Some large institutional investors are focusing more on industrial property leased to a single tenant, signaling one-way commercial real estate buyers are positioning to increase purchases in anticipation of lower interest rates.
ElmTree Funds, Fortress Investment Group and Morgan Stanley are in various stages of launching the sale of stock in new real estate investment trusts not tied to the wider market and, in the case of Fortress and ElmTree, have already begun assembling portfolios of industrial property, including manufacturing centers.
They would be the first nontraded REITs launched this year, according to CoStar data. There were eight last year.
The filings further a trend that emerged in the second half of last year where big-name buyers set up REITs to raise funds to tap into what is expected to be a wide range of investors hoping to pick up valuable properties at reduced prices.
Nontraded REIT securities are publicly offered to accredited investors but are bought and sold in private transactions, with their values set by the net value of holdings and the number of shares outstanding. As a REIT, they offer investors the potential of high returns and tax benefits.
The activity comes as the commercial real estate industry is widely expecting the Federal Reserve will begin reducing borrowing costs this year.
Interest rate cuts were a major topic at the Mipim real estate conference last week in Cannes, France, where tens of thousands of people gathered at the industry's largest global forum.
"This year, the expectation of a lot of sellers is that we will see some swift base rate cuts and a reduction in the cost of borrowing, which is such a key driver for this industry and particularly in the net-lease space, where long-dated leases act as quasi-bond type instruments,” Christopher Mertlitz, head of European investments at U.S. net lease specialist W.P. Carey, told CoStar News in an interview.
High-interest rates of the past two years have cut into the purchase of net-leased properties that are rented out to tenants who cover everyday expenses including taxes, insurance and common-area maintenance. Tenants generally lease the properties for long-term periods with fixed rental rent rate increases.
The higher cost of purchase loans has eaten into those rent escalations.
Focus on Industrial
Industrial properties are expected by some to be the primary target of the latest nontraded REITs being formed.
“Industrial is becoming more preferred as investors are reducing exposure to office and industrial has been the main beneficiary,” Randy Blankstein, president of net-lease property brokerage firm The Boulder Group in suburban Chicago, told CoStar News in an email.
Industrial net-lease property sales fell to $6.8 billion last year after approaching $17 billion in 2022, according to CoStar data. Industrial properties made up 22% of net-leased property sales in 2019, according to CoStar data. That percentage grew to 37% last year.
“Many REITs coming to market as sponsors are also noticing the success of perpetual life funds such as Blackstone Real Estate Investment Trust and are looking to tap into the vast investment demand for private REITs,” Blankstein said.
Blackstone REIT is the largest of the nontraded REITs with $109 billion in real estate property investments as of the end of February.
New REITs
ElmTree, a Clayton, Missouri-based private equity firm, is launching ElmTree Industrial Trust and ElmTree Industrial Access Trust, two REITs that intend to work in tandem to acquire and actively manage a diversified portfolio of net-lease industrial properties across the United States.
“Industrial real estate has long been a cornerstone of the U.S. economy and we believe the sector’s strong fundamentals will remain attractive over the long term,” James Koman, ElmTree’s CEO and founder, said in a statement. “With the growth of e-commerce, the reshoring of supply chain operations, and the movement from just-in-time inventory to just-in-case inventory, we believe that tenant demand will continue to outpace supply for the foreseeable future, resulting in positive net absorption and rental growth going forward.”
For their initial investment, the two REITs acquired a 169,543-square-foot industrial property in the St. Louis market, according to ElmTree. The property is 100% leased to BASF, a European multinational company and the largest chemical producer in the world.
Fortress Investment, an American investment management firm based in New York, is readying the launch of Fortress Net Lease REIT, according to a filing with the Securities and Exchange Commission.
The REIT has already assembled a portfolio of six industrial properties for $142.7 million.
In January, Fortress Net Lease REIT acquired a 212,000-square-foot industrial property in Parkesburg, Pennsylvania, for $21.8 million. The property was subsequently leased back to the seller, Victory Brewing Co., under a 25-year net-lease agreement, according to CoStar data.
The last of the REITs in the works, according to SEC filings, is North Haven Net REIT, an offering led by MSREF Real Estate Advisor, a wholly-owned subsidiary of Morgan Stanley.
North Haven has yet to begin building a portfolio.
Last year, new nontraded REITs were set up by Cohen & Sters, BentallGreenOak, Blue Owl Capital, ExchangeRight, EQT Exeter, Inland Private Capital, Invesco Real Estate and Sculptor Capital Management.