Minneapolis-based Ryan Companies hasn’t been shy about investing in light industrial properties in the Twin Cities market.
This isn’t surprising. The demand for this asset class – which CBRE defines as industrial facilities smaller than 120,000 square feet – has been soaring before and during the COVID-19 pandemic.
Earlier during the pandemic, Ryan as part of a joint venture acquired a $16 million light industrial warehouse facility in Edina, Minnesota. Earlier this year, Ryan closed on its acquisition of the Minco industrial portfolio in Minnetonka, Minnesota. This $12.5 million portfolio includes three industrial buildings totaling 168,315 square feet.
We recently spoke with Shawn Moore, vice president of acquisitions and assets management with the Minneapolis office of Ryan Companies about why the company is so eager to invest in light industrial and why this asset class has generated such demand from investors.
Let’s start with the obvious question: What do you consider to be a light industrial facility?
Shawn Moore: Different people have slightly different definitions. But in general, light industrial facilities have lower ceiling heights than do bulk distribution facilities. They have less intensive truck traffic. They are, in general, less intensive from a traffic perspective. They also might have a bit more office space than other industrial facilities. A building’s square footage might be 25 percent office and 75 percent warehouse.
What is really interesting to us is that light industrial buildings tend to be more infill. You tend to find them a little closer to population centers. The bigger bulk distribution buildings tend to be on the fringes of urban areas and very close to highways.
Why are these buildings so attractive to Ryan?
Moore: Ryan has been and continues to be very active with our development and construction arms in the bulk distribution space. We have done a lot of work with clients like Target, Amazon and Kroger. The light industrial acquisitions we see as a great complement to that construction and development activity. It is a slightly different part of the industrial category that still benefits from many of the same characteristics in terms of tenant demand and investor demand. We look at the light industrial acquisitions as a great complement to the rest of our business.
We also like the idea that light industrial facilities tend to attract smaller tenants. There are times when those tenants end up growing. They might then need a new building. We can build or develop something for them. We see synergies there. We can work with these tenants when they are in light industrial buildings and when they are ready to move to a bigger space. And because we also have expertise in property management, we can also provide these tenants that service, too.
Is it difficult finding light industrial buildings in which to invest?
Moore: There are a lot of buildings in this space. That being said, they are in demand, both from tenants and also from other investors. There is a deep pool of buildings but quite a lot of competition to acquire them. The buildings we choose to pursue are those in locations that are close to population centers. We think that is where the tenant demand is the greatest. The tenants look to these buildings because they want that proximity to their customers. We also look for buildings that are in close proximity to a strong labor pool. Tenants want to locate in buildings that are close to a large number of workers, too.
With the three light industrial buildings that we recently purchased in Minnetonka, half of the owners of the businesses in those facilities live within five minutes of those properties. At the same time, these buildings are close to their customers. Much of their client base is in the western suburbs of Minneapolis. From the Minnetonka facilities, they can service all their clients within a 10- or 15-minute drive. Those type of locations are in the greatest demand from tenants.
How about amenities? Are there any amenities that you look for when acquiring light industrial buildings?
Moore: It’s mostly about location and functionality. Given our construction expertise, we like projects where maybe a little bit of renovation needs to be done. Some of the facilities we recently acquired are in good shape but could use some minor improvements. Given our construction expertise, we do not shy away from projects that have a greater need for renovations.
Is the office component important when looking at these facilities?
Moore: That’s really not the major concern of tenants looking for space in these buildings. The tenants in these buildings have an industrial warehouse need. If they are more concerned with office space, they’re usually looking at a pure office building or more of a single-story office-flex type project. It is the warehouse functionality that is driving tenants to these light industrial spaces. Some tenants might have a sales team that they sit in the office space. But most of the tenants that we work with are focused almost entirely on the warehouse space.
Do you think we’ll see an increase in the supply of these light industrial facilities?
Moore: One of the reasons we like these buildings is because many of them are in infill locations close to population centers. It is challenging, though, to build new projects in these locations. Many of these infill locations are fully built out already. There is not a lot of vacant land in these locations. To build new, you often must redevelop an existing site, which can be more costly. That is another reason we like this segment and these locations: The new construction supply is relatively muted. That makes it easier for us to attract tenants to these spaces. There isn’t as much new construction for them to choose from.
Do you think demand will continue to rise in the coming months for these light industrial spaces?
Moore: My crystal ball is always somewhat murky, but we are making these acquisitions and looking to acquire more properties this year. We expect to see consistent demand for light industrial in the future, at least for the foreseeable future.
