In the middle of the pandemic, people are more challenged when it comes to working in the office and making investments. But is the industrial and real estate markets still a good choice to consider? Justin interviews Jay Tanjuan of the Panattoni Development about finding opportunities in the Southern California Industrial Markets. They did not only speak about the latest market trends, but Jay also shared how he got started.
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Highlights
- The similarity between the great recession and the pandemic: The working life in an office is tough. – 1:42
- Starting small: How Jay got started. – 5:00
- How did Jay’s role change over time? – 12:16
- We recognize that achieving scale isn’t going to happen, but if it’s a good enough deal and in the absence of a better one, maybe that one is worth doing. – 19:46
- What’s the dynamic in Orange County? – 20:40
- There are so many segments and categories that you need to think of how to justify pricing. – 26:58
- Does he think that entitlements and landscapes are changing in the horizon to make it more amenable to projects? – 28:39
- Role in the capital markets when financing deals. – 30:41
- You have to keep going and focus on the good core markets. – 36:09
- The lease rates have surpassed the growth rate of construction costs. – 38:02
- Leasing environment: How does he respond when he hasn’t quoted the rate but people want it? When’s the best time to agree to a deal knowing you can’t deliver immediately? – 40:11
- Best ways to reach Jay. – 44:36
Episode Resources
Connect with Jay Tanjuan
Connect with Justin Smith
- https://smithcre.com/
- https://www.lee-associates.com/
- jbsmith@leeirvine.com
- https://www.linkedin.com/in/justinbsmith
Justin Smith
There he is. How’s it going? What’s going on in your world today?
Jay Tanjuan
It started out with our chat today.
Justin Smith
Cool. Well, thanks for joining me this morning.
Jay Tanjuan
Thanks for inviting me.
Justin Smith
Yeah. So, Jay Tanjuan, Panattoni. Tony is joining me today and I figured the best place to start really is just a little bit about your firm and just your time there. That’d be a good opportunity for people that aren’t familiar with it already. And don’t know a little bit about where it came from and that kind of stuff.
Jay Tanjuan
I’ve been at Panattoni for almost 10 and a half years now. So, it’s really flown by I can’t believe it’s kind of been that long.
Justin Smith
You’re going to approach old guy status soon.
Jay Tanjuan
It was really kind of an interesting time to start, I mean it’s 2011. You know there wasn’t a ton of development going on, if any industrial at that time. So I got hired right after the Great Recession kind of thing. Just kind of coming out of it. I actually ended up in Orange County, because I was in doing tenant rep brokerage for JLL. So, I did that for a couple years from 2009 to 2011. Just an office tenant rep doing cold calls and walking buildings. All that business development sort of stuff. And coming out of the 2009, it was a tough go. I think it’s a lot tougher now for office guys, just because they don’t know what the requirements going to be. So, it’s impossible to make a decision. You don’t know how many people are going to be in the office each day and everything’s in flux right now.
Justin Smith
Imagine buying office to right now.
Jay Tanjuan
How do you value the real estate when you don’t know what kind of a lumpy income that’s coming in. So, who knows how that outcome will looks like? I was doing that, and I really liked it. I had a good time doing brokerage. It was a kind of less than traditional path out of an MBA program. That’s kind of how I ended up in Orange County was from UCI, went to MBA program there, graduate 2009. I knew I wanted to get in commercial real estate, but there really was nothing available, nothing was happening. And I didn’t want to wait around for like an analyst job that may or may not come. I just wanted to start working hit the ground running right after graduation, in June 2009. So, the economy was really bad at that point. Like all industries were affected. It wasn’t just real estate.
Justin Smith
I remember that was a terrible batch of years. Those are the worst ones in the 17 years I’ve been in the game. That two or three years stretch, and it was enough to survive and stay alive but just barely.
