that’s hard to ignore.”
A price-insensitive field
With typical assets of approximately 90,000 square feet and as many as four occupiers a building, Mileway will be an intensive asset management proposition.
Led by ex-Goodman fund director Emmanuel van der Stichele, Blackstone has amassed a 150-strong team for the purpose. “But that’s why we’re so interested in this area,” says Seppala, comparing the strategy with large logistics management. “Take a large 3PL tenant, for instance, negotiating a 300,000-square-foot lease. They are very focused on obtaining that lease for as low a rent as possible. They have many demands too, like turn-key solutions. Now, if you’re a tenant within a densely-populated urban area in Europe and you want a 20,000-square-foot lease, you’re less likely to be quite as price-sensitive. The location is much more important.” He offers a hypothetical where a 30 percent increase in a tenant’s rent is not material to the business relative to its other costs but is significant to the landlord. “Now replicate that 1,000 times. This is much more asset management-intensive.”