Is it different this time? That is the question we’re talking about in this episode of Industrial Insights when it comes to the industrial real estate market cycle. We’re honored to be joined by a 40 year veteran of the Los Angeles industrial market, Rob Neal of Hager Pacific Properties.
Interesting topics we explore:
Is capital going to continue to flow into the industrial asset class? It’s interesting to understand that the capital that has flowed into industrial from other asset classes, will go back as yields get low enough in industrial, and yields rise in retail, office, self-storage, single family for rent, etc. Asset allocation is always evolving.
You and I are the original last-mile delivery drivers coming from the retail store which was just a poorly designed warehouse in terribly expensive real estate.
Where can we go with industrial rents? If they have gone up 20-25% in the last 6 months, is there a natural limit to what businesses can fit into their P&L? So long as the revenue part of the business equation continues to goes up, businesses can continue to pay larger overhead and still stay under the traditional 10% cap of revenue. How do businesses increase revenue? One way is with increased throughput, which is oftentimes through utilizing higher clearances and introducing warehouse automation.
Tearing down older properties to build new ones can be a one-way door in that it is irreversible. Municipalities are making that decision murky and less certain.
Hope you enjoy!
Listen to the full episode below and subscribe to the podcast on Apple.
Highlights
- Having a talent in a particular field – 1:45
- His background – 3:13
- How he got started – 7:39
- Is there a cycle for ecommerce? – 11:05
- There’s so much data in a financial cycle – 12:59
- Industrial real estate – 16:50
- Securing the capital – 20:32
- Industrial has slowly evolved – 22:41
- Making improvements to your business – 32:07
- Transacting and creating wealth – 45:27
Episode Resources
- Connect with Rob Neal
- rob.neal@hagerpacific.com
- https://www.hagerpacific.com/team/robert-neal
- Connect with Justin Smith
- https://smithcre.com/
- https://www.lee-associates.com/
- jbsmith@leeirvine.com
- https://www.linkedin.com/in/justinbsmith
Justin Smith
Well, I figured any good conversation, you’ve got to start with the firm and Rob and just like background, a little bit of who Hagar is, how it came to be. And just some context for anybody that’s listening that doesn’t already know Hager or hasn’t been having a chance to work with you in the past, just so that everybody can understand a little bit better what you guys specialize in and, and so on and so forth.
Rob Neal
Well, listen first of all, it’s a great pleasure to be with you. You’re obviously a student of your craft and I really admire that. We have a lot of folks who are in our industry, that it’s not their passion. On the contrary, I love people who this is their passion, and they really enjoy it. Warren Buffett talks about tap dancing to work every day. I totally get that this is a passion for us and it’s more than that. It’s a vocation. I had the chance to talk to actually quite a number of Roman Catholic priests and bishops about the concept of a vocation in the business field. They were first a little bit like, how could that be we know we have a religious vocation, but can a businessman have a vocation? The answer is, of course, yes but it consists of two important characteristics that define a vocation, whether it be in religious life or in the for-profit world and nonprofit world. Anything, whatever you do, those two characteristics are one is that you have a really unique and remarkable talent in that particular field and that you do things intuitively instinctively, we call them God given. Then you improve upon those with your dedication. So that’s number one, operating at really a high level and elite level and then the second characteristic that’s necessary is that in operating at that level, it gives the individual practitioner great pleasure to do so. So, it’s not only you’re operating at a great level, but it’s also fun and enjoyable. Not every moment of every day, but most of the time. I read that your I call you an ultra-marathoner. I know that’s not exactly the right title, but you put a lot of miles on the road and in doing so it must bring you some pleasure and enjoyment. Otherwise, why would you do that, but you have to have both. I have friends who love golf and if you’ve seen backswing, you wouldn’t want to have a meal afterwards. I mean, it’s just awful but all they want to do is talk about golf. I’ve also had friends who have been extraordinarily good at certain things and that’s not what they want to do. It doesn’t give them any pleasure. So I like to think that, that myself and my two partners, and quite a number of people that Hager Pacific Properties, really look at our business as a vocation. So how do we get started? Well, my background was in the institutional side, I was an acquisition guy for about 10 years with a variety of institutional groups and actually had a short stand right at the end of my career there with Prologis. Thereafter, I joined my partner David Hager and his partner Adam Milstein. This was in 1995 and the three of us formed a group called Pacific Industrial Partners, which pretty quickly became Hager Pacific, we consolidated a number of groups together. This entity has bought more or less consistently for the last 26 years industrial property but we have bought a few other properties. But the thread that runs through all of it is that their value-added types of assets and we add value. We started doing this when it was not fashionable to be a value-added investor and not fashionable to be an industrial. It’s like why in industrial Rob? Can’t you make something to yourself? It’s like, Mom no really, I’m going to be a success.
