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The Key to the First 6 Months of 2024 for Foundry’s Development & Investment Platform: Niche Markets
Foundry Commercial’s Development & Investment (D&I) platform has kicked off 2024 with a bang… closing $300M worth of deals in the first six months alone. This impressive deal volume has largely been found in three unique areas: office to industrial conversions, industrial outdoor storage (IOS) transactions, and necessity-based retail center (NBR) acquisitions. For the Foundry D&I team, maintaining a competitive advantage is always a priority, and each of these niche markets has provided opportunities for Foundry to stand out.
Office Demo to Industrial Conversions
The COVID-19 pandemic brought what has proven so far to be a lasting impact on both the office and industrial real estate markets. With an uptick in remote jobs and work from home, the demand for traditional office space has deteriorated. At the same time, we have seen a significant increase in demand for industrial space, driven by a surge in e-commerce and the return of manufacturing from overseas. This has created opportunities to convert unused and underused office into industrial.
While an e-commerce surge has led to supply shortages in the industrial segment, office to industrial conversions have been a piece in solving this puzzle. This trend is still in its early days, but Foundry’s D&I platform has already found success. Our D&I team has set out, looking for opportunities across the Southeast to demo underutilized office buildings in favor of developing industrial projects on the land. Foundry has closed on or is in the process of doing at least four of these conversions now. One example of the team’s most notable success stories in this area is Horizon Landing in Dallas.
One reason Horizon Landing provided the perfect opportunity for an office demo to industrial conversion is because of its location. Situated in the Airport North submarket of Dallas, in close proximity to DFW Airport, Horizon Landing did not face hurdles that sometimes arise during conversions, such as pushback from surrounding residential areas and rezoning issues.
Additionally, the office building was already vacant, so the Foundry team could begin developing industrial on the site immediately. With the building now demolished and construction underway, plans include building 337,000 square feet of Class-A industrial warehouses with an additional 2.4 acres of outside storage which could accommodate 70 trailer parking stalls. Construction is expected to be complete in Q2 of 2025.
Keeping a close eye on current trends and continuing shifts in both the office and industrial segments, Foundry D&I deal principals believe this trend will continue. So far in 2024, our D&I platform has closed four new conversions and is eyeing additional, similar opportunities.
IOS Transactions
In recent years, IOS, which is short for Industrial Outdoor Storage, is best explained as industrial-zoned land primarily used for the storage of trucks, trailers, vans, large equipment, containers, and materials – has emerged as another niche sector we’re investing in. IOS sites flourish when located in infill areas, creating advantages that other industrial sites don’t always have, like freeway access and closeness to shipping infrastructure. These factors have not only set IOS apart in the industrial sector, but they have also made this asset class progressively more desirable in a post-pandemic world.
Two years ago, Foundry Commercial entered the IOS space and built a portfolio of seven assets valued at approximately $100 million. The D&I team has found themselves with an advantage in the IOS world because of the way the Foundry platform is built and partnerships that have formed with capital and other interested parties.
A common drawback with IOS is that most of these individual investments are often $10M or less, leading many investors to think that IOS sites are not worth pursuing due to the time, fees, and fixed costs involved in their development. But for Foundry’s D&I team, an established Foundry platform has been the game-changer. The difference lies in how the investment side and operations business can work together and pull the team forward. Foundry is actively developing industrial projects in just about every major market in the Southeast. With the nearly 120 brokers across the Sun Belt who can source deals, to the construction managers who are already local and plugged in to the local permitting agencies, to the already established vendor relationships, to the industrial reach Foundry has already established, developing and redeveloping these deals has been faster and less cost-intensive for Foundry than it has for competitors who shy away from these types of deals.
As an example, Foundry has an IOS investment at the Centennial Yards property in Nashville, Tennessee. The property is primely located only fifteen minutes from Downtown Nashville and only one mile from I-40 Interchange, providing the proximity to convenience and access factors that help IOS sites thrive. Foundry acquired the site and redeveloped the existing structures to create as many as three new IOS yards. Foundry has also recently closed a new partnership with an international insurance company to build a portfolio of these assets worth in the hundreds of millions of dollars.
Pryse Elam, President of D&I and CIO at Foundry, notes that while IOS is a smaller niche asset class, Foundry’s strategy is unique, and he believes it will bring success. By utilizing all sides of the platform and the ways in which Foundry is already established in our markets, plus a strategic partnership with Manulife Investment Management, Foundry has emerged as a leader in the IOS asset class.
Acquiring NBR Centers
The final niche market that the D&I team is currently focused on is the acquisition of necessity-based retail centers (NBR). For Foundry, the NBR story has been a similar one to IOS; the entire platform working together is the factor that propels the team forward, allowing them to work these smaller deals that may not seem worthwhile to others in the CRE industry.
These centers are typically 15,000 – 20,000-square-foot retail outparcel buildings, adjacent to a larger anchor, and each holding somewhere between 5 and 10 tenants. The rise of this niche sector has also been propelled by shifts that occurred in the retail segment during and post COVID. During the pandemic, individuals valued convenience; NBR centers provide that convenience. But like IOS, hovering at $20M or less per deal, NBR can be not only inefficient to acquire but also inefficient to operate. That’s where Foundry’s cross-platform strategy sets our company apart again, making these deals desirable for both the services and D&I sides of the business.
Right now, the platform manages and leases 70 million square feet of space across the Southeast and Texas, with a large portion of that being retail. One example of Foundry’s current success with NBR acquisitions is in Charlotte, North Carolina. In April, Foundry purchased Shopton Square, a fully occupied 24,250-square-foot neighborhood shopping center. Foundry Commercial’s retail investment strategy prioritizes this necessity-based retail asset class, which helps to ensure resilience in the face of evolving retail trends. With ownership of Shopton Square, Foundry again assumes leasing and management at the property, and plans include cosmetic upgrades, parking lot repairs, landscaping improvements, and power washing.
The experience and network already in place make it easy for Foundry retail brokers to source these deals and retail property managers to operate them. The D&I team is still in the very early stages of building a portfolio of these assets, but with more deals on the horizon, aggregating and operating more NBR centers is the goal.
Looking Ahead: Potential Future Outlook
Looking to the future, Elam states that Foundry’s D&I team is paying close attention to the 10-year Treasury rates. Expecting the rates to remain fairly stable, the expectation is that market conditions will return to a more normalized condition parallel to what existed before the pandemic.
“We have seen tangible ways Foundry’s platform as a whole sets us apart in these three investment types,” said Elam. “Moving into the second half of the year, assuming market conditions remain stable, we will continue our strategic focus in these areas. Utilizing all facets of the Foundry platform in these types of deals grants Foundry’s D&I platform the competitive advantage we are always striving for.”