Alternative Investments/CRE 2025 Outlook Part 2

We looked at Alternative Investments/ Commercial Real Estate 2025 Outlook Part 1 in our last post. We will review self-storage, student housing, multifamily, and senior housing in that post. We will continue is Office, Medical Office, Industrial in this writing.

February 13, 2025

By Al DiNicola, AIF®
DST 1031 Specialist & Alternative Real Estate Advisor
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, Member of FINRA/SIPC

Retail, Life Science, Data Center and technology will be future featured articles. To access the previous post, click here. Alternative Investments/CRE 2025 Outlook Part 1 – DST Education and Market News

Office

There is a move in many sectors to increase office attendance. We have recently seen this on a federal level for a number of philosophical, financial and potential political reasons. The private sector companies have also begun to require in-person employees. These are in the form of mandates. Stay tuned to see if this strategy will work and create increased productivity.

Underperforming assets is the focus of discussion. Property owners may consider conversion into other uses (if local ordinances approve). Conversion into alternative uses may solve other demand for assets in some areas. Older buildings with high vacancy rates may simply not have the required demands of certain tenants. Recently an insurance company in Chicago vacated a much larger building and moved into a 40% smaller building. While there was a loss of rental space the rents were higher in the newer building, that provided better functionality and use for the employee. Better use may translate to more productivity. Tenants are demanding top tier properties.

There is also limited new construction created by a combination of higher interest rates and increased construction cost. Properties that can be delivered quickly (with tenant improvements) and quicker occupancy should be very appealing in many markets.

Many of the Delaware Statutory Trust (DST) offerings have been large credit tenants repositioning their real estate owned as a sale lease back. The sale enables the company access to cash for upgrading facilities, equipment or expansion. The long lease terms and triple net feature of the DST offering are advantageous to investors.

Typically, all real estate is local. On a national level the office vacancy rate hit a record high of 17.7% in 2024 and is projected to rise another 100 basis points, to near 19% by the end of 2025 (according to CBRE).

Some of the other points are:

Lease Rates: Asking rents have risen steadily post-COVID, their rate of growth is expected to remain below 1% with isolated new development.
Limited tenant demand for older buildings with fewer amenities is forcing owners to begin dropping rates to draw interest.
Net absorption is anticipated to stay flat over the near term as the nation’s uneven recovery unfolds. Demand will likely stagnate in the first half of the year as companies cautiously evaluate economic conditions and federal policy shifts under the new administration.
New construction starts will remain on hold, hindered by elevated labor and material costs and subdued demand.

Medical Office Building is much different than Office.

CBRE forecasts that MOB asking rents will rise by up to 1.8% in each of 2025 and 2026 and vacancies will decline slightly to 9.46% by the end of 2025 from 9.57% in this year’s third quarter. There is a growing demand for healthcare services including outpatient surgery centers. This market is also being fueled by the demographic indicators of baby boomers. There will be more and more demand, which is good news for investors.

The are many types of facilities including doctors’ offices, clinics, urgent care centers as well as buildings associated with hospitals. Some of the centers being offered as DST are smaller in size and may be all cash offerings rather than having any debt.

One of the other interesting factors is the rise in employment in the healthcare sector. This sector outpaced the overall growth rate. Healthcare job growth continued to be an economic driver in 2024, creating 686,600 jobs over the 12-month span and accounting for 31% of the 2.2 million jobs created in the overall economy last year. (Healthcare Powered U.S. Job Growth in 2024 | Health Leaders Media)

Additionally, MOB sales volume increased to $2.51 billion in 2024’s third quarter, up 48% from a year earlier. That marked the second consecutive year-over-year increase following nearly two years of declines. DST offerings were limited in scope and tended to be all cash offerings. This may create a challenge for investors executing a 1031 tax deferred exchange with a debt replacement requirement.

There continues to be interest in the Industrial Asset class

Large fulfillment centers and last mile destination centers are still in demand. Not only is amazon still building but there are also other large distribution centers being developed for automakers. There are also smaller warehouses (such as flex spaces) that may be bigger opportunities. Developers are delivering additional small offerings to satisfy the demand. The construction starts are expected by late 2025. This will be only in markets where the supply and demand balance has returned. Construction costs, interest rates and potential regulatory issues may delay some projects.

