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Posted Feb 17, 2023

An Interview with Andrew Holmberg, Principal at Berkeley Partners

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In a recent conversation, Managing Director Brandon Sedloff sat down with Andrew Holmberg, Principal at Berkeley Partners, for an in-depth conversation about the industrial real estate landscape, investor expectations in 2023, ESG reporting, and more.

Here is a portion of that conversation, edited for clarity. Watch an on-demand recording of the entire back-and-forth here.

Brandon Sedloff: Tell us about light industrial, the markets you focus on, and why you chose those markets.

Andrew Holmberg: We're buying 150,000-square-foot properties to serve various businesses that want to be closer to population centers. We're focused on the fastest-growing major metros across the U.S., where you have growing demand and a lot of barriers to new supply.

Particularly with COVID, the story has been about people moving into the Sunbelt. And while that was true, it also led to very aggressive pricing. That pushed us to focus more on markets like Boston, Philadelphia, Atlanta, and Nashville, where supply-demand for industrial is very much in the landlord's favor.

Now with pricing disruption, coupled with the fact that the yields have shifted, we're looking again at the Sunbelt.

Brandon Sedloff: If such high demand exists, what drives the constraint around supply?

Andrew Holmberg: In a city like Boston, you're competing against other property types also in high demand, like life sciences or housing, which means good development sites are hard to come by. In some cities, you'll see older industrial getting acquired and scraped to build out those other commercial spaces.

Brandon Sedloff: And are there macroeconomic indicators that you look for to give you a signal on the health of the markets?

Andrew Holmberg: We're looking at all the major high-level economic indicators–GDP per capita, population growth, individual household income, et cetera. The big thing is pairing that with forms of supply constraints and focusing on areas where you've got a diversity of demand drivers.

We just bought a three-building portfolio in Phoenix, for instance. Two of those buildings were right on Intel's campus in Chandler, where they are putting $30 billion into building a new fab. These are two standalone, 30,000 square foot, higher power, good, clear height buildings, sitting right up against one of the country's biggest infrastructure projects.

Chandler's also a rooftop-driven area. You've got high-end retail, a lot of houses. Demand for that space will stay the same even if the housing market goes down 15 or 20%. That project is going forward and will drive a lot of demand from service providers who want to be close to Intel's big project.

The other building was right next to the airport, which will also drive demand.

That's what we're looking for–where the long-term demand for the space doesn't have much to do with questions like is housing going down or we going into a recession?

Brandon Sedloff: Your career spanned the early 2000s and The Great Recession. What lessons did you learn through those downturns?

Andrew Holmberg: The biggest lesson I learned was that you got to watch your leverage. Over the last few years, we stuck to property-by-property leverage, financing with local banks, even if we were paying a bit more. Having relationships with banks where you can pick up the phone and work with them really matters.

Some of the bigger banks would lend down if you went for more aggressive portfolio financing. But those were often floating-rate loans, and we stayed away from that. We generally did fixed rates to minimize that risk and ensured we were disciplined in our underwriting.

You also must ensure you've got reserves to deal with a major tenant move-out or refinancing event. You never want to get stuck. I think that was a big lesson from ‘07.

Brandon Sedloff: Talk to me a little bit about how investors’ demands have evolved.

Andrew Holmberg: The biggest shift we've been seeing over the last year or two is around ESG. Investors are focused on that and want to understand how you're meeting not just environmental but also things like governance and diversity of the team. We are pushing hard to meet all those demands. Maybe it's only some investors asking for it at this point, but it feels like it's going to become a must-do.

Brandon Sedloff: Over the last 5-6 years, there's been a significant push to close what we call the transparency gap in transparency.

Most people accept that to be a good fiduciary, you need to be prepared to share a minimum level of information with your investors. We're seeing a substantial push around ESG, specifically from European investors and some state pension funds who have made their own commitments to minimum requirements over the next two or three decades.

So, what will the next 12 months bring to the market?

Andrew Holmberg: I think it will be a stop-start over the next 12 months. But we'll be surprised at how quickly we come to a stop and how quickly we then start back up again, especially once we get a turn from the Fed and inflation feels like it's under control.

Want to get the rest of the conversation? Watch a recording on-demand now.