Justin welcomes Jordan Kovalsky from Faropoint to discuss growing an industrial platform. Jordan discusses her investment strategies while growing in the Chicago market and what comes next for Faropoint.
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Highlights
- A little background on Jordan – 2:00
- Adding value to properties in the Midwest – 2:50
- Chicago being the largest industrial market – 4:00
- Last mile play – 4:30
- Jordan’s role at Faropoint – 7:40
- How rent growth influences lease terms – 8:20
- How Faropoint’s software helps navigate their acquisition pipeline – 11:15
- Asset manager’s direct relationship with tenants – 14:20
- Growing in the Columbus market – 17:25
Episode Resources
Connect with Jordan Kovalsky
Connect with Justin Smith
- https://smithcre.com/
- https://www.lee-associates.com/
- jbsmith@leeirvine.com
- https://www.linkedin.com/in/justinbsmith
Justin Smith: Jordan Kovalsky with Faropoint is with us today for our Industrial Insights. I want to welcome you to the show and maybe Jordan, you could give us an intro into Jordan’s world. Where you came from, some of your experience in your time with the firm.
Jordan Kovalsky: Absolutely. Jordan Kovalsky, I started my trajectory at the University of Wisconsin in their real estate program. Like a lot of us, ended up in the Chicago real estate market. My first seven years were spent at Lincoln property company, a group called Lincoln Advisors. Lincoln Advisors works with three separate account clients that gets to buy industrial and office property all over the United States. So I was working with two of those clients, focused on industrial, looking for deals one day in Miami, the next day in Seattle and every once in a while, in our own backyard here in Chicago. Back in April, I had the opportunity to join Faropoint. A lot of the appeal for me was everything that they were doing with technology. Since April, we’ve now closed on about 20 deals here in Chicago and Cincinnati and just in December closed on our first deal in Columbus. So it’s been a crazy less than a year.
Justin Smith: Yeah, I was just doing a little research and then I saw closing, closing almost sounded like a closing jealousy or envy where I was like, okay, we’re on a roll. This is good stuff.
Jordan Kovalsky: It’s definitely chaotic, but it’s fun. December was a crazy month for us.
Justin Smith: We have Lincoln Property Company here in Southern California. It’s a different experience, right. In terms of what a day in life is like and just kind of what the investment thesis is like. How do those two, how are they the same and how are they different?
Jordan Kovalsky: So, the investment strategy I was working on previously I was working with really a state pension fund and sovereign wealth fund. And I guess it was more like an open-end fund. So when you’re working with evergreen capital, I think you have the ability to go buy more Class A, core assets, and you’re looking at the longevity a little bit differently. Right now our capital, we’re looking at a five to seven year hold and the ability to add value to the assets that we’re buying. So really our focus is more on class B, some class C assets and the ability to purchase real estate at a supreme discount through replacement costs and that’s getting easier and easier right now as replacement cost really goes through the roof. So to the extent that we can buy these, second gen, third gen assets and had value to them, whether that be in some kind of market to market. Which we don’t see it quite like you do out in LA where we can’t even keep up with the market. But we’re definitely seeing it here in the Midwest like we’ve never had before. Or we’re coming into assets and having value on the construction site. Whether it be giving it a shave and a haircut or taking a property that is overbuilt on the office side and scaling it back and putting a warehouse tenant.
Justin Smith: A shave and a haircut. I love that. That’s the first time I’ve heard that one. What a difference it can make though. I’ve been looking at some of the small multi-tenants in Chicago. If you can believe that the California kid would be looking at deals out there. And so it is interesting to think of what major markets are there that have a lot of tilt-up, multi-tenant parks or smaller inventory and like a larger, robust, mature market. In SoCal, we have a big market. We have a lot of that product type, DFW, Atlanta, New Jersey, Chicago is a big one, right? Chicago is the biggest single market. So I imagine that’s a fantastic place to be in terms of being right in the middle of a market, that’s got a lot of activity going.