Jay Tanjuan
I was making a career change from the Navy, so something totally different. But I just had this interest in real estate and through meeting people while I was in school, and networking, and doing internships, I really loved the industry. So, I was like this is what I want to do, and I was going to get a job in commercial real estate no matter why. A lot of my mentors were pushing me towards brokerage because the thought was like, hey, you’re not making a lot of money as a student, you’re making zero pretty much and then so just extend the pain a little bit longer as a runner on a brokerage team. So I got hooked up with a really good firm and a really good team. And I think for the young folks looking to get into brokerage, I would place the quality of the team higher than the name of the firm. You think Oh yeah, I want to go to like a well-recognized firm, but if you don’t have a team that’s helping you and guiding you and mentoring you, it’s going to be a tough go. So, I got really lucky I worked with Wade Clark, Rhonda Clark, and Joe Bevan, in the JLL office. They were former Staubach folks. It was just an interesting time in that office too because they just acquired Staubach. So JLL was more of a salary plus bonus type of structure. Then they brought in all these kind of quote on quote, street brokers who are commissioned only. So, it’s a big culture change. So, just kind of interesting time to be there, we’re really small. And then, I had an opportunity to join Panattoni, about 18 months or so into my time at JLL. At that point as a broker, you’re seeing your see the light at the end of the tunnel, you’re doing your own deals, and you get some momentum. It was kind of hard to just leave all that, all the relationships I’ve built. You know cold calling like crazy and finally some of these leases are starting to expire and I was getting shots that went in the business and all that. So, I had to wrestle with that decision but to go into something in industrial development. I didn’t have any background and I had zero knowledge. I didn’t know where the Inland Empire was. Driving up to Vegas, passing through all those cities, Ontario, Rancho Cucamonga but I had no idea what that was. I didn’t know that was the real hotbed for industrial development and so important to what we do. It was a big steep learning curve for me. Initially, as I mentioned earlier, kind of struggling with the decision. I just thought again, kind of consulted with some of my mentors. I didn’t want to look back and say, oh I could have done it at that time, but I didn’t. So, I was just like, Alright, I’m just going to jump into it. Industrial I don’t know anything about, but it seems to make sense. You got the two biggest ports in the US by far. Everything’s coming in from Asia, from China through those forts. So, they got to store all those goods somewhere. So, it just seemed to make sense. I had no idea that industrial would be what it is today, I had no idea that e commerce would make such a huge impact to our business. So, it’s just kind of dumb luck but very fortunate to have landed at Panattoni and in industrial for sure. That’s kind of how I got my entry into industrial development 10 plus years ago. The reason I really got hired was Panattoni did this big billion-dollar joint venture with CalSTRS. So basically, they looked at all the national portfolio of pane Panattoni they picked all the best assets and they rolled it into this big joint venture. And then it would allow us to keep the lights on when development slow because we’re getting leasing fees, we’re getting asset management fees, disposition fees kind of along the way as you’re managing this portfolio and existing portfolio. Then we could chase new deals and that was really the goal to be able to chase new development deals.
Justin Smith
The portfolio is made of buildings that the firm had built.
Jay Tanjuan
Right. So, it’s all Panattoni developed buildings. Now you have the cash to kind of go chase new opportunities. And it’s been a really good relationship, a really great relationship the past 10, 11 years. I think that joint venture was formed in January 2011. So right before I got hired in May 2011. So, I started out, just doing some leasing, and was doing some TIs. So just kind of started get my feet wet. And then as I leased up that portfolio, the existing portfolio that we had started get more responsibilities. I started working on development deals and then really started getting in on entitlements acquisitions. I just really got a good exposure to a lot of the different areas in the development process. And I think it helped that when I started in 2011, there were only three of us. There was a partner, another senior development manager, and then myself as a new hire. So, we were doing everything. So, we got to wear multiple hats and really kind of got raised in this business as a as a generalist and kind of just doing a lot of different things. It’s been a great experience it’s still going. So right now, there’s no end in sight.
Justin Smith
I feel like having the lease background, when you think of good first experiences, I got that when I was looking to jump in. When you think of part of your JLL experience of knowing the underlying user, the requirements, knowing the leasing process, and what it takes to put that together. Know that’s the underlying value to these buildings in the first place is probably a great place to started.
Jay Tanjuan
I really appreciate how difficult it was to get a deal done. Just come in 2009 like nothing was easy. There was it a lot of competition. A lot of brokers calling on the same tenants and calling on the same people. It was definitely a good learning experience and got me really comfortable picking up the phone and calling people and walking up to build, walking up to people and office buildings that I don’t know, and that’s kind of opening a door.
