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[Interview] Industrial real estate

Ares Management sees rental demand-led growth in US properties

Value-add, development opportunities likely to fare better in markets with record-high valuations

Oct 21, 2021 (Gmt+09:00)

Thomas Mcgonagle, managing director of the Ares Real Estate Group
Thomas Mcgonagle, managing director of the Ares Real Estate Group

Industrial properties in the US will likely continue to outperform other types of real estate, driven by significant rental growth in the e-commerce sector, said a senior executive of Ares Management Corp.

The Los Angeles-based investment firm has been an active buyer and developer of industrial real estate in the US for the past 11 years, overseeing approximately $17.6 billion of aggregate transaction volume. 

"We believe that rental growth will continue to drive significant organic growth across the sector.  Additionally, we expect significant growth ahead with e-commerce," Thomas Mcgonagle, managing director of the Ares Real Estate Group, said in an email interview on Oct. 21.

Specifically, the US investment firm targets industrial properties with a diversified tenancy in strategic locations, which can appeal to the broadest range of potential tenants and minimize long-term capital requirements.

"Ares’ industrial team believes that these types of properties and projects offer downside protection during a market correction and can enhance overall returns through market cycles."

With valuations sitting at or near all-time highs, he recommends value-add and development opportunities to earn higher returns.

Mcgonagle, an ex-senior managing director of Black Creek, joined Ares after Ares acquired the US industrial real estate investor in July of this year. At Ares Management, he oversees its US industrial real estate equity portfolio.

This email interview was conducted ahead of his speech at the ASK Conference 2021 on Oct. 27, hosted by The Korea Economic Daily. 

The following is the full transcript of the interview.

What is the current outlook and what are the key drivers of growth for the industrial sector? 

"Industrial real estate continues to outperform other property types, particularly Class A and B bulk and light industrial properties located in tier-one coastal and tier-one inland logistics markets. These target markets typically have the least amount of volatility in vacancy rates from peak to trough. Over the past 10 years, market rent growth and core cap rate compression in the sector have resulted in consistent value appreciation across institutional-quality, well-located properties."

"We believe that rental growth will continue to drive significant organic growth across the sector.  Additionally, we expect significant growth ahead with e-commerce. Historically, e-commerce growth has averaged 10% to 15% annually, with growth accelerating to 20% to 30% in some markets throughout 2020. E-commerce still only accounts for approximately 15% of total sales (US Census Bureau, February 2021), and is expected to grow to over 30% during the next ten years (Green Street, Q1 2021)." 

What are the key components that Ares’ industrial team looks for when evaluating industrial opportunities?

"Ares’ industrial team acquires institutional-quality properties with a highly diversified tenancy in strategic logistics locations. The team believes that these types of properties and projects offer downside protection during a market correction and can enhance overall returns through market cycles."

Institutional-Quality Properties:

• Ares’ industrial team acquires highly functional buildings with generic finishes to minimize obsolescence, minimize long-term capital requirements and appeal to the broadest range of potential tenants.

Highly Diversified Tenancy:

• Ares’ industrial team acquires properties with durable tenancy that is diversified across end-user industries and lease term duration to provide a predictable and growing income stream with reduced volatility.

Strategic Locations:

• Ares’ industrial team acquires properties in targeted high-barrier to entry markets and select secondary markets with long-term income growth potential with an overweight emphasis on the top-tier national distribution markets. These markets are generally characterized by the following and are shown in the following graphic:

▪ Key distribution hubs; access to highway, airport, rail and seaport infrastructure
▪ Proximity to large population base
▪ High barriers to entry; supply-constrained markets
▪ Strong institutional investor demand
▪ Rental growth rates consistently higher than the national average

Where are we finding the most value when evaluating industrial opportunities? 

"In the current market environment, where core pricing is at or near all-time highs, we believe that value-add and development opportunities are best suited to capture excess value above core pricing and yields."

▲Who is Ares Management Corporation and what has been the firm’s accomplishments in the industrial space to date?

"Ares Management Corporation is a leading global alternative investment manager offering clients complementary primary and secondary investment solutions across the credit, private equity, real estate and infrastructure asset classes. By collaborating across our investment groups, we aim to generate consistent and attractive investment returns throughout market cycles." 

"In July 2021, a subsidiary of Ares Management acquired 100% of Black Creek Group’s US real estate investment advisory and distribution business. Black Creek brought to Ares Management a vertically integrated platform specializing in the industrial sector."

