Discussing the Industrial Development In Northern and Southern California with Taline Agopian

Podcast

Discussing the Industrial Development In Northern and Southern California with Taline Agopian

Mar 17, 2021

Discussing the Industrial Development In Northern and Southern California with Taline Agopian

Justin interviewed Taline about the components of building successful industrial developments.

Key Takeaways:

  • Having pre-construction is huge in the merchant developer business so that you can have high-level conversations and game planning very early in the acquisitions and JV process.
  • On-the-job training with the right senior person is more valuable than almost any other method of education.
  • Bay Area industrial pricing is very similar to Orange County industrial pricing on a land basis and with rental values.
  • Certain communities are elevating the image of industrial development and developers are having to respond with higher image product with increasing amenities.
  • Developers are increasingly looking to increase new development ceiling clearances to 50′. This will help accommodate increasing warehouse automation and robotics installations.
  • Certain cities are putting out moratoriums on industrial development which narrows the path to successful entitlements for large product. Developers are increasingly looking at small buildings for sale to users as another path to create successful projects within the community. Small buildings for sale have breached the $200 PSF watermark with no end in sight.
  • Covered land plays are common these days, meaning you buy a development site that you are comfortable holding onto as a leased investment while you entitle and run out the lease terms.

 

Here is a 2-minute clip from Industrial Insights Podcast with guest Taline Agopian.

Discussing the Industrial Development in Northern and Southern California with Taline Agopian

 

Listen to the full episode below and subscribe to the podcast on Apple.

 

Highlights

  • Being able to learn the southern California industrial market – 3:02
  • The type of data that the industry did not have before – 4:13
  • The value of being in the field – 4:45
  • Having in-house preconstruction – 6:12
  • Every deal is so different – 9:37
  • Having big deals – 12:32
  • The product of UPS – 14:02
  • The cost to relocate – 22:20
  • Having an education process – 43:48
  • Developing eco-friendly – 44:40
  • E-commerce trends – 45:31
  • What can affect our markets – 47:00

 

Episode Resources

 

Taline Agopian

Hello

 

Justin Smith

how are you?

 

Taline Agopian

I’m doing good. How about you?

 

Justin Smith

Who knew that you did get to become a developer for how you shop? We had to change the whole industry for you.

 

Taline Agopian

It’s just crazy what’s happened this last year. Think about the old people buying groceries online.

This is what we’ve been talking about as an industry for the last four years is about the growth, that specific growth of online retail. Unfortunately, it’s occurred, but now everyone was forced just to switch to that. So that’s the growth that we’ve been counting on. It got forced into us this year and it’s only going to keep growing now that we’ve lived and breathed it for an entire year.

 

Justin Smith

I think it is a blessing when it was so difficult to have all of that already be set up and already be mature. It was a lifesaver for a lot of people.

 

Taline Agopian

Imagine this happened 10 years ago, 15 years ago, when we didn’t get stuff to our door in two days, let alone the same day. It definitely had a hiccup; it wasn’t smooth sailing for a few weeks. Nonetheless, to have that, I can’t fathom what this year would have been if I didn’t have.

 

Justin Smith 

It was like at day 30 in when you started to really appreciate it and feel like how much of a benefit it was, or it continues to be. Then before your role now, you had time at Rexford, what were you doing over there?

 

Taline Agopian

At Rexford, I was working in acquisitions, kind of turning rocks if you will. We created really the first Salesforce database for them. Where they’ve got data on every existing building effectively in SoCal now. When I say data, it’s conversations that date back 10 years ago, even 15 years ago, dialogue and building stats and comps. So, I was able to learn about the Southern California industrial market at Lane, more than I think I would have anywhere else just because that’s their focus. That taught me a lot about Class C, Class D, Class B, and A of industrial real estate in these markets. Now I have the luxury of building Class A industrial, which is awesome.

 

Justin Smith

It gave you insight into Salesforce too, I imagine. We use it as brokers and continues to evolve. It’s really helpful. It’s amazing how much it can differentiate just your ability to stay plugged in and to look back and to share with your team.

