The Investment Strategy – Cohen Asset Management
2011/2012 INVESTMENT STRATEGY –TARGET MARKET FOCUS
Jason H. Haas
Bradley S. Cohen
In executing the investment strategy highlighted in Cohen Asset Management’s proprietary Target Market Study, we contemplate making investments in industrial real estate assets located in select major metropolitan markets across the United States (“Target Markets”). Based on current market conditions, we have segmented our Target Markets into “Primary Focus Markets” and “Secondary Focus Markets” as summarized in the table below.
- All of the markets included in the table below are considered Target Markets of CAM, however, we expect to place greater emphasis on those markets listed as Primary Markets. In designating markets as Primary Markets consideration was given to current market conditions and the resulting opportunities we see, the high quality of those markets, and the depth of Cohen Asset Management’s relationships in these locations.
- As market conditions change, market allocations may change in response to pursuing the most compelling investment opportunities however; we expect the theme of a strong focus on both the west and east coasts to continue for the foreseeable future, as evidenced by Cohen Aseet Management’s offices being strategically located in Los Angeles and Northern New Jersey.
PRIMARY FOCUS MARKETS
SECONDARY FOCUS MARKETS
|West||40% – 60% 1||West||0% – 10%|
|East||35% – 50%||East||0% – 10%|
|Southwest||10% – 25%|
1 Estimated investment allocation in each region.
Industrial Sub-Property Types – Current Trends and Opportunities
As Cohen Asset Management has detailed in its Target Market Study, market selection is only one consideration in defining the value-added investment strategy in industrial real estate. Of equal importance is an understanding of the sub-property types in industrial real estate and the key drivers of performance as it relates to these sub-property types. Cohen Asset segments the industrial sector by three sub-property types:
- Large Warehouse – 400,000 sf and greater, Uses: typically regional or national distribution
- Small Industrial – Under 400,000 sf, Uses: includes manufacturing, local/regional distribution
- Research & Development/Flex – Typically higher office finish, Uses: light manufacturing, technology
Please refer to Target Market Study for more detailed definitions and discussion of the industrial sub-sectors
Noted below are several observations on the industrial property sector and opportunities that CAM is currently seeking to exploit
The performance of assets in the warehouse rental market varies significantly, especially regarding size. If one is looking for assets with the lowest variability in income performance along with the strongest overall trends, the smaller assets appear to provide such performance.
With availability rates in check, the income performance for the smaller ranges has outperformed the larger ranges. The largest assets fare the worst from an overall income perspective, in part due to high rates of construction since 2000 and the fact that this product tends to be more susceptible to changes in consumer-related behavior as compared to business-to-business tenant activity.
- The manufacturing sector has been a bright spot throughout most of this recovery. With the weak dollar and recovering global economies continuing to drive strong export growth, the sector should continue to see respectable growth. The Federal Reserve Bank conducts detailed surveys to measure the percent of equipment being utilized in the manufacturing sector and this indicator is up from a level below 65% set early in 2009. The figure climbed to the 75% range by May of 2011 before stalling in September and October.
The availability trends in the largest assets have fared poorly in recent years due to the heavy pace of construction. However, the specific market encounters problems when supply is delivered in metropolitan areas where space fundamentals and structural issues in the marketplace make development inappropriate and when supply is somewhat ahead of the fundamental economic demand for space. This is especially true when macroeconomic factors negatively impacting the national economy come into play, as they have since late 2007.
As shown in the following chart, the large format warehouse pipeline has the lowest quantity of space slated for delivery in 2011 and 2012 since construction downturn of the early 1990s. As a result, the supply/demand balance is more likely to tilt toward investors’ favor as economic growth resumes. Investing in this sub-property type requires detailed attention to competition from new assets aimed at changing patterns in demand from logistics operators as there are potential structural shifts in the national path of goods movements.
- With strong trade growth—especially from emerging economies in the Far East—port-driven markets have been among the best-performing and most stable industrial markets during the recession and recovery. Industrial investors have and continue to develop strategies that target port markets, taking advantage of the trend toward increasing globalization, which in turn, through steady growth in trade volumes, drives demand for space. At the same time, because port markets are generally mature and border a major body of water, they are often more space-constrained, which makes new construction more difficult and costly.
We believe International trade will continue to drive industrial demand, with the dollar continuing to play a key role. While exports have already surpassed their prerecession peaks, imports remain below their pre-recession levels. Imports, however, are growing and are expected to surpass their pre-recession peak level in the second half of 2011, which is particularly good news for industrial investors as imports have a larger direct effect on industrial space demand than exports. Wary of the economic uncertainties, we believe inventory levels remain unsustainably low. Once robust and stable consumption growth is evident, inventory accumulation will need to proceed at an even more rapid pace.
- Continued investment by the nation’s railroads throughout the recession has led to improved rail efficiency. With reduced bottle necks at West Coast ports, the share of total trade volume is now growing there. Rail transportation is more cost effective than shipping by truck and less affected by regulatory uncertainty, making it more appealing for the majority of shippers. With the recent and continued investment into the nation’s rail infrastructure, rail shipping should continue to gain market share at the expense of long haul trucking. Path of goods markets with good rail infrastructure are well positioned to capitalize on increased rail shipping and will see stronger demand growth than those markets with minimal rail networks.
Performance of this sub-property type is highly cyclical with favorable economic trends driving outsized gains during certain investment periods. The tech sector turned the corner in 2010 and is driving healthy leasing again in key submarkets. This tech driver is considered to be a key factor to growth in the coming decade. As firms grow, research and development spending increases, and the size and number of tenants in these types of buildings also grow.
Demand for high tech products remains robust and we’ve already seen pockets of demand return to high tech markets such as the target markets represented in Northern California.
 “Industrial Property Performance and Building Functionality,” Yajie Zhao, MIT Center for Real Estate, September 2003.