Jordan Kovalsky: Yeah, absolutely. Our market is, I think we go back and forth with Dallas. And if you ask somebody from Dallas, they’ll say they’re the largest market and if you ask somebody from Chicago, they’ll say they’re the largest industrial market. So it’s a good head to head that we have going. I think what’s unique about both markets and I’ll say, especially ours since I’m a little bit biased, is that within our market, not dissimilar from LA is that there are so many micro markets within it. So, as a market leader for the Midwest in Chicago, we’re constantly looking at, not just where do we want to buy in Chicago, but what are the different dynamics and fundamentals of each specific market. And as a group that’s focused on last mile, we have to recognize that everything is last mile to someone. So of course, you think Chicago, great. We need to be in close proximity to the population center of the city of Chicago, but we also have large suburban pockets that have a desire for last mile distribution. So to the extent that we can be in close proximity to the Northern suburbs, the Western suburbs, the Southern suburbs, how can we distribute to those different pockets as well? Which is one of the main reasons we focused on the O’Hare market as an example, because you’re close to an airport and you can pretty quickly shoot out to the Western and the Northern suburbs. So not necessarily downtown in the middle of Chicago, but a great last mile play.
Justin Smith: We think LA is the biggest market, right? It’s so funny how everybody feels that way. What are some interesting challenges that are unique? Like property taxes. Taxes something that everybody will like a gripe about. How do we deal with that? Or it’s once we’re all on the triple net basis, it all evens itself out because I got to imagine a lot of people still have old school gross leases, then you got to deal with that. Forgive my ignorance, in these pockets, some pockets are better or worse when it comes to taxes too, or something maybe you’re more sensitive about?
Jordan Kovalsky: The same way you guys never talked about prop 13. We never talk about Cook County. Yeah, Chicago is notorious for having some trouble with its taxes. I think that the takeaway is that to the extent that we can compare our sub-markets on a gross basis, it’s an easy comparison. Cook County definitely has a higher tax, so it varies building to building. You do have the opportunity to apply for what’s called a six view, which essentially means if you’re improving the exterior of your property, whether that be giving your building and shaving a haircut, in order to not just improve the building, but to bring a tenant to that market, you can decrease those taxes for 10 to 12 years. But for the most part, the buildings don’t have six Ps in place. So you’re looking at somewhere between two and $4 per square foot in Cook County. Whereas outside of Cook County, you might be looking at between a dollar and $2.50. So definitely a big Delta but you see that we make up for it on the face rent. So it really all comes down to that gross rent. Tenants do prefer to be outside of Cook County though. Investors prefer to be outside of Cook County. How will that change over time? I think we’ll start to see Cook County has a stronger market for the last mile perspective, whether it be proximity to the city of Chicago, proximity to O’Hare or just proximity to highways.
Justin Smith: Are you purely on the acquisition side or do you do like asset management or how do the roles shape out?
Jordan Kovalsky: Yeah, so I oversee our entire Midwest market and so right now that encompasses Chicago, Cincinnati, and Columbus. That means I’m working on our acquisitions, our asset management. I wear our HR hat. So when I started, it was just me, we’re up to five people right now over the summer, we’ll have three interns. We’re looking to grow that team right now. So it’s a pretty dynamic role. The asset management side has actually been pretty exciting recently because you know, we underwrite rents, one number and by the next week it’s a dollar higher. So the same way, it’s fun to win a deal. It’s fun to bump a lease up.
Justin Smith: Yeah, asset managers used to have to deal with what the acquisitions people for better or for worse. Where now it’s like see, I managed to look at what I was able to create.
Jordan Kovalsky: I’m the hometown hero.
Justin Smith: Yeah, but underwriting, like that’s interesting to think of how you look at that now with how high can you push rents or how are the increases, the annual increases? Are you looking for a shorter lease now or longer leases to capture or lock in? What’s kind of your take on that?
Jordan Kovalsky: I think it comes back to understanding the different dynamics of the different pockets within our market. I think as you get more on the outskirts, it’s okay to have a seven to 10 years lease in place. But if we’re talking about upper village, which is just adjacent to O’Hare international, of course we’ll do a two to three-year deal because we just don’t know where the rent growth is going. And even to the extent that we’re able to push those four to 5% escalations on a tenant, which more and more often we’re able to do, not just in Chicago, by the way, we’re finally hitting that in Columbus and Cincinnati, which is awesome. The rent growth might be higher than that. So if we want to get to market three years from now to beat our own lease that we just signed. Yeah, we’ll do a shorter.
Justin Smith: Yeah, probably you have a wide variety of sizes too. I would imagine. The few I had seen, like, I would think like 20 to 50,000 feet, but I saw maybe a couple that are like a hundred. I don’t know if those are a hundred and a hundred plus or a multi tenant or like a single tenant. But that probably changes a little bit of how you look at term two, I would guess.