 

Taline Agopian

For instance, this is the scenario that we got ourselves to. Now the market leaders can be out in the field with the broker, any broker and just be looking at a building be like, Oh, I wonder if we have anything and pull out their map on Salesforce and pull out all the stats on mobile. That type of data our industry didn’t have before. It’s crazy how much it’s evolved. My boss is in his 60s and he talks about when he was a broker, and it was all on a Rolodex, it was all on index card. That was the business and that’s how he created value. It’s interesting how our worth or our value that we bring to the table at our companies has changed because data is changing the way we share information.

 

Justin Smith

Allowing you to be in the field more and the value of being in the field, you can really realize that value.

 

Taline Agopian

Absolutely.

 

Justin Smith

You’re with Connor now, maybe you can help me and everybody understand a little bit about what Connor is all about. Then we can get into a little bit of your time and your role with Connor.

 

Taline Agopian

At Connor commercial, we are true merchant developers. It seems like it might be a dying breed but we are out there and we like to JV with life companies, big insurance companies, and institutional investors. We do JV partnerships in which we generally entitle lease and sell our product. We like to sell as soon as possible to get our money back. What we focus in is generally industrial throughout the states. We have offices that headquarter in Chicago. We have major offices in Arizona and then as well as in Texas. With all of those offices, what makes us unique is that we have a sister company called McShane Construction who we share offices within all of those regions and the benefit that I get from them is in-house dialed in pre-construction. Having that ability to sit down with my pre-con and have a conversation about pre-conceptual development is extremely valuable for us in our due diligence. I think, for better or worse, we do a lot of homework when we’re looking for deals because of that ability to really understand the construction from the beginning. What is also unique in that they do all of the designs, so they are designed built for us. I am no expert in architecture or engineering. They own those construction drawings. As soon as I get my entitlements done, they take that on through permitting and then they manage the construction and our work there. That allows us to free ourselves up to focus on leasing up assets. That’s the general spiel about the company.

 

Justin Smith

You’ve been there a couple of years and have been done analyst work maybe, to begin with, but it seems like the more I get to know you, the more you’ve had an opportunity to work on all parts of the development. What changed starting there to where you are now? Or is it kind of titles have changed but the role generally has stayed the same?

 

Taline Agopian

I don’t know how to frame it. I’ll just say, I started as an analyst. I was still pretty fresh out of college. I just had a year or two experience at Rexford. I was walking in pretty green but I had somebody above me, John who has just been an extremely willing boss of mine. He’s more than just a mentor to me, he’s easy to work with and I enjoy working with him. John loves working in the business and he’s been in it for so long. He’s one of those people that is driven to get deals done and figure things out. I think what works so well for us was that I was just so easily teachable and excited. The shop runs very lean, generally speaking. The big merchant developers run pretty lean. So very shortly after starting, it was just John and I. I got thrown into an 815,000 square footer that we were titling up in Fremont, California, with extremely difficult entitlements. Overall, the entitlements took about two and a half years but the project was extremely successful for the company and it’s something that we’re really proud of. Effectively I just started, and we would kind of just go soup to nuts on everything, and there is no siloing of anything.  I’ve been fortunate to learn the deals front to end. Also, all spectrums of the cycles and for that I’m very grateful. I just don’t know that I could even gain that knowledge anymore at school, just because every deal is so different and they’re so unique. My boss describes the job as plate spinning for like the circus where you just got to keep up all the plate and make sure that they’re going and going. It’s more of project management than anything, hiring the consultants and managing their time and the budgets obviously.

 

Justin Smith

Just knowing when to spin each plate more.

 

Taline Agopian

Absolutely. I think I was pretty timid starting off, but the only reason why I think I was successful was because I asked my boss for confirmation on all major decisions and I still do. It’s hard to come up with the right answer all the time. I like to think critically through both options, multiple options and present the options to my boss and come with come up a good decision, but it’s so on the fly. It’s hard, but I love it. I love them.

 

Justin Smith 

The small, dedicated team, I feel like having leadership in a place like that really gives you the ability to grow and to take responsibility of projects and suggest forward action for them. The Bay Area, that’s a big project and looking in the Bay Area for new projects. So is that is an area that you’re focused on, in addition to the Inland Empire?

