In the fast-paced world of industrial real estate, few voices carry as much weight as real estate magnate and philanthropist Patrick Carroll.
As a long-time and respected powerhouse in the world of real estate, Carroll has gained national recognition for his sharp instincts and perceptive analyses.
Under his leadership at Carroll Org., headquartered in Atlanta, GA with regional offices in Houston, New York, Raleigh, and Tampa, his strategic investment moves built a massive portfolio estimated at over $5 billion, prior to selling the firm.
His particular area of interest—the one he’s planning to bet big on—is the industrial sector.
“I’d rank industrial real estate as the strongest of all the sectors,” Carroll told us. “We see exploding demand for logistics, e-commerce, and data storage, with strong rent growth, and a positive absorption in Q1 2024 with no slowdown in sight.
“As people continue to shop online and as new data centers are being built,” he says, “everything is positive and I expect it to stay that way in the foreseeable future. The wind is definitely behind our backs.”
How Interest Rates Shape Carroll’s Investment Strategy
Is now the right time to invest in real estate? Carroll sees lots of opportunities—he likes suburban brick and mortar retail in high growth sunbelt markets, even though traditional retail might never be like it once was due to the massive growth of online shopping.
“Industrial and housing are forever plays,” he says. “At this point, with not a lot of distress in the market other than high interest rates, I’m happy to still have significant holdings in the multifamily space. If I can find the right entry points, adding industrial and some select retail to my portfolio is both strategic and long term.”
Asked about the impact of the Fed and possibly lower interest rates on future growth in the sector, Carroll expects that, as rates come down, cap rates will likely also decline, giving a boost to asset valuations.
“As an investor,” he says, “I keep an eye on interest rates because when they go up, property values tend to come down. When they decline, property values tend to increase. If you’re watching the market closely, you can see these trends beginning to form, identify the opportunities, and adjust your buy/sell strategies accordingly.”
Discipline is critical, he warns: “If I can’t get a positive leveraged return of, say, 8% or higher, you’ll likely find me on the sidelines. That’s why I’ve been patiently playing the long game.”
The Standoff Between Buyers and Sellers
The big concern for investors is how fast interest rates will be cut. If you invested near the interest rate highs of 2021 and 2022, when asset valuations were extremely high, you face some challenges.
“Cap rates back then were extremely low,” he says. “When their loans come ready for refinance, they’ll have to bring fresh capital to the table. So those people could be in trouble.”
The effect of the Fed’s policy of raising interest rates over the past several years, in his opinion, has had a negative impact upon new deals.
“Frankly, there’s been a stare down between buyers and sellers,” he contends. “Sellers not wanting to face the fact that their property is no longer worth what it was. Buyers not willing or not able to pay the prices sellers want because their borrowing costs have doubled or quadrupled.”
That hasn’t stopped people from leasing or paying rent, he says. It simply stopped buyers and sellers from transacting.
Better days are ahead, he predicted.
With anticipated lower rates by the Fed, he expects a quick and positive impact on development and construction in the industrial space. In his view, “Lower rates will make real estate deals pencil out again. It will make sense for everyone in the transactional business, especially for anything that is really new and anything climate-controlled.”
Carroll’s Advice for New Investors: Patience and Cash Flow
Are the current high-interest rates affecting tenants?
“Tenants could care less,” Carroll told us. “Supply and demand of the actual leased space is siloed off from interest rates, so in most cases, tenants are not affected. The costs are typically borne by the developer/owner.”
But if economic conditions get worse?
“Naturally, that would slow demand for space and that’s not good for our industry,” he admits.
“But if the economy rips in a good way and the Fed’s policy gets more accretive, with easier access to credit all around, people like myself and other real estate developers and investors will be much happier and much more active,” he added.
For now, however, Carroll finds himself in a wait-and-see mode, not eager to make a major move while the rates remain where they are. “I’ve always tried to buy a 100 basis points to 150 basis points above what my borrowing costs are. But if my borrowing costs are fixed at 5%, that means I have to be buying a 6 to 6.5 cap, which is very hard to find.”
“I’m looking at a hundred to a thousand deals to find just one.”
In short, his advice to new investors is simple: “Make your numbers work. Don’t force deals.”
Wrapping it up, he believes the industrial real estate market—including spec plays—is strong with potential.
Just make sure you have a strong cash flow and borrow for at least 5 to 7 years minimum to ride out fluctuations in the interest rate environment. Be ready to handle the inevitable ups and downs in the market.
But if anyone knows how to weather those, it’s Patrick Carroll.