Justin Smith
Now, don’t worry Mom, this has a future?
Rob Neal
Yes, well I didn’t know. We went to industrial and went to value added again. This was 25 years ago; we went there because there weren’t a lot of people in the space. Generally, that’s what we tried to do. We tried to go to investments where there’s not a lot of people on the space. If you keep doing what everybody is doing, you will basically revert to the mean, you might do a little better than the mean, you might do a little less, but you’re basically going to do what the mean is doing what the average is doing. So, we have always tried to find a space where others aren’t in for a long time, that was industrial. Now today, my gosh, it’s unbelievably crowded but I do tell people every dog has its day, a stopped clock is right, twice a day. When I got into the business in 1982, which unbelievably, next year will be 40 years. I just never thought I’d be that guy. There were guys who had been in the business like 10 years when I got it, and I remember my God, he’s going to be in a wheelchair soon. But when I got into the business, you know what was the most attractive, the most robust, the most ironclad investment there was infallible and cannot fail. Do you know what that was?
Justin Smith
I do not know.
Rob Neal
Closed regional models. They commanded the absolute lowest yield, the highest price, they were the bluest of the blue plugs of property. Today, I think we’d all agree that if you had a continuum of assets, and one end was those that were attractive and at the other end were those that were not, it would be way over here, at the end that is not attractive. So, it has gone from being the most attractive asset in the entire history, and the entire constellation of real estate investments, to now being the least attractive investment of all, it’s gone from the absolute best to the worst. So, there’s a lesson there for all of us, in that at some point industrial will not be as attractive, but we don’t think about that our institutional friends don’t think about it that way. They think this is going to continue forever. Then they do what we sometimes hear stock pickers doing, which we know is problematic when they price it to perfection. That’s what’s going on in industrial right now, its price to perfection, nothing can go wrong. And so we’re getting assets that are trading, at three and below three yields. Which really, when you look at it, that’s probably an overall return, an internal rate of return or maybe five and a half to six to seven. If spreads on the treasuries go up, you’re looking at debt that is going to be probably in the four range solidly and that’s maybe 150 to 200 basis points in a real return. That’s not enough, not enough for the liquidity of real estate, or the capital recurrence of real estate or the uncertainty of real estate. So I’ve given you a very long answer to a short question about how we got started and how we look at things. Today, we’re a firm that boasts about 125 properties, all privately held. The partners hold all of the assets. We don’t have any institutional capital at all. So, everything is our own 100%. We get to benefit from the great buys, and we certainly are burdened by the bad buys completely. And today that makes us pretty unusual when we started. And when I started in the business, it wasn’t unusual at all. It was actually the norm there really was very little institutional capital, most of the capital was either private like ourselves, or might have been aggregated in perfectly maybe like, a guy goes out and finds six dentists and sort of syndicates the deal, roughly. But today, we’re the odd man and we’re the unusual one. But it gives us of course, remarkable flexibility. We’re not bound by any acquisition criteria. As I like to tell people, I can make any mistake I want to, in any type of property, and often do. So that’s some background on who we are and what we do.
Justin Smith
Yeah, I love it. It’s so wild to see a mall in Richmond be bought by Prologis. Right to take that analogy, cradle to grave and then see okay, interesting. Nobody would have seen that come in 10 years ago or 20 years ago.
Rob Neal
Yeah. By the way we’ve seen this with other assets and other asset classes. Certainly, with retail as a whole, with Office. People think that industrial is without a blemish, and it may be at this particular moment, but history would suggest that it too, will fall out of favor, something will happen. And so the question is what could possibly happen to industrial real estate, supply chain real estate? Well, I can think of a few things. But we do know it must occur and so it’s important as an investor to think like this. Not only to take advantage of market irregularities but also to think about the assets that you hold and how will they survive and how will they perform? That’s one of the joys of the job is not just looking at today, but also looking down the road, and trying to understand how the portfolio will mature and how it will perform.