 

Taline Agopian

It’s a unique story, we’re down here and we never had offices up there. We had some pretty large successful projects down here. When I say large like big bombers, we prefer not to do smaller product. Around the recession and after that, we had wrapped up some projects down here, but we hadn’t heard of some opportunities up in the Bay Area. Frankly, I think they were overlooked, the market down here was not looking up there at the time and it was because the prices were crazy, they seemed crazy. We got in on the land there for like, $30 a square foot. By the time we had entitled that we were getting offers unsolicited for 50 for the dirt. That incremental value is insane. Ultimately, we leased it to UPS, the full building. We did that project with a RA who ultimately bought us out of our position. They’re going to hold that asset long term. Prior to that, we had done a great building in Hayward UPS that went back and leased to FedEx, which was also an area that ultimately sold to Deutsche Bank for a market high. Then prior to that, we had built something for Amazon up there. So, it parlayed into big deals for us that were extremely successful but due to the scope and the limited personnel we have, it’s just as time-consuming. Now, I was flying up there every other week. I was taking the Southwest airbus up there for day trips and when you got to turn something into the city, you got to hop on a flight. It’s pretty crazy to think about that. I don’t know what the future looks like, but we want to do deals in SoCal more than anything. We have some stuff tied up right now but we’re very excited to be doing deals in our backyard again. Our GC is down here with us and so this is our home base. We just had some fortunate success up in the Bay Area. Not that we wouldn’t continue to do deals up there.

 

Justin Smith 

Once you have experience and a track record, it’s a lot easier to have follow up projects. I was looking at the East Bay market reports and when I looked at those, I basically saw Orange County in them. That’s when you look at the economics, the market size, the absorption, the general trends-

 

Taline Agopian

the demographic trends, the pace of life, all of it, which resembles a lot of Orange County, for sure. I image Orange County. The product that we built for UPS was such a high image. It looked like an office complex. It was stunning. I’m so proud of what it is because it’s just gorgeous. It’s nothing like the industrial you see in the Inland Empire.

 

Taline Agopian

I was telling you on our last call that like I had to build out a ton of EV chargers. Actually placed the chargers in spaces. At that point as a developer, we’re generally building something generic because you just don’t know what tenants want and parking anything for that matter. So, how do you even know if they want the EV chargers in this certain spot, but it was building code in Fremont to include those.

 

Justin Smith 

There is a Tesla factory in Fremont. How many did you have to install?

 

Taline Agopian

For the 800,000 square feet, it was about 70 stalls.

 

Justin Smith

Okay, it was not one or two or three or 4

 

Taline Agopian

No, it was actually 70 EV chargers running. It was very interesting. I could get no rebates on it. There are still rebates out there but because it’s building code, they don’t provide you anything. It’s just required but again, that’s the future, right? I’d like to believe that in my lifetime, I’m going to drive by that building and I’m going to see those chargers being used. Hopefully.

 

Justin Smith 

There may even be more depending on when you go by there.

 

Taline Agopian

Exactly. I mean, they’re at the forefront of it so I completely understand that. Other building features we added to the place is excessive skylights, which make all the difference inside of the building. It seems excessive until you’re in there, but it just lights up the whole space. Then in our office pods we included the glass roll-up doors with a patio space so that employees can take a break, eat lunch, and get some natural air in the building.

 

Justin Smith 

That we saw in creative office, over the last three or four years in a few projects that we were repositioned, and everybody loved them. We don’t really see that in industrials so much in Orange County and I could totally see with the move to bring more fresh air into buildings. Is that a design feature that we think is more prominent?

 

Taline Agopian

Totally I can see us doing that especially with COVID. I could see us certainly implementing that in building design moving forward. It’s not that expensive, but it really does add flavor to the building and the ability to have that fresh air is huge right now.

 

Justin Smith

Seeing more of these creative design elements go into future projects. I think that’s a trend to be on the lookout for.

 

Taline Agopian

A hot trend to be on the lookout for, I just got the word is that we are going 50 Clear. Prologis just released that they’re going 50 clear, in I believe it’s Central Valley. I’ll send it to you later but we were all shocked. The slab is super thin, which we’re shocked by, but it’s exciting to see us going up and having the sprinkler systems to be able to do that.