Justin Smith
Opening the door and introducing yourself.
Jay Tanjuan
It helps now with acquisitions and because I’m on the phone a lot just talking to brokers and talking to potential land sellers. All that experience really helped. There’s really no one path to development, so a lot of these developers have various backgrounds. It’s pretty interesting to see just in our office, there’s folks with construction backgrounds. There’s folks that come through the analyst route. I came through the brokerage route. So, there’s a lot of different ways to get there. I’m biased because I came through the brokerage route. I think of course, that’s the best way.
Justin Smith
It’s one of the common ways. How has your role changed over time as you’ve moved on? When you think of today as still lean and mean tea, you still probably where a lot of hats and still cover a lot of areas? Do you still handle leasing and TIs?
Jay Tanjuan
I still do a lot of the leasing for existing portfolio. I’d say half my time these days, I’ve been trying to focus on acquisitions. Last year, we picked up the LA market and San Diego industrial market. The previous partner left the firm to start his own firm. So, it was a really good opportunity for me personally, just to expand that area and try to grow it for the firm. Over the 10 years, we’ve developed really good relationships in the Inland Empire and Orange County. We know a lot of folks and so we see a lot of deals without having to make outbound calls to people. LA it’s definitely a challenge, a new challenge for me just to introduce myself and reach out to all the brokers in LA. So that they understand that there was a transition and because some people I’ve called they didn’t know that there was a transition. I’ve just been doing it kind of word of mouth, word of mouth marketing, and calling every day and meeting with people face to face. It’s kind of really interesting and fine to start building relationships. I mean, you’re not going to be best friend after the first phone call and first meeting, but over time you have to develop the trust. So, when something comes up that you’re kind of top of mind. That your brand is strong enough where someone will think Okay, this is the guy that I want to bring this deal to. I got one shot to make this deal and who do I call first? That’s kind of how it is and you just have to prove that over time by doing what you say you’re going to do and follow through and get it done. Then you see kind of what happens just in the Inland Empire, there’s a lot of inbound calls that happen. You see it in brokerage as well. Once you have that brand recognition and you’re Top of Mind with potential clients that you’ve been trying to prospect, they’re going to call you. know, he’s That’s why the senior guys in the business, maybe aren’t doing as many outbound cold calls because they have so much inbound stuff coming in and just managing all the clients that they do have.
Justin Smith
I’ve got a problem. Something came up. There’s an opportunity. We signed a contract. Which is exciting, I imagine like exploring a new area. Along with meeting the players, you see a different dynamic. Was there anything you would say in LA and San Diego, that was not surprising, but that it’s a different dynamic that you picked up on that you thought was interesting or appreciate more?
Jay Tanjuan
Yeah, with LA, it’s just a massive market. I mean, it’s a billion square feet. So, there’s so much opportunity. Even in a really tight market where there’s not a lot of deals happening. there’s still a lot of opportunity because there’s a billion square feet.
Justin Smith
That’s like picking up Chicago. Let me think I’m going to have to come up with a plan here.
Jay Tanjuan
Yeah. So, I really haven’t even touched Ventura County or North LA yet. I’ve been focusing a lot of my efforts in central LA, mid counties, and South Bay. There’s more than enough there to keep me busy. And over time, I want to get more up to speed in North la in Ventura County. I think there’s opportunities there. I’m still trying to wrap my head around it, like in terms of like the disparity and inland pricing up there.
Justin Smith
What’s it’s place within the market?
Jay Tanjuan
Exactly. Same thing with San Diego, I haven’t really penetrated that market yet, but you only have so much time in the day. There’s also opportunities there especially kind of what’s going down close to the border and Otay Mesa. Amazon’s obviously down there. They’ve made a big investment there. And it seems like wherever Amazon goes, a lot of good things start to happen. A lot of synergies start to reveal themselves and it just creates some momentum. So, I think that’s going to be a really good submarket to watch. And then also if this nearshoring ever takes place where we are less reliant on manufacturing in China and Asia and look to Mexico and maybe within our borders to do more of that the manufacturing component. Then that Otay Mesa industrial market could really take off more than it has already.
