GCP: Versatile strategy critical to deployment in US logistics

This article is sponsored by GLP Capital Partners (GCP) 

In the fall of 2019, specialist logistics manager GLP sold its first three US funds to Blackstone for just under $19 billion. On the back of the deal, the leadership team responsible for GLP’s US business created GLP Capital Partners, known as GCP. In July 2021, GCP held a final close for GLP Capital Partners IV (GCP IV), the largest-ever closed-end discretionary fund focused on North American logistics real estate, with over $2.3 billion in equity commitments.

Senior managing director Steve Crowe and chief investment officer Adam Berns tell PERE how GCP is responding to the challenge of deploying a large pot of capital in a sector that is currently garnering enormous interest, as well as how the company is identifying the strategic approaches most likely to generate strong returns in the year ahead.

How are secular tailwinds impacting investor sentiment towards logistics real estate?

Adam Berns: The combination of resilience and growth potential that logistics real estate demonstrates right now is quite rare. It’s an investment opportunity that shows both strong secular trends, which help mitigate the potential impact of broader economic cycles, and high growth. That is what investors are lining up behind. There is potential for the sector to have a Goldilocks moment.

Logistics assets help form the backbone of the infrastructure required for a world in which expenditure increasingly flows through digital channels. Properties located near dense population and consumption centers are often irreplaceable from a tenant’s perspective.

In 2022, we will approach 50 consecutive quarters of positive net absorption in the US. Despite record levels of demand, supply continues to lag, and in top markets is not meaningfully higher than long-term averages. We are experiencing double-digit annual rent growth in many markets, with projections that the next few years may see higher annual rent growth than we have averaged over the past five. This may result in even greater capital allocation to the sector.

A fundamental redefining of core asset classes is underway, with logistics now demonstrating the characteristics that long-term investors once sought in prime CBD offices or high-street retail. Today’s questions are less about the attractiveness or strength of logistics real estate, but how investors can be ahead of the curve in an increasingly competitive environment.

What strategic approach is best suited to deploy capital in what is currently a very hot market?

AB: In a market that moves quickly and attracts a lot of competition, investment versatility is critical. Having a single deployment strategy, or even two or three strategies, is a competitive disadvantage when there is abundant capital looking for opportunities across the entire property lifecycle and risk-return spectrum.

One of GCP’s strengths is our ability to find and execute attractive investments of any size, from development to core, in single assets or portfolios, and be active in all major markets across the country. We’ve built and positioned our team this way because we believe it’s an approach that is effective over longer periods of time, and is not just based on what the investment landscape looks like at any one moment.

A strategy that is limited to a single stage in the property lifecycle – only development, for example – or is strictly defined by transaction size or geography, will naturally exclude attractive opportunities that fall outside these narrow parameters, particularly in a fast-moving market and with a multi-year investment horizon.

A strategy that is narrowly focused may be effective for the next six months, but to be effective three years from now requires more adaptability. We are constantly looking for relative pricing dislocations and, to capture these, a manager needs to be versatile enough to evolve as the market inevitably evolves, as well.

GCP has a fully integrated logistics real estate operating platform, Modlo. How does that enhance your investment strategy?

Steve Crowe: Vertical integration is another critical factor in being versatile. We do everything from development to buying stabilized assets because we have the capabilities in-house to execute across a broad range of business plans. Having internal experts for leasing, construction, property management and operations generates data and insights that can influence our investment approach.

Our operational expertise and close customer relationships give us a deep understanding of those customers’ requirements, which allows us to seize investment opportunities more quickly, with conviction and unique insight. On an ongoing basis, as an operator we can maintain greater control over the customer experience in our buildings, which supports retention. We also gain more detailed insight into customer demand and how customers think about competitive supply than we could glean from brokers’ statistics alone.

We use these market observations and customer experiences to refine our investment approach within a particular market, or to extrapolate across other markets with similar characteristics. Meanwhile, our construction team stays close to suppliers of building materials to maintain enhanced visibility into price changes or supply chain disruptions that could impact development timelines or capital expenditure costs.

