REIT Titan Sam Zell Makes the Bull Case for Industrial Real Estate

a large building: REIT Titan Sam Zell Makes the Bull Case for Industrial Real Estate © Provided by Millionacres REIT Titan Sam Zell Makes the Bull Case for Industrial Real Estate

Sam Zell is a real estate visionary. He was one of the early leaders in using real estate investment trusts (REITs) to create value for investors. Zell famously sold his first office REIT, Equity Office Properties, to private equity giant Blackstone Group (NYSE: BX) right before the commercial real estate market collapsed during the financial crisis. He’s built two other leading residential REITs, enriching investors and himself in the process.

Now, Zell has his sights on another property type that he believes will be very rewarding in the coming years: industrial real estate. Here’s a look at why he and his team want to invest in the sector.

Battling over an industrial platform

Sam Zell currently controls office REIT Equity Commonwealth (NYSE: EQC). However, his team has been slowly selling off the office properties, cashing in on institutional investor demand for this relatively stable asset class. They’d hoped to use the cash to go bargain hunting but never found a compelling opportunity.

That led them to switch gears and look for an opportunity to build a new base in industrial real estate. They thought they found their ideal target in industrial REIT Monmouth Real Estate Investment Corp. (NYSE: MNR). Equity Commonwealth agreed to acquire Monmouth in an all-stock deal valued at $3.4 billion. However, a rival bidder in Barry Sternlicht’s Starwood Capital is working to scuttle that deal with an all-cash offer. While Equity Commonwealth recently sweetened its offer, that doesn’t seem to have been enough to win over Monmouth’s shareholders.

Why Sam Zell wants to get into industrial real estate

Zell and Equity Commonwealth CEO David Helfand recently laid out their case for industrial real estate in an open letter to Monmouth shareholders. They wrote: “Industrial fundamentals have never been stronger – more e-commerce means more warehouses; it is not the right time to sell.”

Instead of selling out to Starwood, Zell and Helfand believe Monmouth should merge with Equity Commonwealth so that the combined company can leverage their strengths and take advantage of the growth they see ahead in the sector.

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Zell and Helfand continued by writing:

The pandemic has accelerated the pace of adoption of e-commerce and next-day delivery, resulting in increased demand for industrial properties. While supply for these properties has increased, it has not kept pace with growing demand. We don’t view this imbalance as momentary — we are in the midst of a long-term secular shift in the logistics networks across the U.S. The recent growth and performance reported by industrial REITs are a testament to these outstanding supply-demand fundamentals.

They’re not alone in this assessment. According to a recent report by CBRE, the U.S. needs to add 330 million square feet of warehouse space dedicated to fulfilling online orders by 2025 to keep pace with demand. While the industry is building new supply, a myriad of constraints will make it hard for it to keep up with demand. Because of that, vacancy rates will likely remain low, which should continue driving up rental rates.

That long-term upside potential is why Zell and his team want to transition Equity Commonwealth to the industrial sector by acquiring Monmouth to accelerate this shift. However, even if that deal falls through, Zell will likely look for another opportunity to invest in the industry. His team has an extensive history of base building in new sectors and a cash-rich balance sheet to help finance its transition and expansion in the industry. They also have experience in the sector, as both Equity Office and Equity Commonwealth owned industrial properties in the past.

They’re already on the lookout for additional M&A transactions and smaller portfolio acquisitions. Meanwhile, they have extensive relationships in the industry that could yield partnership opportunities to develop an industrial platform from the ground up. Given the amount of warehouse space the U.S. needs in the coming years, Equity Commonwealth will likely have no shortage of opportunities to put capital to work in the sector to build a best-in-class industrial real estate platform.

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A megatrend that real estate investors won’t want to miss

Sam Zell and his team expect demand for industrial real estate to grow for the next several years. That’s why they want to transition Equity Commonwealth to that sector so that they can take advantage of this massive opportunity. While Zell might not get his first choice to acquire Monmouth, it seems likely that his team will pivot to another opportunity to build a base in the sector. His bullishness is another reason why real estate investors should seriously consider looking for opportunities to invest in the industry so that they, too, can capture its upside.

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