A few years ago, the Supply Chain issue surrounded many aspects of the economy. Much has ease since COVID. However, it is projected there will be pressures and risks, disruptions, delays, and high costs will continue. In 2025, last-mile delivery solutions will be crucial to boosting agility by ensuring more reliable deliveries. More companies will adopt route optimization strategies and crowdsourced delivery networks to improve the last mile and adapt to unexpected delays, making the supply chain more resilient and flexible.

There is a continued effort to ease supply chain issues with near shoring & re-shoring. This is an attempt to get more product “On Shore” meaning in the USA. This also is a good indicator for the industrial sector. The new administration has a mission to bring more manufacturing back to the USA. Another good long-term sign for industrial. The DST industrial offerings over the past two years have nearly outpaced the multifamily offerings in numbers of offerings as well as volume of offerings. Some industrial offerings may be small bay flex spaces to one million square feet of auto parts distribution warehouses. However, as of February 2025 the available industrial DST offerings have decreased, indicating active investor interest as well as directing investment dollars to this asset class.

We want to thank many of the sponsors who have provided 2024 and 2025 analysis including Inland-Investments, Capital Square, Cantor Fitzgerald, Brookfield, Starwood, CBRE, and others.

NAMCOA® is a SEC registered investment advisory firm that provides comprehensive portfolio management, financial planning, and fiduciary decision-making services on behalf of retirement plan sponsors. Our Difference is summarized by our fiduciary approach which enables us to better meet portfolio and retirement plan objectives, resulting in stronger risk adjusted returns for investors and peace of mind for Clients. We also focus on alternative real estate investment. Many real estate investors are seeking tax deferred solutions utilizing §1031 exchanges or Opportunity Zones.

DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com.

This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 8215 SW Tualatin- Sherwood Rd, Suite 200, Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.

Thank you.

June 16, 2022- DST.EDU Series B- Part 8 Industrial Asset Class

Editor’s note- this is part eight of a ten-part series on the various asset types of DST offerings.
Part 8: Industrial Asset Classification Discussion

By Al DiNicola, AIF®
June 16, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC, member of FINRA/SIPC

INDUSTRIAL ASSET CLASS
Industrial is one of several commercial asset classes and is also offered by sponsors of Delaware Statutory Trust (DST) . Cash investors as well as 1031 tax deferred exchange investors seek out industrial to add to their portfolios. There are different types of industrial buildings but many of the DST offerings are focused on the larger distribution centers, industrial manufacturing facilities and potentially building that house production facilities. For the purposes of this writing, we will focus on the larger buildings and not the smaller flex spaces (while very popular). The rationale may be the smaller buildings are not in much demand of DST offerings.

Over the past few years and surely aided by the COVID 19 pandemic, the large warehouses have become very popular in all commercial offerings. This may be a Real Estate Investment Trust (REIT) investing in a new distribution center (AMAZON) including a last mile distribution center to a very large (2 million square feet) automobile motor parts distribution facility. The industrial DST offerings may be a single site offering or a portfolio of industrial facilities. The portfolio may also have geographical diversification meaning located in several markets or states. The Industrial asset class has had fewer offerings when compared to the multifamily DST asset class. When offered the Industrial DST asset tend to sell out quickly.

Structure and function of industrial buildings.
Over the past five to ten years Logistics has been a buzz word for describing many aspects of the economy. This is also true on the storage and distribution of goods that are found inside industrial and manufacturing buildings. The industrial buildings are very large and typically there is minimal office space. Suffice to say industrial space is important in all regions of the country. The purpose of this article is to focus on the investment into industrial space. The continued development of manufacturing facilities in the US has had it challenges with many products being made offshore. However, once these products (even though produced abroad) may need to be assembled, stored, and ultimately deliverer to market for the consumers. There is a move to bring manufacturing back to the US known as “onshore”.

Industrial development considerations
Many areas of the country have seen an increase in the development and delivery of industrial space. Most notably the south has seen an increase compounded by increased migration of population. That does not mean other areas of the country are not seeing growth especially along the major transportation interstates. Every product that is purchased in the store or on line may move through many steps while being produced, packaged, loaded and delivered to the final destination. (Although at my home many of the Amazon deliveries are returned, but that is another topic). Where the individual facilities are located needs to be vetted as to the best location to handle the specific requirements of the delivery process or supply chain needs.
Some structures and properties may be owned by the end user of the building but if not, is owned by an investor. The investor then would lease to users of the space. The larger facilities are typically owned by public entities because of the sheer size and cost of the building. These public companies may be REITs either publicly traded or non-traded. Sponsors of DSTs will seek out well located industrial buildings to package the property. These packaged offerings will facilitate the needs of cash investors as well as 1031 tax deferred exchange investors.

