Nearly two years after buying out his partner and becoming sole owner of BKM Capital Partners, Chief Executive Brian Malliet is making strategic investments and hires to keep the Newport Beach-based industrial investment firm in growth mode during a time of market uncertainty.
Malliet has hired three new executives—including a former fund manager at Newport Beach-based Pimco—to help launch the company’s third fund and invest $500 million in new value-add assets through the end of the year.
“We are at the point where we can match our expertise on the real estate operations side with seasoned executives on our fund management operations side,” Malliet told the Business Journal.
BKM is approaching $2 billion in assets under management; it is one of the larger locally based investors of light industrial buildings. The company and targets multi-tenant buildings that are typically smaller than larger warehouse and distribution buildings used by big logistics firms.
It plans to raise $500 million as part of its third fund to acquire and additional $1.5 billion worth of assets.
Like its prior two funds, which helped build a portfolio that totals 15 million square feet with a $2.5 billion value, the third fund will focus on value-add, light industrial assets across new and existing BKM markets, including Orange County.
BKM has scouted executives with fund management experience to help launch its next buying spree, including the company’s first chief financial officer.
The company has tapped Bill Galipeau, previously the executive vice president and head of investment operations at bond giant Pimco, for that position.
“Bill previously ran 26 funds at Pimco, and prior to that held senior finance roles at Fidelity Investments,” Malliet said. “He’s a crucial addition and will help scale our fund and logistics platforms.”
BKM also hired Harry Hedison as senior managing director of capital markets and investor relations and Susan Rounds as managing director of operations.
BKM, which last added to its Orange County portfolio in 2020, is expected to close on local assets ahead of the launch of the third fund.
It’s currently underwriting a deal in Lake Forest and is in negotiations for other properties in Aliso Viejo and Laguna Niguel. Malliet declined to share specifics as the transactions have yet to close.
“It’s very tough to find these kinds of assets in Orange County,” Malliet said, adding that the firm is looking for additional off-market opportunities.
Lake Forest is a hot market for the company, which typically acquires industrial sites in the 100,000 to 150,000-square-foot range at a purchase price between $15 million and $40 million.
The company in 2020 spent $425 million to buy nearly 2.7 million square feet of buildings from New York-based private equity giant Blackstone Group, including Lake Forest’s Spectrum Centre Business Park, a multi-tenant property along Bake Parkway.
Malliet pointed to Blackstone’s acquisition of PS Business Parks as a vote of confidence for the light industrial sector. Blackstone last month closed on its $7.6 billion purchase of the Glendale-based REIT, a real estate investment trust that specializes in industrial business parks around the country, including about 1.2 million square feet of space in Orange County (for more details, see the Aug. 8 print edition of the Business Journal).
“The largest equity player made a move into the light industrial sector for the first time, and that’s huge validation for us, as we’ve been specializing in the sector for the past nine years,” Malliet said.
Interest Rate Impact
The light industrial sector is especially attractive now as institutional investors seek better returns on their assets as inflation and interest rates continue to impact the market.
“Larger investors are taking a hit from the interest rate increases, so they’ve been sitting on the sidelines this summer. That’s created an opportunity for smaller investors like us to come in and get good prices for value-add properties,” Malliet said.
“Light industrial buildings have shorter lease terms, so we can buy and reposition properties and secure new leases to capture the rent growth that’s been happening over the past few years.”
The industrial sector has seen historic rent growth since the onset of the pandemic, thanks in large part to growth from the e-commerce sector. That rent growth has slowed somewhat lately, but Malliet expects lease rates to still rise 20% year-over-year by the end of 2022, and for double-digit rent growth to continue through 2025.
“We are leaning into the interest rate hike environment and taking advantage of opportunities while still being choosier, and finding assets with good returns,” Malliet said.
$420M Under Escrow
BKM counts assets in seven states across the Western U.S. and is eyeing an expansion into Texas through its third fund.
“The state has a price per square foot that’s attractive to us compared with other markets,” Malliet said.
The company is based out of an airport-area office at 1701 Quail St. and has two other Southern California offices in Los Angeles and San Diego.
“We’re looking in all three of those markets,” Malliet said of Southern California.
BKM has closed on north of $500 million in acquisitions over the past year and plans to close on an additional $500 million in deals by the end of the year.
“We already have $420 million in escrow of that projected $500 million,” Malliet said.
It’s currently hiring to support that transaction volume.
BKM, named one of Orange County’s Best Places to Work by the Business Journal in July, counts 90 employees, up from 78 at the start of the year. The company plans to hire 10 or so more people by the end of the year.