Jordan Kovalsky: Yeah. I would say typically on those smaller tenants we’re seeing that they’re looking to sign three to five-year deals and we’re actually one of the few groups willing to do a three-year deal right now, just because we see the potential there. I think a lot of other companies would prefer to have the term on a hundred thousand square foot tenants. You’re right. Most of those are single-tenant buildings for us. They’re not broken out in multi-tenant. Those tend to be five plus year leases just because the tenants are looking for a longer commitment.
Justin Smith: Tell me about this magical technology that we speak of. I started to see some people get a lot better at tracking assets and their relationships with brokers and how they handle inquiries and submittals for potential acquisitions, but more on like the CRM and managing the flow of data. This is something as I was just looking into the company a little bit more like it’s a tremendous asset that you guys have built. So I was just curious to learn a little bit more about that.
Jordan Kovalsky: Yeah. I’d say it’s really two-fold. It’s funny, when I was at Lincoln, we were just starting to integrate pipeline software because we were looking at 500 deals a year. It’s a lot of deals. Especially if they’re not just located in one market. So in Seattle, in November and not look at a deal in Seattle again until the following June you don’t remember everything about the market. So you want to have all your data integrated into one place. Now, when I come to Faropoint, sometimes it feels like I’m looking at 500 deals in one month, and that’s just because of the deal velocity, especially when you’re looking at smaller deals that could range from 2 million on. So we’re definitely seeing a lot more deal flow in order for us to manage that we’ve come up with a process that really starts with our acquisition pipeline. And I think what’s unique about it is that it is. Integrated our brokers into that process. So our brokers actually have the ability to come into our pipeline software to upload deals, and it’s constantly flowing so that we’re able to quickly submit an offer call within an hour.
Justin Smith: Brokers don’t complain that it’s more work, right?
Jordan Kovalsky: I think because of the amount of deals we’re able to get them like I said, in seven months, we were able to pull off 17 deals and that was with me just starting in April. That’s pretty phenomenal growth for a company just based on the technology that we had behind it. And I think the second part of that is due diligence, in which we use a task management platform called monday.com, which involves all of our third party consultants. And having them integrated into that process. You know, you wake up check Monday, kind of see where all of your due diligence is on each deal. Let’s say I have 10 deals going on, all of my third party consultants are on that same platform. Being able to kind of pick up where they left off on any given deal and know what we need to do moving forward. So from start to finish on any given deal, everything is flowing through a different tech platform and then the process for collecting all of that data to make us smarter in our decision making, going forward.
Justin Smith: To your point of, if you only look at Seattle deal and it’s been a while, like here you’ll have different deals from different markets that can all live in one place that you could access.
Jordan Kovalsky: Exactly, and even if it’s a deal that we ended up deciding not to pursue the ability to go back and review that information to say, why did we miss that deal? Should we have been more aggressive? Maybe on our underwriting because to our points earlier about how aggressive rents have been moving. We can reflect on, hey, we weren’t aggressive enough on our rent or rent growth or Hey, maybe if we’d use the four or 5% escalations that we’re now ending instead of the three, we could have won that one.
Justin Smith: Yeah, so tough to everybody looking back now. You were a hero and now you feel like, oh, anybody could have done that. It’s easy to look back on that and at the time it wasn’t so accessible or so easy. And then sourcing deals all through brokers. You guys find them on your own or how do you build that part of the pipeline?
Jordan Kovalsky: We believe heavily on leaning on the brokerage community. We’re not doing it on our own. We’re definitely a relationship group. So we work a lot with leasing brokers, investment sales brokers to help us source the deals and help us from those deals start to finish and then onto the next.
Justin Smith: Property management, you’re not doing that too or that’s a third party, or how do you guys handle that or look at it?
Jordan Kovalsky: We do pretty much everything in house except leasing and sourcing. So within our Chicago group, as an example, we’ve got five team members that are doing acquisitions, asset management, property management, construction management.
Justin Smith: Yeah, and I imagine that’s just keeping control of it, and it probably helps in driving the value too I imagine. And being accountable to like a project success or like having more ability to influence it positively.
Jordan Kovalsky: I think what’s nice is that our asset managers, for example, can walk in and get to know a tenant. Tenant wants to put a silo in the parking lot. It’s a quick conversation where they can give an approval. There’s no jumping through hoops. They have that direct relationship with the tenant and the ability to give them the quick yes or no as opposed to having that tenant jump through hoops. So creating that direct relationship is really giving value to the tenant. I think they’ve come to appreciate that a lot.