Justin Smith
You would think that investment would foreshadow that something they’re betting on? Yeah, that’s exciting. It’s fun to pick up but the size of the market, you got to pick and choose the hotspots. And especially when you think of the size of projects that you’re looking for. I imagine you also want more velocity there, like medium size or larger when you’re picking your pockets.
Jay Tanjuan
Yeah, and that’s another thing like in LA, it’s more infill. So, the size of the deals aren’t as large. We’re looking at 4 to 6 acres is kind of the sweet spot for a lot of these potential development deals. You know, it’s really rare unless it’s an assemblage, which is probably even more difficult to find in LA. It’s harder to amass like a large parcel of land. We’re seeing that in the Inland Empire west as well and in the east. So, to really get anything of scale, you’re having to push further and further east. And do like these creative land assemblages, which take time and resources. That’s definitely a big difference. An obvious difference between LA and Inland Empire. Which we still have a good presence in Inland Empire still have a strong presence in Orange County. But just now adding on kind of more opportunities and more territory.
Justin Smith
I was on the phone with an institutional group yesterday that was telling me about what they’re looking for and what they bought recently. One of them was a 17,000-footer in Santa Fe springs. And I was like, oh my God, institutions are buying 17,000 footers. Then next is going after 10s. They’re not really going after them. But in some of the inland markets with the inventory being tight, Okay, I guess that’s clean, we’ll do that one. And we recognize achieving scale isn’t going to happen there. But if it’s a good enough deal and in the absence of a better one, maybe that one’s still worth doing.
Jay Tanjuan
Yeah, especially with the land prices the way they are. A small deal ends up a $20 million land deal, for a four-acre or five-acre site. So, it ends up being a pretty significant deal at that point once you’re talking overall dollar amounts.
Justin Smith
It can become above the threshold of something very quick. And then Inland Empire West and East is what you started working along with Orange County. What’s the dynamic in those? I mean, I have a decent understanding, but I figure I’d love to hear your perspective on just the current sentiment of where we’re at and what’s happening.
Jay Tanjuan
Yeah, it’s really been interesting, especially of late because typically the infill markets like South Bay and Orange County, they kind of lead the way in terms of lease rates. So, they always have the highest lease rates and they’re always significantly above. The further east you go like the Inland Empire is significantly big difference in lease rates. It’s just really been interesting to watch because it seems like that gap has closed a little bit. But I think it’s more of a function of there’s so much new development and new construction that’s happening in the Inland Empire. The velocity of deals is so much greater than in the info market. So, the rates are constantly being pushed, you’re having 20 to 25 million square feet of industrial development being delivered each year. So, each of those new buildings and there’s a lot of institutional ownership out there. All the institution owners are pushing rates because it allows them to justify their next development. It’s all intertwined, as these lease rates go up, the land prices go up. So, you got to get more aggressive in your underwriting going into these deals. Construction costs are going up. Everything is increasing. So, in the Inland Empire all these deals are happening, and rates are getting pushed higher and higher. It’s crazy right now.
Justin Smith
The velocity is.
Jay Tanjuan
Even in the older product, which is second generation it’s still pretty good. It’s like a 2000 construction building is still 30-foot clear ESFR. So, it could still command the high rates that some of the newer buildings are getting because it’s still very functional. Whereas in LA and Orange County, the ownership typically is more of mom and pop and one-off kind of family type owners. And a lot of the buildings are functionally obsolete. So, a lot of these mom-and-pop groups, they just care about vacancy, and they don’t want to spend a ton on TIs. They just want to jam a tenant in there that has good credit. That’s awesome. They’re not pushing rates. I just saw another the other day, there’s a deal in Brea, I think it’s a Western Reco building that was built on Nasa Street. It’s 104,000 square feet and the rate was $1.13, which that’s good but it was good maybe a year ago or something. I think it should be much higher because what’s in the Inland Empire, we just did a deal on a renewal deal that was 229,000 square feet, 2000 construction and 30 foot clear is part of a larger and that was at $1.12. And then there were two brand new deals that just happened as well, they were $1.15 triple net in the Inland Empire. A 246,000 square footer and then a 199,000 square footer for $1.15. So, the rates in the Inland Empire should not be higher than Orange County. It’s not supposed to happen. I think it’s this location of information that’s kind of out there and I think that means to me at least that in LA and Orange County in these like true infill markets that there’s more rent growth coming. Deals that are going to happen that really need to push because the Inland Empire used to be like the threat that Orange County and LA people would use to landlords, hey, we’re going to move to the Inland Empire, we don’t need to pay these rates. But now, you can’t do that. And you can’t even go to Reno, Vegas or Phoenix. All those markets are extremely tight right now. It’s really tough for tenants out there that are trying to renew or find new buildings. It’s just super interesting time unprecedented. I talk to guys that have been in the business 30 years and they keep saying, hey, I’ve never seen anything like it. I haven’t been in that long. I have almost 11 years and I’ve never seen anything like it but we’ll enjoy it while it’s still here.