Fast facts on Industrial Asset class

Location is very important for a number of reasons. Yes- location, location, is still valid.
Access to all transportation methods: highways, railways and air transportation should be motivating considerations.
Moving goods via truck is a vital primary component of the supply chain. The location of buildings with close adjacency (and visibility) to interstate highways becomes an added benefit.
New needs force new designs. Long gone are the days of shaky buildings with outdated facilities (amenities) inside and out. The bar has been raised on what the long-term users expect from the environment. The institutional investors are on board with providing the necessary capital to entice specific users to engage for long term. The end result is an increased appeal for the physical structure which may be a valuable consideration when ultimately sold.
The overall size in square footage and cubic volume is increasing. The warehouses (bulk storage) are becoming larger and larger. Not only the building sizes but the overall size of the land mass that permit potential expansion and more truck and trailer storage.
Raise the roof! Looking in the rear-view mirror 24 feet clear ceiling height was the standard. Currently the desired height is 32 feet and 36 feet. You may hear the reference clear ceiling heights and that would be calculated from the floor to the ceiling. Higher ceiling means more volume for goods. Recent improvements in the storage capacity of the racks inside the buildings (racking systems) increase the bulk storage capacity (volumetric storage space).
The depth of the newer buildings is a factor that is becoming more important. Typical industrial buildings may have a depth of 150 to 160 feet (larger than flex at 120 feet). The newer building may have depth as long as a football field and up to 400 feet deep.
There is a need for additional outside space. Occasionally we neglect to consider what goes on OUTSIDE the warehouse. To expedite the movement of goods there have been noticeable changes adding to the efficiency of the operation. There is need of ample tractor trailer storage as well as parking and providing a safe space for maneuvering the big rigs. The need for extra space equates to larger overall sites.
There have been building efficiencies improvements including added insulation and other advancement in protecting mechanical components. There may also be considerations for needed air conditioning for the items being stored even temporarily inside the warehouse. Certain buildings may also have dedicated frozen sections as well.

The investment Focus
Nearly every offering Private Placement Memorandum (PPM) includes a section or disclaimer on the COVID 19 potentially disrupting business. Some companies may have increased inventory which currently may create other unintended consequences as the consumer is rethinking their buying habits and needs as a result of inflation. However, AMAZON and others continue to secure well located bulk storage facilities with larger truck courts as well as facilities known as Last Mile Distribution Centers. Many consumers utilize e-commerce and have packages delivered nearly every day to their doorstep. We are all familiar with the delivery vans (originating from the last mile distribution centers) that show up nearly every day of the week to our homes.

Typically, DSTs (and other NNN) require the tenants to take care of repairs. However, there are occasions where the investors or sponsors are responsible for structural components. Those details would be included in the lease agreement along with renewal options, rent increases and other details.

Investment structure will vary depending on the sponsor offering.

DSTs are long term assets that may range between 7-10 years.
By design many of the DST offerings are structured with leverage. However, there are a few all-cash offerings from time to time.
The leverage is non-recourse and may satisfy the investor’s IRS requirements of replacing the debt under the 1031 tax deferred exchange.
There may also be offerings with increased debt or loan to value (LTV). By design a higher LTV may be in place to offset higher debt replacement needs.
Distribution will vary depending on the individual offerings.
There is also a structure referenced as Zero Distribution (similar to a zero coupon). Rather than paying an annual distribution to the individual investors all distributions are dedicated to paying down the loan on the property. The investor may benefit from a lower loan payoff when it comes time for the property to be sold.

Tenant quality

The tenant quality may include a local single user to a national credit rated quality tenant.
There has been single tenant user who have owned their building for many years and have equity in the property. These users include private and public companies. These users may execute a sale lease back (pulling cash out of the property) and then execute an extended long-term lease. The cash would be used to make improvements to an existing structure.
Large users (Amazon, major auto manufacturers, etc.) will make a substantial investment inside the building including robotics to assist in the processing and needs of the business.

Conclusion
Industrial has demonstrated a track record of a stable investment asset. There is a growing need for additional industrial space in many locations throughout the country. DSTs may provide tax favored returns. If you are considering an investment, please consult your financial advisor for additional information.

NAMCOA’s corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
Thank you.
NAMCOA® – Naples Asset Management Company®, LLC