 

Justin Smith 

I had met a handful of different warehouse automation folks over last year, and certain warehouse automation systems need the height when you just think of the expense of putting these systems into place and then getting the density and the amount of volume that you need to make it be a worthwhile investment. That is a big part of that, and I could totally see that be something that that you try to like. I think it’s more prevalent in other market but here is something where I think we’ll continue to see that without a doubt. I have heard to your point about institutions and enjoying the investments the tenants are making and buildings that 65 to 70% of the cost of the systems they’re putting in is surprisingly labor. The cost to install these systems because you think of what you see with your eyes, you see the machines, or you see the different automated component pieces. When you think of the cost of putting these systems together, meaning that the cost to relocate, to tear them down, and to build them back up in a new building or to build a new system is also pretty cost-prohibitive. You definitely have to make long-term investments.

 

Taline Agopian

You’re absolutely right. It’s probably such a portion of the cost has to do with the people engineering and coming up with the masterminds of the seven minutes. Nobody’s going to get paid for that.

 

Justin Smith 

No doubt. So today’s main focus is the Inland Empire, right?  You’re from there, you can call that a hometown. So that means you probably know it better than many.

 

Taline Agopian

That’s right. I would have never thought I’d be working for these industrial buildings I kind of grew up around. Yes, the Sprawl watching that happen through my lifetime has been super interesting. I’m still young so most of the industry legends have seen how Ontario was the end of it, but I experienced that as well. That was the end of the journey of the IE for us and seeing that evolve over the last decade, two decades, it’s been amazing to see. I think that there has been a lot of fruit from it. I’m excited to be involved in counties and cities that I grew up around and have friends and family that still live out there.

 

Justin Smith

As I was looking at the East Bay and realizing how much it resembled Orange County. I compared that with Inland Empire, right to see how that translates. I’ll give you this quick snippet, the demand for 2020 positive net absorption 23 million feet in the last 12 months rents growing 6.9% in the last 12 months. What all brokers know that many don’t is that when you’re representing a tenant going into the market, you basically don’t find the existing inventory. You only find new inventory and that’s what you have to choose from. So, if you’ve got 200,000 feet, you’re trying to land out there, and you’ve got 13 or 14 options. Twelve of them are on new construction. They are in their pre-leasing phase. That’s just a whole different experience and it also changes your timeframe because you’re building has to be complete. It has to be like you have to line all of that up. Kudos to those who plan further in advance that can then deal with completion dates for projects. It’s a whole different experience for people brokering deals out there than it is. In some of these other smaller markets, where you’re just dealing with older inventory.

 

Taline Agopian

I can imagine. That’s something we struggle with, certainly, with weeks off your competition is a building that’s put together. You might have some stuff to do inside but at least it’s got that stamp on it, that you can use it. That timing and perfecting that timing, as it relates to crafting a leaf, it is an art and missing can have liquid damages that hurt everyone. You’ve got to get it, right.

 

Justin Smith 

You are on the hunt for land, right? A, on the hunt for land, and B, help with the titling of it. What’s that look like these days?

 

Taline Agopian

These days, those yields in the IE are looking very, very thin and the entitlement projects are looking harder and harder. If you don’t know already, it’s every other city, every other city has thrown out, we don’t want more warehouses. They’re throwing out moratoriums. They’re doing everything they can to make it that much harder for us to get our projects approved. In evaluating everything, you’ve got to consider the path to entitlement more now than ever. Equity sources are very sensitive to the risk; it’s the riskiest part of the business. We’d love to get a lot of entitled sites ready to go but this generally requires an excessive premium, or, you know, entitlement projects that are worthwhile the time. It goes back to these big bombers, I’d much rather entitle an 800 or a million square foot or 600 more than I want to entitle a 100 or two. The time management is likely the same and the cost to entitled not that far off, your consultants, the labor, the legal work, the environmental consultants, they’re all going to cost-effectively the same. It doesn’t matter if it’s a 60-acre site or a 20-acre site. Those are things that you kind of have to evaluate what the problem is; all of these large box sites are picked over. If they’re out there, everyone’s bidding on them. How are we going to be the competitive bid on these very highly sought after site. We haven’t found a lot of success in chasing those sorts of deals as of late but we do have something under contract that was marketed and entitled. With a little bit of risk-adjusted returns, I think it’s extremely attractive for us. We’re excited about doing it. It’s smaller buildings, really user size, product, and a good location in the IE. We’re excited about that and all the heavy lifting is done now.