Justin Smith
Yeah, it’s interesting to think of the parity between different markets. And how much of that is brokers and ownerships and developers that only have visibility to certain portions of the market and are not seeing one or the other and how much that’s leading to a disparity. That’s information, like racking the visibility, and how much is different segments, right. So, like size segments, hide segments, first generation, second generation and just thinking through like, I feel like if anything, now there’s so many different, like segments and categories that you could think of, of how you would justify pricing. And I feel like there’s more and more reasons to how can we justify more? why is this one not commanding the amount it should? But it is interesting to think of that parody could have been 15% or greater. And then now to see sometimes that parody and sometimes the reverse, where it’s going five or 10%. ahead. And it is also interesting just the age of the product and dealing with that and what that means to you. What that means to velocity and what that means to pricing. Yeah, I love it. It’s infinitely fascinating to try and make sense of it all. When you think of on one hand, you’re looking at how do we build? Or how do I make sense of this site? And then imagine if you’re the user, and you’re Jo CEO, and you’re trying to make sense of it. One more step removed from the market itself, and you’re relying on your team and trying to make sense of what’s the best place I can be? Or why should I pay this amount? Or I’m stuck with this rate and add a renewal. Am I powerless or can I do something about it? Or where could I go that’s better? I feel like that’s a challenging time for users. It’s very difficult, no doubt. But then a lot of them also have their own like business opportunities, right? Where if their business is booming, maybe it’s not as big deal like problem to them, as we may perceive it, just seeing what it was and what it is. It’s interesting to look at everybody’s perspective and see how that fits into the big picture. The current lay of the land with the cities, are things getting much harder, kind of staying the same or similar kinds of challenges with entitlements? Do you see the landscape much change on the horizon? Or any way for it to become more amenable to more projects? Or does it seem like, it keeps narrowing and narrowing and narrowing and we don’t know? Not every place can narrow in some places will see an advantage or look to participate more in the market? What do you see in there? 0.
Jay Tanjuan
As industrial gets more notoriety and success, with that there comes a lot of folks that that want a piece of that as well. And so, there’s always been kind of an aversion to trucks and warehouse development, especially near residential neighborhoods. No one wants a warehouse in their backyard. So, I think over time and it’s happening now, these cities are starting to push back, and it really makes entitlements a lot more difficult. So entitled land these days, I think is just absolute gold. I mean, if you have entitled land for industrial because of how difficult it is becoming in these cities. There are cities like, Santa Fe Springs that have been talking about a moratorium on industrial for a bit now. There are other cities that are kind of looking at that sort of stuff as well. It’s definitely a challenge for us. You think about, okay, what could stop or slow us down in terms of industrial development? That’s one thing that could. I don’t think it’s going to stop industrial development, but it’ll definitely put a damper on how fast you can get through the entitlement process. Just with some of the pushback that we’ve been seeing.
Justin Smith
From the demand side, right. Right. You don’t see many go the other direction, where they’re now open, or trying to find new ways to accommodate growth. Or trying to increase the amount of inventory that they have available. And then capital markets, is that something you play much of a role in, in terms of how you’re financing deals?