How do you use your platform to meet customers’ needs and demands?

SC: We aim to acquire assets that cater to the deepest pools of customer demand within each market. To do this, it is important that we understand how customers use their facilities and the location and building attributes that are most critical to their operations. While there are many different uses, a comparison between bulk distribution and infill or last-mile facilities highlights some of the key considerations.

At one end of the spectrum, bulk distribution facilities ship and receive goods over a wide area, often distributing to a wide geographic area as the next step in the supply chain.

Because of the large service area, customers seek locations that can reach multiple markets or large population centers within a day’s drive time. Location decisions for these facilities are often driven by proximity to major transportation infrastructure, such as ports, intermodal facilities and key highway nodes.

Meanwhile, last-mile operations – the final step in the supply chain – are focused on quick, efficient delivery to consumers, so they require infill locations close to areas of high population density.

The building requirements for the two different types of operations also look very different. In bulk distribution areas, there tends to be more available land, relatively speaking, so buildings are newer and bigger, with modern features like high clear heights, large truck courts and more dock doors to facilitate efficient storage and higher throughput distribution. Proximity to labor and parking for employees have become more important for these assets as warehouse operations get more labor intensive.

For last-mile facilities, location considerations are paramount. The availability of buildings is limited in these infill, supply-constrained locations. Land is scarce and customers must compete with other real estate uses. Therefore, these facilities tend to be older and customers make do with lower clear heights and fewer of the modern building features associated with newer bulk product as a trade-off to prioritize proximity to consumers. As demand drivers and customer requirements can vary widely, an in-depth understanding of these factors is critical to identifying attractive investment opportunities in each market.

Another example of how we utilize feedback from customers was our creation of a comprehensive, flexible, vacant space preparation plan. Customers are now moving with much greater urgency than they did in the past, as they respond to the rapidly evolving dynamics of modern supply chains.

Bringing vacant space onto the market faster enables us to support customers with near-term requirements, allowing them to take occupancy more quickly, and can provide a competitive advantage when trying to secure a leasing deal.

Where do you see the biggest opportunity in 2022?

AB: It is easy to be lured into thinking you’re on to something in a sector that has long-term tailwinds and extreme supply-demand imbalances. The underlying real estate fundamentals will change in markets over time, and the differentiation between the various strategies being pursued today will become more evident.

We have made a concerted effort to concentrate our portfolio in coastal markets and high-growth, major logistics hubs, which we think present the most compelling risk-adjusted return prospects. In 2021, cap rates compressed by a greater magnitude in non-primary markets than in primary markets.

As a result, the yield spread between the two is the tightest it has been in at least five years. But when the mid- to long-term growth prospects for these types of markets are taken into account, we believe the greater opportunity continues to be in higher-growth coastal and primary markets. This approach also aligns with our view of the macroeconomy.

In 2022, we may experience challenges around inflation and higher interest rates. In such an environment, opportunities with higher cashflow growth can mitigate the impact of potential increases in cap rates or higher borrowing costs. A strategy of general exposure to the sector that has worked in an environment with cap rate compression may not bring about such strong results going forward. Bond-like income streams without that growth potential tend to underperform in rising interest rate environments.

Asset management also becomes more important because it drives cash flow growth. There is an increasing need for greater precision in investors’ strategic approach to the sector. When supply adjusts, or demand moderates, assets that cater to the deepest pools of tenant demand will have greater potential to generate higher returns.

Market trends: Shifting dynamics in Seattle

“We really like the underpinnings of demand growth in Seattle: technology innovation, job and population growth, and it also has the fifth largest port system in North America,” says Crowe. “Industrial vacancy stands at less than 5 percent in a land-constrained market where rents are projected to grow 50 percent over the next five years.”

Rising demand from larger customers motivated GCP to develop the largest speculative building in the market. Shortly after completion, a major e-commerce user approached GCP to lease the entire 628,000-square-foot facility, located near the Port of Tacoma, for a 10-year term.