PERE Predictions 2019: Oregon State sees a year of logistics aggregation

The Portland-based public pension believes institutional investors will increasingly look to scale their industrial portfolios.

The Oregon State Treasury – which had $9.76 billion committed to real estate during the past year, according to the 2018 PERE Global Investor 50 ranking – expects institutional investors to step up their investments in the industrial property sector during the next 12 months.

“In 2019, I think you’re going to see a very large trend towards an aggregation in the industrial sector,” senior real estate investment officer Anthony Breault told PERE. “There’s a huge appetite for it across LPs and GPs. I don’t see that changing.”

Breault and his team make real estate investments on behalf of the Oregon Public Employees Retirement Fund, the State Accident Insurance Fund, the Oregon Short Term Fund, the Common School fund and other agency portfolios in the state.

Breault: senior real estate investment officer at Oregon State Treasury

Going into 2019, Breault expects Oregon to be part of the logistics aggregation trend, taking on the challenge of building an industrial portfolio with scale. It is difficult for an industrial portfolio to not be underweighted by an institution’s office holdings, according to Breault. Industrial assets are generally smaller than office and the Oregon State Treasury acquires them individually. That means building a sizable portfolio takes time.

However, industrial properties are in hot demand from occupiers and he expects the asset type will produce strong risk-adjusted returns underpinned by excellent rental growth going forward, especially in gateway markets.

The logistics assets Oregon intends to acquire will not be limited to the increasingly sought after last-mile logistics properties in urban centers. These smaller-scale industrial assets are closer to the consumer and are driven by the demand for quick delivery associated with e-commerce. However, Breault still believes there are certain areas like Lehigh Valley in Pennsylvania and New Jersey that can support big-box industrial assets. The key is finding an area with a skilled labor force that needs employment and is around 30 to 40 miles from an urban center, he explained.

These areas are inexpensive places to build quality logistics properties and can be good long-term investments, Breault said. Companies like Amazon, which operate from large distribution centers, will desire logistics assets close to a skilled workforce they can hire from, he added.

Technology has driven industrial sector growth in many corners of the globe, and favorable returns in the industrial sector over the past year have not been unique to the US. Industrial assets are also being bought and built in the markets of Asia and Europe.

Industrial-focused real estate funds raised a total of $10 billion this year as of December 19, the most since 2015, according to PERE data. Industrial fundraising peaked in 2015 with 22 funds closed and a total of $15.75 billion raised. Fundraising fell the next year to $6.29 billion, but steadily increased in 2017 and again in 2018. Sixteen funds closed in 2017 and raised $8.42 billion in total.

However, Oregon plans to be heavily focused on the domestic market next year to strip out volatility caused by currency fluctuations and create a portfolio that is resilient through different parts of the cycle, according to Breault.

“As a domestic investor with a US dollar-denominated pension fund, real estate doesn’t need to take on the currency volatility, even if It’s good underlying real estate,” he said.

To provide for the needs of pension beneficiaries, each asset class plays a unique role in the Oregon state portfolio, according to Breault. At 12 percent of the overall portfolio, real estate investments are focused on current income and minimizing volatility, he said. The best way to minimize volatility is to underwrite conservatively and pursue strong, stable income streams through assets like industrial and multifamily in more secondary markets.

As the real estate investment world anticipates a turn in the cycle, Oregon is purposeful in its search for stability and growth visibility. It sees at least part of the answer residing in the world of big boxes and distribution.