SAN FRANCISCO - If Guy Jaquier, the new executive vice president and chief investment officer at AMB Property Corp. has his way, pension funds will double their allocations to the industrial property segment of their real estate portfolios. "The majority underweight industrial at 10% to 12%," Mr. Jaquier said in a recent interview. "We're targeting 20% to 25% to match its weighting in the NCREIF Property index."
AMB's specialty is industrial real estate. Since Mr. Jaquier joined the San Francisco-based firm earlier this year, he has been working to sharpen that focus, he said. "Before we concentrated on large hub markets, markets we wouldn't necessarily choose today, such as Wilmington, Del., and Charlotte, N.C. We're refining that to move goods more efficiently." Now AMB is selecting locations in close proximity to ports, airports and freeways. The technical term is `high throughput distribution' properties - properties located in major distribution markets that benefit from their proximity to a large customer base.
Mr. Jaquier is well-attuned to the way pension funds operate, after serving for the past two years as senior investment officer for real estate at the $177 billion California Public Employees' Retirement System, Sacramento, where he oversaw $8.5 billion in equity real estate and helped to restructure the real estate portfolio.
He noted that many pension funds tend to hire multiple advisers to manage their real estate. Most of those managers do better with apartments and retail properties than with industrial, which requires special expertise. "It's hard to find good industrial properties," he said.
AMB favors the industrial sector, which makes up 90% of its investments, because it's later in the real estate cycle. Since real estate bottomed seven years ago, the cycle is further into a recovery, Mr. Jaquier explained. Industrial does better in a down market and is more defensive than other sectors.
"You can have triple net, longer leases, lower-tenant maintenance. (have re-worked this part after checking with Jaquier again). Revenues aren't dependent on customers showing up, as they are for hotels; or on retail sales, as they are for regional malls who charge rents based on sales. Warehouses can charge a fixed rent. They also benefit from low tenant improvement costs. "When a tenant moves out, you just hose the place down, whereas other types of real estate often require large capital improvements when tenants leave. The sector outperforms in a stabilized or a down market," said Mr. Jaquier.
The firm has $4 billion in assets, plus another $500 million to $600 million in its investment management advisory unit. (All the money in the advisory unit is from pensions, foundations, endowments). AMB recently hired Sylvia Melikian to manage private real estate accounts for institutional investors. She previously held a similar position at UBS Brinson Realty Advisors, LLC, Hartford, Conn.
And late last month, it closed its first institutional fund - AMB Institutional Alliance Fund I - at $400 million, which included a co-investment of $80 million from AMB.
Investors in the fund include the $13 billion pension fund of CitiGroup; $2.2 billion endowment of the University of Chicago; $700 million Bush Foundation; and $4 billion John D. and Catherine T. MacArthur Foundation.
The fund's strategy is to acquire and develop industrial distribution centers in major U.S. cities. "We're catering to businesses that need to ship products quickly. We'll sell assets that don't fit that strategy and redeploy them into higher growth assets," Mr. Jaquier said. "We have outperformed our peers by focusing on the higher growth end of the business." For the 12 months ended Sept. 30, AMB's total return was 23.0%, compared with its benchmark, the Morgan Stanley REIT index, which rose 21.3% in the period.
Currently AMB and the fund are concentrating on developing distribution facilities in six markets well-positioned to receive international cargo shipments by sea, air, rail or truck: New York's John F. Kennedy Airport; Atlanta; Chicago; Dallas; San Francisco/Oakland; and Los Angeles, to the port of Long Beach.