Justin Smith
So we had an intro call where you brought up a topic that’s infinitely fascinating, which is the market cycle which you are alluding to and then in industrial, we have the current wave that’s I tried to do justice to describing in the book of e-commerce and all of the different component pieces of it. That I would think is a structural change to industrial and how you categorize structural it’s a big impact, no doubt. But it is not able to change that there are market cycles, that’s the part that you’re inferring or explicitly mentioning. It’s interesting to think about, how is there a cycle to e commerce, who is qualified to talk about its effect, and its effect on industrial? I would imagine you have a lot of visibility between the portfolio of properties and the tenants who are your customers and what businesses they are in and the relationship you have with your customers. Much like I found a Prologis they have a relationship with their customers that seems to glean more insights than many landlords that are out there. So I’m curious how you see, on one hand, something that changes the cycle and on the other something that never changes over time, there being a cycle? Do you think of it just being like a second bump, or a third boom or something along those lines? Then we’re all just forecasting how big that boom? Is? Or how long that lasts? Or how do you kind of take those two concepts and wrestle with them in your mind at the same time?
Rob Neal
You’re asking the 60 thousand question or $64,000 question, which, by the way, was a great show, if you ever watch it, maybe on YouTube or something, it was fascinating. So, if I can distill it into a few words, is it different this time? The answer is different this time because when we look at cycles, which by the way, everything tends towards a cyclical behavior, virtually everything. As humans were organized around a cycle, whether it be a solar cycle of the day and resting and sleeping and waking and being more alert and less alert, whether it be the seasons of the of the earth as it travels around its path around the sun. We see this in nature in not surprisingly, we see This repeating behavior in all sorts of different things. Financial Markets are probably no more prone to cycles than anything else but there’s so much data that it’s easy to discern a cycle and we’ve gotten very good. It’s like, show me a great stock analyst also show you a guy that loves baseball. And I think it’s not because he loves the game so much, but because of the abundance of data. So, the question is when we look at all this data, and that’s a discussion topic for a whole another show. But when we look at all of this data, what does it tell us? We actually have more noise now, in terms of our research than we’ve ever had before and it’s harder, not easier to discern these kinds of things. But we’ve been struggling for years. For the 40 years that I’ve been in the business to discern, are we making the structural break, which is what you’re talking about? So if you’ll remember your old economics class, there was the behavior of moving up and down a cycle or curve, if you will excuse me. A basic supply demand curve, moving up, back and down, up and forth. And then there was the concept where we actually moved and push the curve. we be we started moving up and down unintentionally. And so, there’s been a structural change. So, the behavior that we saw before is no longer relevant and it does not accurately depict conditions as they exist now. Yeah, but this is the question because it’s a very dangerous answer. So, if you make the decision, yes, it’s different this time and that gives you license to make remarkable long bets. On the history of pets.com, I think pets.com is gone to the moon and I want to buy pets.com, which by the way, was one of the great internet flameouts in 1999. But if you really look at cycles, and you also have to necessarily, you also have to look at bubbles, and how they exist. And there is always one person, who is the last guy or gal in and there must be a reason why they’re doing, they must see something that allows them provided they’re not intoxicated, or neighborhood, which they may be with some of our GameStop friends. But in the event that they’re not there must be something going on, in which they said no. I think it’s different this time because by the end of the any natural cycle, in any natural boom you’re in a territory that no one’s ever seen before.
Justin Smith
Trying to remain confident in order to make a long-term investment. There’s still someone at that peak with the confidence to say, yes, this is my hard-earned money, I believe in the future of the return of my investment assets.
Rob Neal
The sad fact is that the vast majority of time, the answer is no, it is not different. As a matter of fact, we’re just going through, the same basic curve that we’ve always done. So, it’s extraordinarily dangerous, to be in a position where you’re asking that question and you’re answering it in the affirmative, yes, I think it’s different this time.
Justin Smith
That’ll be an outlier scenario where it is indeed different. That’s a very small minority of the amount of time, right?