Jay Tanjuan
I think it’s definitely a challenge as these land prices get much higher because you’re going to have to find equity and debt who are on board with your vision and telling them Hey, this is kind of the landscape. Now, if you want to acquire industrial product, it’s no secret that land pricing in the infill markets are kind of in that 120, and in some cases on some of these openly marketed deals, north of 120. I’ve been hearing 130 to 140, land foot numbers. It’s pretty staggering. You take five-acre site, and let’s say, you could 50% coverage, you get 100,000 square foot or on there, and lands at 120. So, for 100,000 square foot building, that’s $240 a square foot on the building already, just going into it, and let’s just land. With construction costs increasing and whatnot and you’re looking at 140 to 145 a foot just on the hard and soft cost. So, then your total project costs on it on a new deal for 100,000 square footer is going to be pushing $400 a foot. An example that I gave, that’s 380 to 385. But if you’re paying more for the land, then that’s going to push it to 400. You have that part of it and then the other part is, okay, we’re at lease rates. Lease rates have to be in north of kind of 150 for 100,000 square foot building, if you’re solving to like a high force yield on costs, that’s the math that has to make sense. So, maybe the guys that can hold long term, and they’re not as concerned about that. They can solve to like a high threes yield on costs going into it. In most cases, if you’re solving to high fours, and you’re close to 400 bucks a foot, that means that you got to be 500 bucks a foot on the exit. And that’s like, the high threes exit cap rate. What does an office building in downtown LA sell for high rise? So now, you’re going to have to make sense and be comfortable with industrial buildings being more per square foot than high rise offices. So, you know that if you want to play in this game at this price is kind of what it has to be at. So, it’s definitely a challenge out there and we haven’t seen as many like in the investment sale comps to kind of support that exit. but that’s just what people have to kind of underwrite to and eventually there will be some comps at that price. But I think a lot of our partners are like, Okay, well, investment sales bring out product out to the market after we lease it up and sell it as investment sale. But nowadays, it’s like, Okay, well, if we sell it, everyone’s high fiving with the highest price per pound and lowest cap rate and popping bottles of champagne and everything. But now, how are we going to put this cash you get so now you have to buy something more expensive. So, you don’t see a lot of these deals coming out to the market. So just hold on to it.
Justin Smith
It’s education. I imagine that constant education without the capital markets players of just figuring out like, okay, in that environment, how do we adjust our strategy? Or how can we make a winning situation out of that environment when you know it’s a high bar of entry?
Jay Tanjuan
You can’t rely on today’s comps. You have to look at kind of the deals under construction that are actively negotiating on lease rates. To say okay this is where I think lease rates are going to be so it’s a lot of faith is involved and faith in the infill markets that things will continue. If you stopped a year ago and you didn’t do any new development because you thought that the pricing was too crazy, you would lose out on years worth of tremendous opportunities and tremendous growth. And who knows, if we’re going to say this a year from now about the market today? We believe so. Otherwise, we wouldn’t be in the game. You just kind of keep going and you focus on the good core markets and when the music does stop, you just hope that all the deals that you have picked up are going to be able to get leased. When you play in the infill markets, I think you’re going to end up okay over the long term, especially if that’s kind of the outlook.
Justin Smith
A few pick quality markets, you build quality product, right. That’s the best way you can set yourself up to go from offense to defense if you have to litigate your risk as much as you can. I think if at some point, you would think capital would flow less into industrial and more into other places where there’d be higher yields and more risk like buying into office. If you look at that as a comparison. But I feel like, the capital flows just continued to dogpile as that kind of how you’re feeling it, too and what you’re seeing?
Jay Tanjuan
Yeah, at least for the time being, I mean, there’s definitely need for folks to get into industrial everyone wants to be in Southern California industrial but there’s obvious high barriers to entry to get into this market. So, it’s definitely tougher for folks who just want to jump in now.
Justin Smith
Have construction costs plateaued and are coming down dramatically? Or they continue the same trajectory of like shortages, roofs, and labor?
Jay Tanjuan
Yeah, I think we’ll continue to see that but luckily the lease rates have surpassed the growth rates of the construction costs. I think a big problem right now it’s just you know, the roof structure delivery timing. We’re hearing up to a year sometimes in the deliveries for roof structure. So, you really have to try to be proactive and watch that and try to if you have a project, you want to try to lock in the pricing now happier, have your roof structure design now and lock in the price and now. Then in a year when you have it titled and you have all the CDs fully designed and approved and then you’re under construction by that time you hope that a year is enough lead time to do that. So, it’s been pretty crazy to see that part of it because if you’re not doing that, you’re going to have to stop the job. You know, once you get to the roof structure, keeping open lines communications with your general contractors and kind of talking to them and understanding what’s coming down the pike.