"The team has been actively investing in industrial real estate in North America over the past 27 years with more than $22 billion of historical industrial acquisition and development volume: it reflects all industrial acquisitions and development gross investment, including future costs, and future commitments across multiple Black Creek/Ares-sponsored industrial investment vehicles from 1994 through June 2021. This includes 1,484 buildings encompassing more than 277 million square feet, as of June 30, 2021." 

"From mid-2010 through June 2021, Black Creek has been recognized as a top three acquirer and developer of US industrial real estate, averaging more than $1.5 billion of annual industrial property acquisitions and development over this time, excluding portfolio transactions and development sites (Real Capital Analytics, 2011-2020)."

"Additionally, during this time the industrial asset management team executed more than 1,180 lease transactions nationally, totalling approximately 86 million square feet. Black Creek’s industrial senior leaders have extensive knowledge of the sector, developing nearly $8 billion of industrial properties, totalling 220 projects and approximately 95 million square feet." 

"We are pleased that Tom McGonagle, Managing Director, and the Black Creek were recognized in Globe Street Real Estate Forum’s September 2021 edition as Industrial Influencers of the Year."

What are the competitive advantages of Ares’ industrial team?

"We believe the Ares’ industrial team are some of the most strategically positioned to capitalize on the opportunity in industrial real estate today. In our view, the team’s most significant competitive advantages include:

Experience and Sponsorship:

"Ares’ industrial team’s senior leaders have on average over 25 years of commercial real estate investment, development, accounting and finance, and operating management experience. During that time, the team 
has worked for public REITs, private equity real estate firms, institutional asset managers, national industrial developers and global investment banks. In addition, the team has a successful institutional track record, having sourced, acquired, developed and managed properties for seven primary industrial funds since 2010."

Established National Operating Platform with Local Market Knowledge:

"Ares’ industrial team, including those members who joined as part of the Black Creek acquisition, have been successful in building and managing several large national industrial portfolios. Ares’ industrial team is comprised of more than 130 full-time employees, including dedicated, seasoned leaders with demonstrated experience in acquisitions, development, asset management, leasing, investment management, accounting and reporting and capital markets. Using a decentralized operating platform, Ares has greater local access to transactions, tenants and properties, which we believe leads to successful industrial operating performance."

Extensive Deal Sourcing Capabilities:

"Ares’ industrial team has been an active buyer and developer of industrial real estate in the US for the past 11 years, overseeing approximately $17.6 billion of aggregate transaction volume. More importantly, the team has the infrastructure in place (people, processes and platform) to execute on two to three times this annual level. Ares’ industrial team believes that our on-the-ground, experienced teams have the relationships and ability to source and quickly execute on attractive strategic transactions, including off-market transactions and smaller individual property transactions in scale, across the investment spectrum."

In-House Construction and Development Experience:

"Ares’ industrial team has an extensive history of developing industrial properties and our in-house development team is responsible for sourcing and entitling land, managing local contractors and overseeing the construction of Class A industrial properties across the country. Additionally, the Ares industrial team has an in-house construction management team comprised of dedicated professionals who are responsible for managing annual tenant improvement and re-development projects."

Data-Driven Investment Process:

"Currently, Ares’ industrial property ownership footprint and local team presence in targeted top tier US industrial markets provides the team with extensive, real-time intelligence and data on certain key factors impacting industrial real estate. These include both macro factors, such as occupancy trends and supply/demand dynamics, as well as micro factors, such as specific tenant demand, rental rates and individual transaction details."

"Ares’ industrial investment process starts with top-down research combined with the bottom-up in-house analyses from the on-the-ground acquisitions, development and asset management teams. Ares’ industrial team believes that this multi-pronged approach to market intelligence enables us to move swiftly and efficiently within our target markets to capitalize on a diverse range of opportunities across the industrial sector."

How is Ares able to generate attractive deal flow given the increased competition within the industrial sector? 

"Ares’ industrial team capitalizes on our vertically-integrated platform, which includes people and processes on the ground, in order to source distinctive and attractive deal flow. From mid-2010 through June 2021, Black Creek was recognized as a top three acquirer and developer of US industrial real estate (Real Capital Analytics, 2011-2020. Excludes portfolio transactions and development sites); however, the industrial real estate market continues to be extremely fragmented. By having our operating teams on the ground – close to tenants, brokers and our properties – we are able to source a significant number of off-market deals."
 
"Additionally, our ability to execute across the risk spectrum (core, value-add, and development), makes Ares Management a unique owner and manager of industrial properties. We also believe that our reputation for moving through diligence efficiently and closing on a timely basis makes us a preferred buyer in certain competitive bidding scenarios." 

Yeonhee Kim edited this article

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