Rob Neal
Right but it does happen. The fact of the matter is because the pace of change, the actual pace of change is accelerated. We’re just seeing more and more cycles being played out. And we’re seeing more instances where in fact, it is structurally different. So the question is, are we structurally different in this cycle with regards to real estate, specifically industrial real estate? I’d have to tell you the answers is yes and the answer is no. And what do I mean by that? Well first of all, what do I know? What does anybody really know? At this point, we’re really looking into a crystal ball. I got off the phone today with some with an individual today who told me that his best date is suggesting and in the last six months in the Inland Empire West, he believes that rents have moved a minimum of 20% in the last six months. Okay, that behavior not only doesn’t exist in markets, it just shouldn’t exist in markets, especially real estate markets.
Justin Smith
Irrational exuberance.
Rob Neal
Maybe and maybe not. We may be looking at every market, by the way, everything is a question of supply and demand. So, you can look at any basic behavior over enough iterations, and you can see the effective supply and demand on how markets work. In real estate, it’s actually pretty straightforward. When we see rents moving like that, unless there is a massive psychological move towards the hoarding, which might work with toilet paper, but I don’t think it works with warehouses. Some of the judges suggested that’s exactly what’s going on. We’ll talk about that in a second. But unless that’s the case, you must have a situation to have that kind of rent spurt. You must have either a tremendous driver of demand, there just must be so many more tenants in the marketplace that they were worried before. Or on the spot market, what’s happening immediately, a third of the building stock was just wiped out. Who was it the cow and the Great Chicago Fire that knocked over the lamp and destroyed half of Chino and took the stock with it. So we know that hasn’t happened. So it must be demand driven? And the question is in this case, can you say that the demand is genuine? We’re not sure. I mean, sometimes we see market behavior by participants today, where they literally will lease a space to preserve it and try and keep it from competitors. It sounds extraordinary to me. But Amazon has been accused of doing that. And now we have evidently quite a number of Amazon type clones out of Asia that are doing something like that in our warehouse markets. Again, I just throwing it up for consideration and saying that’s actually the case. But in any in any event, the question is getting back to your original-
Justin Smith
It’s pervasive enough where it warrants a second thought about it, no doubt.
Rob Neal
Might be. So, the question is do we have something structural, and do we have something cyclical? I said, I think we have both. So, when we’re talking about a basic cycle, we have capital moving into a product type that I think at some point the capital will abate, because you’ll have capital not going into office capital, not going into retail of any kind capital not going into agricultural land-
Justin Smith
Hospitality.
Rob Neal
some other aspects of hospitality or even other asset classes, and so yields rise to attract capital. And at some point, the yield in industrial is attractive as the product type may look. They won’t be able to secure the capital, the capital goes somewhere else, that’ll take pressure off of yields, yields will rise, prices will follow, and they’ll stabilize. So, I think in that sense, industrial will be beholden to a continued pole of a basic market cycle. But structurally, it is plausible to say that in fact, we have changed the way we distribute goods. This is what you and I were talking about earlier, if you look at it and take the labels off of you, until recently you and I were last mile delivery men. And I’ll give you a great example, your wife said, Honey, we need the Flintstone vitamins, the chewy kinds of we’re all out and I love those. You being the good husband, you are said I’m going to stop by CVS on the way home. So you walk into CVS, which is essentially a warehouse storing a lot of goods and you go up and you find the chewy Flintstones, and you pick them. So you’re the warehouse picker and you get in your car and you drive home with exactly one product. So we’re looking at a warehouse that by the way, the CVS warehouse is a low clear warehouse with bad loading, there might be one dock door in the back or common and it’s on incredibly expensive land because it’s sitting on Bristol or something. But the fact of the matter is that was really sort of supply chain. Amazon and a lot of other smart people came in and said, we can do a lot better. We can hire our own last mile delivery people and they can be driving around with a specially equipped van that’s got all sorts of chewable Flintstone vitamins and a lot of other things and we can add a lot of precision to that we can add to online ordering. And if we do that, do we really have to have a CVS on Bristol across from South Coast Plaza? And the answer is no, we do not have to have it there, we need to have it close where there’s rooftops, but doesn’t have to be on Bristol across from South Coast Plaza. And so in that regard, things have changed. That is a structural change. Because up until the last five or 10 years, I can tell you industrial has slowly evolved but the changes were evolutionary, they were not revolutionary. until just recently. Prior to that, 24 feet, I remember when I got into the business in 1982, what was the prototypical industrial warehouse, 24 feet tall, probably had calculated sprinkler system like point four or five of the most remote, 3000 feet and it had one dock door per 10,000 feet and it had a loading and staging area of 120 feet, that was considered very generous. And things move through the buildings got taller, the staging areas got wider, the calculations got more dense for fire suppression, but these were all evolutionary changes, they really weren’t revolutionary changes. And now we’re looking at in the last few years, a revolutionary change, where all of these basic channels of distribution to a great degree and especially the last mile have changed. So that’s why I say the answer is both yes with these changes in the supply channel that are completely unprecedented and no, meaning that at some point capital will, our returns will be reduced or won’t look so good compared to other asset classes. And again, another very long answer to a short question.
