Why ElmTree, Guggenheim are targeting ‘mission critical assets’

Chief executive and founder James Koman said the firm has been utilizing the term – now growing in industry popularity – for the past decade.

Mission-critical assets are the focus of private equity real estate firm ElmTree Funds’ new separately managed account with Guggenheim Investments to invest in industrial e-commerce properties across the US.

Guggenheim, on behalf of its clients, has provided the entire $600 million equity for the strategic partnership focused on a core-plus investment strategy. St Louis-based ElmTree, which specializes in acquiring build-to-suit properties net leased to investment-grade tenants and is understood to have gross assets under management of $4.4 billion, will be investing the equity in industrial real estate assets tied to the e-commerce, last-mile logistics sectors.

The phrase “mission critical” assets – typically used to describe facilities designed by the landlord to support the essential operations of the tenants – has grown in popularity within the real estate industry over the past few years. The coronavirus pandemic has particularly accelerated demand for e-commerce logistics facilities that have a mission-critical element.

“Mission critical is a term we have utilized for 10 years or more,” ElmTree founder and chief executive James Koman told PERE. “It has seemed to have caught on in the industry over the last couple of years, especially among the brokerage community.”

In an interview with PERE, Koman defined “mission critical assets” as “corporate driven, corporate mandated.” He explained: “Even though corporations sign a 12-to-15-year lease, through our due diligence, research and interviews with the corporations, we believe they will stay beyond their existing lease term and in some cases go on for 25-40 years of operating that facility, if not longer.”

And different managers have approached the phrase in different ways. ElmTree refers specifically to “newly constructed, mission critical and operationally significant industrial and office assets” on its website. In December, PGIM Real Estate also provided a $356 million loan to Stockbridge Capital for the acquisition of an industrial property portfolio. In the transaction’s announcement, Bryan McDonnell, PGIM Real Estate’s head of US debt and chair of global debt, noted: “To that end, these assets are mission-critical to their supply chains – strategically located in close proximity to large population centers and labor pools and provide best-in-class physical attributes. Additionally, the investment-grade tenancy further positions this portfolio for success while mitigating any short-term risks.”

The ensuing market volatility over the past year, however, has also changed the underwriting and due-diligence process for all transactions, including ones involving mission-critical assets. Koman noted that the firm has started “digging deeper into fundamental market statistics like vacancy, absorption and rental statistics more than ever now.” The firm also conducts interviews with the property management team to understand how a specific asset compares to the rest of their real estate portfolio.

“It has added another page or two of more questions and more in-depth thinking and analyzing on an asset level basis,” he said.