 

Justin Smith 

It does seem like the flow of capital and competition is creating an environment where investors need to go further out on the risk spectrum as they look for opportunities and what risk means for people is different for each shop or organization. If you are only big, now you’re big and small. You only built for investors or for single tenants now you’re open to multi-tenant or selling to users. Looking at sites with environmental issues or that have other constraints, where ordinarily firms wouldn’t have waded into any environmental whatsoever. Now, you almost want to have an environmental wiz on your team that can help you because you may find that’s where you’re going find your opportunities. Where you can compete and win, or you can use that as an advantage.

 

Taline Agopian

Absolutely. I have a great firm that we’ve been working with for a while now, and I rely on them to safely bring a project back to buildable land. If you can price that in and take on that risk, there’s so much upside, but back to reality we partner with institutions. It’s one thing if John and I got to just invest in our deals because we believed in them and we know we could do them but we’ve got to explain the story and sell it to people that just don’t get it. Frankly, that’s really hard sometimes and weighing those risks, quantifying those risks for our partners is also hard sometimes, but you got to believe it. If you want to be in the IE, it seems like there’s no other option but to pay up.

 

Justin Smith

A lot of is, A- education process and then B- I feel like you have to have your mind open to a couple of different investment thesis. There are 10 ways to make a buck in industrial. We’re good at these two, these other two or three are ways that we traditionally that wasn’t our initial model, but there are opportunities there, and we need re-gear for them or retool or be open to them.

 

Taline Agopian

Exactly. For instance, this deal that we have tied up right now, I have to underwrite my deals as leased investments, that’s just how it is. That’s the only way we’ve ever done our deals and that’s how it probably will always be, but there’s absolutely an opportunity for user sales on the table. Our partner knows that and that’s going to be, you know, something that we have to evaluate on a case by case basis moving forward with the project, but certainly we can cut up the buildings, we can lease some of them, we can sell some of them. There’s just so much opportunity. I think that provides a lot more flexibility. Not being so lease driven. The smaller sizes provide the ability for users to buy the buildings, users are not likely going to buy a 700,000 square foot building. These 20,000 30,000 square footers in great locations, and the IE. I’ve seen that demand comes from walnut, where I grew up, you just bleed out into the IE. A lot of those company owners, the small business owners take a lot of pride in owning their real estate, and they live nearby so it makes a lot of sense for them. I think having that flexibility for investment strategy, in general, is huge. The only one we can’t waver from is that we want to sell eventually.

 

Justin Smith

That’s just part of the structure. I feel like the user sale demand is somewhat insatiable at the moment and when I got into the business was at the end of Orange County’s small building for sale movement. Where there was a long period of time where that’s what was attractive and that’s what was being built there. Several 100 small buildings that were all sold was smaller in South Orange County. This is 5, 10, and 15, maybe 20 were small out there is 20, 30, 40, 50, and 60. I would think without a doubt; it would be product type where there would be so much demand that you may be surprised at what your pricing is by the time you’re done with the project. By the time it’s marketed, and it’s, and you start seeing the demand. Yeah.

 

Taline Agopian

We’re seeing trades. We saw trades in the two hundred in the Orange County area a while ago now. We are seeing that happen now in Ontario, Chino, and Fontana. We passed the 200 watermarks so for these user-sized buildings in the IE, I think we’re there now. Call it three years from now, we’re certainly trading big numbers.

 

Justin Smith

That’ll be a great project to work through and see if that’s something that you continue to underwrite, or you know, that’s now a tool you have in your tool belt, as you’re looking at different pieces of land and figuring out what to do with them.

 

Taline Agopian

It’s evolving so fast. You have to have a good team that knows the codes in these jurisdictions as they’re changing. It’s helpful to have brokers that understand that as well.

 

Justin Smith

It’s not a temporary phenomenon. It’s just a continued evolution.