Justin Smith
Yeah, that’s interesting way of looking at it with the capital and flowing back in is there’s more like a equilibrium in different asset classes. That’s where I think most oftentimes people think about e-commerce and its maturity are not like the end of e-commerce but like reaching the limit of it’s like maturity within that asset class. That’s where I feel like the confidence is there that it’s only saturated the marketplace 18% or somewhere along those lines, and there’s still a lot of runway for e-commerce to continue to gobble up market share from like a traditional or older supply chains. We’re thinking about it more on it is one of many assets and thinking about it that way that’s seems like that’s irrefutable are all but inevitable, that those have to, like go when they are out of equilibrium, then they will revert back.
Rob Neal
Yes and we talk about it with regards to securities, we talked about asset allocation. We talk about a pivoting of a stock portfolio, we talk about capital rotation right, you hear those words on CNBC or Jim Cramer. And what does that all mean? It means that capital is pretty efficient these days, we’ve seen it in our own industry. When we raised capital 40 years ago, is extraordinarily difficult and it came from small source and took a long time to aggregate. Now I have guys who call us up and say, we want to buy your portfolio and they say, No, seriously, we just raised a billion and a half dollars in the last 32 minutes, and they’re only half kidding and the guys are like 27 years old. Only discretionary. It’s mostly true and because of the network that’s in place, I just finished a fascinating lunch with a fellow who is running a capital aggregation firm, that raises money from small institutional investors, their average raise out of these little trust funds is $32,000 per person. Let’s see its June 28. So, the month is not quite finished, and he’s raised $91 million this month, on just that one program.
Justin Smith
In $32,000 increments.
Rob Neal
In $32,000 increments in 28 days. And that’s one program. He’ll raise a billion dollars and that doesn’t even talk about these institutional allocations that come from CalPERS and CalSTER and Colorado PERS and LA Fire and on and on and on. So, the ability to raise capital has never been greater. So, what that really means is that the friction in these intermediary channels has really been reduced to nothing. It’s fairly efficient to aggregate capital in our asset class, in real estate. But as capital comes in, it can also go out. And that’s what I was talking about in terms of these capital flows. The other thing I wanted to touch on, by the way, and this helps some people when they’re trying to think about how tall can that tree grow? What we need to be looking at, and this is especially telling now with regards to rent levels, is where can we go with rents, because if rents really have gone up 20 or 25% in the last six months, obviously, that’s not sustainable. But it means that a substantial asset or expense category for these warehouses has gone way up. So the question is, is there a natural limit there? And there is, our own understanding is that as long as occupancy costs stay at or below 10% then that’s probably sustainable but if the revenue keeps going up, then you can continue to increase your warehouse expenses. So you start to think, how does revenue go up and it’s really throughput. And that’s one of the other reasons that we’re seeing such great rental growth is not only because they’re is a great shortage of warehouse product but because people can still make sense, occupying these properties. Even if there was a shortage, where people couldn’t make sense, they wouldn’t occupy the buildings. And so I like to think of these warehouses as like a pump, if you will. Now, you’re an ultra-marathoner, you have an incredibly efficient pump, your heart and your lungs. And that whole system power is your cardiovascular system, at a rate that’s probably much more efficient than the vast majority of people, including myself, even though I consider myself pretty fit. What warehouses are also like that, if we can increase the throughput, through the asset through the warehouse, we can increase the revenue stream, we increase the revenue stream, then we can right size the amount of expense that’s associated with occupancy costs, and we can afford to pay more. That’s another reason that warehouse clearances have gone up, volumetrically cubically, these are a lot bigger building. Even though the footprint is the same, we really see that on an asset or product type that we love, which is freezer buildings, although they’ve been priced beyond belief. But we love freezer buildings, in part because people thought about freezer buildings, not as a square footage but as a cubic. It we have a number of freezer operators who still and this will blow your mind, but they still operate in excess of 100% occupancy. Okay. So tell me how that happens?
