SparrowHawk, like most merchant investment firms, is carefully establishing goals and objectives for 2021. Projecting vacancy rates, evaluating leasing obligations, challenging expenses and optimizing net operating income for properties and portfolios are our highest priorities.
Perhaps a more compelling strategy question is whether we intend to be net buyers or net sellers in 2021.
On the surface, with industrial real estate being the most popular and productive CRE asset class, the answer seems obvious and clear. At the end of 2021 SparrowHawk wants to showcase the acquisitions that made us net buyers next year.
If we had our way, there would be asset acquisitions in markets where we already have a presence within our portfolio. Those markets could include Chicago, Indianapolis, St. Louis, Louisville and Greensboro/Winston Salem in North Carolina. These are markets where we already have a critical mass and can be operationally efficient. We know the landscape and have good relationships there.
At the same time, we would love to be expanding in certain other areas of the country. We like Texas a lot. Our roots are here, and we believe there is lots of opportunity. There always has been a strong correlation between population growth, the rooftops that are needed in expanding markets and industrial real estate. After all, the housing industry, and all the facets it includes, relies heavily on industrial real estate.
We also like markets including Kansas City, North Central Ohio (Columbus and Cleveland) and Detroit. Those markets may see expansion opportunities through gains in ecommerce and/or manufacturing. Ecommerce has been one of the most significant rivers of the economy. Covid has only accelerated the growth that already was taking place. And in terms of manufacturing, one of the outcomes of Covid also has been an increased willingness by users to expand materials and inventories on hand to avoid any delays that a disruption in the supply chain could cause.
So for all those reasons, and all those markets, SparrowHawk intends on being a net buyer in 2021. Unless …
The flip side of being an active player in the hottest real estate sector is that we see firsthand the impact this popularity is having on the market. Because of its strength, industrial real estate is no longer the less preferred real estate asset class that typically falls in line behind more glamorous asset classes—retail, multifamily, senior housing and office properties.
With so many investors looking to invest capital in industrial real estate, cap rates are being artificially compressed as competition for industrial assets pushes prices higher. That’s both good and bad news. First, certain investors are buying into the frenzy. In turn, traditional investors like SparrowHawk could elect to sit still until things settle down. Yet at the same time, we also must evaluate whether it could be in the best interests of our investment partners to capitalize on the frothy market and selectively sell some assets.
It is an interesting conundrum as we close out 2020 and look to 2021. Our intention is to be a net buyer in the weeks and months ahead. But only time will tell.
Alfredo Gutierrez is president of Houston-based SparrowHawk Real Estate Strategists. He has more than 35 years of experience in real estate acquisition, operations, investment and management.