 

Taline Agopian

I hope that we can change the tone, change the perception. I hate to throw Amazon under the bus, but they’ve had a really bad rap in the IE. I’ve read articles of people killing themselves in these warehouses. It’s just small, bad PR like that, it flows through the community. Those are people in the community that work there. They’re low-paying jobs so I can understand some resentment towards that. I’d like for us as a community of industrial developers in the IE to come out and be amiable to the neighbors that we’re building.

 

Justin Smith

All product types, all development has concerns and I feel like so much of it is an education process. There are so many positive attributes and impacts that go on unnoticed or that you do not think about unless someone like help demonstrates those and makes it easy to understand. That’s a continued challenge we all face.

 

Taline Agopian

I was just going to add with that, it’s not only that but it’s also considering the environment as well. That’s also part of the whole shield against SQL work that we were trying to get approved as people are not not happy with the amount of contamination that these buildings provide sometimes. Warehousing tends not to be as contaminating the environment as manufacturing has been in the past. Hopefully, cars change that and hopefully just will evolve. We can become a little bit more ecofriendly and we can develop more ecofriendly.

 

Justin Smith

Trucks and how they continue to evolve and with the missions and different energy sources. Then I think of cooler freezer cold storage; how is that evolving and how does that play a role in our evolution with e-commerce as well? Those are all big trends, but I feel like they do continue to improve without a doubt. I think that’s all I’ve got for today Taline. The last question with you is my favorite one, asking what where we’re at in the cycle, right? It’s so funny. This cycle you would think it was at the beginning, then it was at the end. Now with e-commerce, it’s back at the beginning again, and how does the e-commerce trend jive with the economy? Do you think we’re at the start of a boom or at the end? Is it time for things to get into equilibrium? Do you have any way of knowing or are we just in the middle? Is it the middle or a sharp middle?

 

Taline Agopian

Well, I think it’s fair to say that it’s booming right now, without a shadow of a doubt. It has been booming. It’s been on the rise for a while. I graduated after the last recession, so I’ve only been able to stay in the market rise. I’ve been wary through my career of a bubble the whole time. For the last three years, how many events that we’ve been to and they’re like we’re in the ninth inning. I don’t want to hear we’re in the ninth inning ever again. Let’s stop saying that.

 

Justin Smith

You’ll know when you’re in the ninth inning.

 

Taline Agopian

Exactly. We’ll know, the sounding sirens will be out. I think what we have to be wary of and keep monitoring is the Amazon effect. We’ve all benefited from Amazon, as we talked about and started with and they account for a lot of business in the States. If you look at the percentage of the business, they drove this last year. It’s the greatest it’s ever been, it’s more than half of the business. For that reason, we have to watch that. That I think is something that can change at any point. We don’t know when it can change, but we know that it will affect our market, all of our markets. That’s the only thing I really have felt strongly about this last year is watching how Amazon’s moving in our markets, because it certainly drives our markets, therefore affects our growth and potential downfall. We’ve had great, great absorption over the last few years. I think that this last year with COVID, it was obvious that developers were cautious. It didn’t feel like there was an oversupply, obviously because it all leased up, but all got absorbed but there’s a fine line. Amazon plays a part in that. So that’s all I’d caution. The innings to be announced, you know wherever Amazon’s at, that’s where we’re at. And we have to continue to build for that and work for the e-commerce effect. Hopefully, Amazon isn’t the only player in the business in the long run. I’m a major fan of, you know, having that Empire diversified, for other people to be successful in that business as well. So, rooting for the smaller players, the Walmarts of the world, the Targets of the world to grow. I think they are. they’ve proven it. I had no idea that Macy’s was still top 10 e-commerce group. They killed it. I still buy stuff from them, but those groups are still catching up. They’re always right behind Amazon and I think as they continue to grow. Hopefully, the Amazon effect isn’t as dramatic and risky for the business.

 

Justin Smith 

They’re on the leading edge, but there’s so much more that’s maturing now that that’s that all buoy or continue to buoy positive absorption. Cool Taline, I appreciate you taking the time. It’s good to get to know you more and it was fun to talk about what’s going on out there. I feel like that was a great conversation.

 

Taline Agopian

Likewise, I look forward to hearing what other interviews you have. I’m sure you’ve met with some great people that have some good insight as well. Thank you for your time. Justin. I’ll talk to you soon, hopefully.

 

Justin Smith

Thank you. Bye Bye.