Justin Smith: Yeah, the buck stops here, right? Like if that’s what you want to hear is I will be responsible for making sure that this gets done. And then construction, TIs, capital expenditures, these haircuts. When you think of what a typical Capex project would look like, that’s just a regular TIs or like we’re adding docks, we’re doing new roofs, or what would you say is a general scope of work we’re usually working on?
Jordan Kovalsky: I would say various things across the board. We’ve bought two projects that have had vacancy and from day one our plan is to go in and get them ready to be lease ready. So whether that be just white boxing them, cleaning up the office, putting on a new roof, whatever that may be. We want them to be ready for tenants to move in tomorrow because of the velocity in the market. We don’t want to be sitting on our hands, waiting for the tenant to come along when we know that there’s so much lead time for that work. I think to the extent that we see projects in the market that are vacant, that require a little bit of heavy lifting. We’re open to doing that because we see the opportunity there. So we’re not afraid to get our hands dirty.
Justin Smith: Have you been a part of any sales yet or like when you think exit strategies are for a five to seven year hold. Maybe that’s something, your experience that you haven’t touched on so far yet.
Jordan Kovalsky: So we sold a couple assets on a one-off basis within our fund. So we just sold one in Cincinnati as an example, that was called a little bit more incubator product in a tenant’s average, probably around 5,000 square feet. It’s the building that didn’t have any dock high loadings. So it didn’t fit perfectly within the fund. It was an opportunity when we bought it in a portfolio.
Justin Smith: That’s what I’m looking for. There are people that look for that kind of stuff.
Jordan Kovalsky: Exactly and you know, what, it ended up being a great transaction on the sales side. We were able to get it at a low enough basis that we got comfortable. We added some value to it, gave it a shave and a haircut, got it least up and were able to sell it within the fund life. So there’s definitely assets like that, that we look to dispose of that don’t perfectly fit our strategy. But on the aggregate, we’re really looking to build a portfolio.
Justin Smith: Growth wise, where do yourself being in the next market? Or is it really just about focusing on the ones that I recognize that you have you and your market, and then we have the other people at your firm and the other markets. And we haven’t seen you out here yet, but hopefully sometime soon. What’s the growth plan for you and for the firm?
Jordan Kovalsky: So I would say for our current market leaders, myself included, you know, we just closed on our first acquisition in Columbus, in December. That’s definitely going to be our focus for the Midwest in the next 12 months, how do we grow Columbus? For our Tennessee market leader, he’s looking to grow Memphis into Nashville as well. Our Florida market leader just moved down there two months ago. So he’s looking to grow Miami, Jacksonville, and Tampa, possibly Orlando as well. And then possibly in the next 12 to 18 months, we’ll look at a west coast market leader who will focus on LA and surrounding markets, whether that be Phoenix, Salt Lake City, Vegas, wherever else makes sense for us.
Justin Smith: Yeah, that’s awesome. I don’t know if you’ve met Tom in Columbus. So we’re in all those, Columbus and in Nashville is our newest office. So that’d be maybe an introduction if we can help introduce you to some of our people that are running those offices in those Columbus, Nashville, and Miami markets. I’d be happy to make introductions for you.
Jordan Kovalsky: Yeah absolutely.
Justin Smith: Cool. Well, I think we’ll keep it brief Jordan. We hit the high notes and I don’t know if there’s anything else you’d like to add other than it seemed like you’re hiring for some positions and why would people want to work there? I imagine there’s plenty of reasons. It seems like you guys are aggressive. You’re very focused. You’ve gotten all the resources and like to know your stuff cold. So I got to imagine, it’s not too hard for people to find it to be a good position and a good firm to work for.
Jordan Kovalsky: I think it’s a young entrepreneurial company. There’s a lot of opportunity to get a lot of reps in while learning a lot really quickly. We’ve been around since 2012 focused on industrial since 2018, but we’re still some of the startups. So there’s an opportunity to kind of get in and still mold a company. Which I think is unique, that being said, we’ve got almost 80 people, so it’s a big group that you can lean on. So it’s been a fun learning experience for me, and I’m still learning a lot every day and that I’ve enjoyed it so far.
Justin Smith: I’m jealous. Yeah, being in the middle of all of the deal flow and seeing everything that comes available. I feel like you get so much experience so fast. That’s got to be a ton of fun.
Jordan Kovalsky: For sure.
Justin Smith: Well, thank you, Jordan. Thank you for joining me. I really appreciate it. We look forward to catching up with you later.
Jordan Kovalsky: Sounds good. Thanks Justin. I appreciate the time.
Justin Smith: Okay. Bye-bye.
