Colony Capital is doubling down on industrial real estate with the rollout of a new strategy in a sector that has been one of the bright spots in the troubled company’s portfolio.
The Los Angeles-based firm closed on a $1.16 billion industrial portfolio last week, adding 7.7 million square feet of last-mile logistics property and jumpstarting a new strategy focused on bulk warehouses.
Since 2016, Colony has invested in light industrial properties – facilities that are 250,000 square feet or smaller – through its open-end industrial fund. Such properties are used for same- or next-day delivery of goods within a specific city or metro area. Now, Colony has branched into the bulk market, eying larger properties for regional or national distribution.
Colony Industrial, the firm’s Dallas-based logistics platform, purchased the portfolio at auction from Dermody Properties, an industrial real estate developer and manager headquartered in Nevada. It consists of 48 light industrial assets acquired by the Colony Industrial Fund and six larger warehouses bought through a joint venture with an undisclosed investor, PERE understands.
During a quarterly earnings call last week, Colony founder and chief executive Tom Barrack said the company plans to acquire more bulk industrial assets through co-investment capital that would invest alongside its open end fund.
Barrack, who called Colony Industrial “one of the darlings of our portfolios,” said the expansion aligns with firm’s existing logistics strategy because the large national and international corporations that lease last-mile space also have bulk warehousing needs.
“Those customers are really the same and our goal is, we have to supply Amazon, Microsoft, Apple, all of the users of that space with the product that they want,” Barrack said during the call. “And they have a voracious appetite.”
Lew Friedland, head of Colony Industrial, said the bulk portfolio is 67 percent leased, primarily by “blue chip international companies.” These properties average 700,000 square feet and are in five markets: Oregon, northern California, Nevada, Pennsylvania and Kentucky.
At 3 billion square feet, bulk warehouses make up 32 percent of the US industrial market while light industrial consists of 4.3 billion square feet, or 47 percent of the market, according to data from the CoStar Group. Bulk properties are built on less expensive land and have lower costs associated with them, as well as fewer barriers to entry, according to the analytics firm. Light industrial properties, meanwhile, have experienced greater rent growth in recent years thanks to the rise in e-commerce.
Overall, net absorption has outpaced the delivery of new industrial facilities for 20 of the past 21 quarters, according to CBRE. Nearly 60 million square feet was delivered in the fourth quarter of 2018 alone, yet the national availability rate continued to fall from 7.3 percent at the end of 2017 to 7 percent.
Friedland said Colony plans to add value to its new assets by adding more tenants. The occupancy rate across the portfolio stands at 71 percent, well below the national average of better than 95 percent, according to CBRE. Friedland said the rest of Colony’s industrial portfolio is 95.8 percent leased.
The Dermody portfolio acquisition was one of the few positive notes in an otherwise challenging quarter for the Los Angeles-based manager. Darren Tangen, the firm’s president, outlined the ongoing efforts to stabilize the company, which include staff cuts, divestments and liquidations, after sustaining losses from a three-way merger with NorthStar Asset Management and NorthStar Realty Finance.
Last year it shed two-thirds of its non-strategic investments and Tangen promised more downsizing through the rest of 2019. He said the firm also plans to ramp up capital raising for several strategies, including credit, digital, energy, liquid securities and co-investment strategies, as well as industrial.