Five Questions for: BGO Managing Director Michael Glimcher

In The DI Wire’s latest installment of “5 Questions for,” the editorial team interviewed BGO managing director Michael Glimcher about industrial real estate trends, including the firm’s focus on “modern industrial.” BGO is an international real estate investment firm with $83 billion of assets under management, including more than $28 billion of industrial assets, which they manage on behalf of institutional and retail investors.

The DI Wire: What do you consider “modern industrial”? Could you provide some examples of properties that would meet this definition?

Michael Glimcher: Very broadly, we generally consider properties built after 2000 as modern industrial properties, but it is more about the condition of the building, as opposed to its age. We ask a lot of questions when considering a modern industrial property. For example, how tall are the ceilings? Modern buildings generally need taller ceilings to house newer robotics and automation. We look for properties that feature a clearance height of at least 28 feet, with many properties we look at containing ceilings that are 36 feet or higher. Another question we ask is, “What is the power capacity?” Modern industrial properties, like data centers, tend to have more robust power needs. We believe that new, modern buildings with sufficient height and power will enable tenants to deliver more volume effectively, resulting in meaningfully greater profitability for the tenant’s business. Tenants will have the flexibility to pay higher rents for modern buildings, in a strong labor market with ample transportation connectivity, without sacrificing the tenant’s profitability.

So, yes, with about 70% of today’s U.S. industrial inventory built before the year 2000, much of the current industrial stock is outdated, but we may consider an older building if we believe it could be updated for modern usage. That is one of the benefits of industrial real estate – it is incredibly adaptable to a variety of uses.

DIW: What do you find compelling about the industrial real estate sector?

MG: What I really find compelling about the industrial real estate sector is that it is, I believe, a very nuanced asset class and a cornerstone of today’s global economy. With the evolution of technology and end client demands, industrial real estate must grow and evolve as well. As more consumers turn to online retailers, these retailers need more and larger warehouse space. Many companies also learned through COVID-19 and recent political events the value of supply chain resilience and nearshoring.  Furthermore, we expect that, as more businesses incorporate advanced robotics, automation and artificial intelligence into their industrial buildings, this will contribute to a significant increase in demand for more modern industrial assets. The lack of supply of modern industrial properties, along with a robust investment from tenants, could, in turn, lead to a greater chance of lease renewal. I feel that all of this has contributed to the increase in demand for industrial real estate recently.

I also think industrial real estate is very compelling in the potential advantages that it offers – You generally get tenants with stronger credit and longer lease periods, plus with a triple net lease, you can minimize a lot of your landlord obligations. Industrial also tends to be less susceptible to the fluctuations of the market and may offer significant diversification advantages. And, like most other forms of real estate, you may have the opportunity for important tax benefits. Of course, each individual should do their own research, but, to me, industrial real estate is a really interesting and vital sector.

DIW: What sort of geographic characteristics do you seek when considering an investment? Why?

MG: Location is something we think about a lot when considering an investment. First of all, we look for a location that has access to blue-collar labor. This is crucial for the effective operation of today’s industrial facilities. We look for areas with structurally low unemployment and rapid growth in industrial demand to help ensure a supply of labor in the area.

Along those lines, we also look for undersupplied locations with a large and growing population. Historically, some very strong demographic markets have lacked the manufacturing base to warrant industrial space, but this is changing with e-commerce and onshoring. I believe those factors are now contributing to an increase in the need for industrial space in these traditionally underserved markets.

Similarly, we are also looking for areas where there are supply constraints in place – high population density, difficult approval processes, challenging topography. We investigate these areas and see how we can capitalize.

Finally, we look for properties close to a large demographic base or a large distribution infrastructure. If there is access to a local population, nearby goods production or a distribution network, then that is something we definitely prefer.

DIW: Real estate investors can choose from seemingly countless options, from pure play strategies in a particular asset class to diversified option that investment in several types of real estate. In terms of industrial real estate, is a pure play focus a better strategy than diversified?

MG: That’s a really great question. Diversification is valuable when investing, whether it be within a specific investment fund or an individual’s personal investment portfolio. However, from a fund perspective, a pure play focus provides investors with options to manage diversification within their greater portfolio.

As we’ve discussed, industrial offers a number of potential benefits, and given the current trends and demand drivers, we expect that industrial real estate will continue to perform well in the near-term. At the same time, there is room for diversification under the industrial umbrella. When BGO looks to construct a portfolio of assets, we seek out a number of different types of industrial assets in a variety of desirable markets, including bulk distribution, light industrial, last-mile distribution, temperature-controlled logistics, data centers and many others.

DIW: According to CBRE, the overall industrial vacancy rate increased for the third consecutive quarter in Q3 2023, up 50 basis points to 4.2%; and according to CommercialEdge, part of the Yardi network, the national vacancy rate was at 4.6% in October 2023, up 20 basis points month-over-month. With these vacancy rates seeming to be tipping upwards, do you still feel that the current market is still a good time to invest in industrial real estate assets? 

MG: There are always reasons not to invest. If you dive in a little deeper to some of those statistics, however, you’ll discover that the vacancy rate has increased, but it’s been largely driven by the amount of supply that’s reached the market. In Q3 2023, CBRE also reported that construction completions totaled 168 million square feet – 64% of it vacant.  This is after the industrial market added 83 million square feet of vacant supply in Q2 2023.

Additionally, even with the increase in basis points, the industrial vacancy rate is still below the 10-year average. Furthermore, the average asking rent rose by 2.0% quarter-over-quarter and 9.1% year-over-year to a record $10.16 per square foot, despite this rising vacancy, again as reported by CBRE. These construction levels and record rents speak to, I believe, the demand for high-quality industrial assets, especially in areas like last mile delivery, e-commerce and mission-critical supply chain operations.

Past performance is never predictive of future results, but, as technology continues to evolve, supply chain resilience becomes even more prevalent and the use of e-commerce grows, we believe the demand for modern, superior industrial assets will continue to increase, potentially providing some compelling opportunities for those who can capitalize.

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