Justin Smith
You can’t build a building without a roof. You can’t lease it, if you can’t get out, you can move into it. That’s a huge part. But I think what you alluded to, and maybe our last topic, perhaps, is the leasing environment, right? Which doesn’t heal all, right. That’s the demand component manifesting. And so it’s interesting thinking of the lease up of when you can, quote a rate, when you can entertain a deal, how you respond when you haven’t quoted a rate, but people want it. And then knowing when is the best time to agree to a deal knowing you can’t deliver for however many months it takes? How have you looked at that and what are you experiencing?
Jay Tanjuan
I mean with so much demand, I’ve never seen anything like it because before when I first started whenever we pre-lease something, that was a good thing. People were excited we pre-leased the building and the rates weren’t moving so fast. Some of the rates that we did on, when we pre-leased a project, in a kind of a multi building scenario towards the end they there was some little bit of rent growth. But it wasn’t drastic enough, where we would say, oh, we wish we didn’t do that deal that first building. We wish we didn’t prelease that one. So, there was never that sort of talk. But nowadays, if you have a project that gets introduced to the market, that’s blasted out to all the brokers, that’s not even breaking ground, it’s going to generate a ton of calls and activity. We have a project in Santa Fe Springs, I was talking with our brokers because we’re going to break ground in November. We’re talking about, okay let’s go ahead and put this brochure out in the market next week. I was just like, hey, be prepared to get bombarded with calls, if you want to do it this early. We can probably do it a little bit later as we’re closer to breaking ground. So, there’s kind of good and bad, but we’re not going to respond really to any deals because it’s just too early because we don’t know where rates are. I mean, by the time this building delivers, it’s going to be seven months from let’s call it November. So, we’re still like, nine months out from having a completed building. So, rates in nine months could be who knows, right? I mean, at this pace it could be $2. We underwrote this thing at $1 is a 92,000 square footer underwrote at $1 right around the time we closed, like October 2020. So, there was really no comps that supported $1. So, we were already crushing it. And then now, I think that’s $1.45 or $1.50 maybe and that’s just less than a year. The pace at which these rates are pushing is been totally unprecedented. I think the best thing is just to wait as close to construction completion as you can and make the best deal with the best credit and the best terms at that time. I mean, we’re very IRR driven so, we can’t wait too long because you can build the building now and then lease it two years later, and the rates will be probably astronomically higher, but that obviously killed the IRR. And you don’t want to tie up your money. You want to make money. So, you want to get at leased. So, the best timing I think is just do it as close to the construction completion as you can and go from there and don’t look back. When you look back at some of the deals you did and you say, Oh, yeah at the time they’re the highest but then six months later, they’re already just afterthought for the market.
Justin Smith
Did we do ourselves a disservice? Were we doing a terrible job and don’t feel that way at the time? We’re doing the best that you could with what was available. Oh man, it seems like so backwards in the sense of where you usually would look for like, the same building 10 years ago, you would want to lease it up and you’re just looking for the positive net absorption of just moving it and getting it occupied. Yeah, and it’s weird to wait and to be patient and you know, not jump the gun and to like, know when the best time is to actively strike a deal, but now it’s the waiting game. Well, I think that’s all the fun stuff. Jay, I know you’re a busy man. And you are an avid reader. If someone wants to reach you, they got an opportunity or something. So, LinkedIn is a good place for you.
Jay Tanjuan
Email is great. LinkedIn all good. I’m active on LinkedIn. All good ways to reach me.
Justin Smith
Okay, I’ll put that in the show notes. I appreciate you spending the time, Jay. It was fun to catch up. We had just had lunch, but I feel like long spurts of time like this are few and far between. So, it’s fun to get a spare moment. I appreciate you being available.
Jay Tanjuan
Thank you again for inviting me. I had fun just talking about the market and talking about what I’ve seen and hearing what you’re seeing as well. It’s always good. If you ever want to have back, I’m glad to be back. So let me know.
Justin Smith
Awesome. Cool. Thank you, Jay.