Justin Smith
So, I can only imagine, like the usual problems where you’re at such capacity or moving things around just to access others, and you’re just like, using your common area, so to speak.
Rob Neal
A lot of these guys rent the same space twice. They rent the same space twice because they might be renting it for two weeks, but the customer was out on the 10th day, and he brings the next guy in for two weeks and for four days is rented twice and that’s how they do it. It’s not well over 100% but the best operators, we’ve had them do that. With guys that are moving around small product. They have small clinics. Anyway, that’s just an aside.
Justin Smith
And the pump, that is interesting too because back when I was delving into warehouse automation, and robotics, right, all of those are an attempted increasing throughput. But throughput can’t be increased in all operations, and it can’t be increased in all sizes, or with groups with certain capital structures or all of those have to fit. So that would tell you that only certain operators are going to make it or you’ve got to invest in modernizing and find out what throughput related improvements you can make to your business in order to then afford to pay these higher rates. And wherever that tops out the amount of companies that can do that will be one input into your, how high can rents grow formula or one variable within that?
Rob Neal
Yes, it’s really important when you look at the modeling that takes place with some of our institutional friends, first of all, you’re just astounded that it could be so accurate, who knew that in year three, that rents would grow 7.34%? I mean, that’s really remarkable. I need to get them down to the track and help me bet on horses. But what you find is, is that it’s done in a vacuum and it’s never an understanding of, could the potential tenant still be able to afford these rents. Maybe where we were at rent levels before, it wasn’t so important. The other thing that we see that’s really skewing rents is there has been a change in the way product gets used. And if you’d like I’ll spend a minute just talking about that, because it’s been a fascinating ride for the last 40 years. So when we first started buying industrial property, call it 25 years ago, we looked at older stock and we did so because I’d had good luck when I was doing my lesson of acquisitions when I was drawing in on his paycheck and the main reason was, is nobody was in the space, nobody was buying. So I’ll give you an example. We bought a property that sat on six acres. We still own it today in Downey, very close to the 605 freeway and it had an old series of metal buildings that at one time had been used to build the tail structure of the space shows. I got fascinated and these were buildings that had at that had been built at or around World War II. World War II, as so many of the buildings in Southern California were major manufacturing center for the wherever. So, we were drawn to it because we liked the location. We liked the land. We were buying it cheap. We were really drawn to that. But it also hits some things that, we thought would be pretty interesting. Some attributes, and we thought at the end of the day will turn around and we’ll sell it to our friends or Prologis or Duke or somebody and they’ll end up smashing it and building a nice brand-new industrial building couple 100,000 feet. Funny thing happened along the way. All of a sudden, a lot of other people had the same idea, and the buildings were bought, but they were bought by developers who immediately demolish them. So, the amount of stock of this older asset, these older assets diminished rapidly. While they were missing a lot of the modern conveniences, new development, they also had some things that you wouldn’t build necessarily today, like sections that were 40 feet clear. With 20 ton under hook crane ways. Now who needs a 20 ton under hook crane way? Well, no one. Well, there’s a few people but when you find that person, he’s got to have that craneway. That’s what he’s got to have. This building also had 5000 amps of power. Now, who needs 5000 amps of power? Well, not many. But if that person needs 5000 amps of power, or 4000, or 3000 to bring that kind of service in is dramatically fantastically expensive. Other things like that utilities that people wouldn’t ordinarily See, plus the coverages were a lot lower. So, there was a lot more yard space and so we found that, while there weren’t a huge number of tenants like this, there were actually no options, actually no options for them. And so are types of these types of properties that were older, all of a sudden started getting attractive to the point where the values raised enough that we thought my gosh, maybe we’ll never sell these to a developer, and we’ll just continue to use them as is. Well, that was chapter two. So, chapter one was, first we were buying it, and we figured at some point, it gets smashed and sold to a developer. Chapter Two was as well wait a minute, there’s no more of this product and we have people that are really interested in it. Now, Chapter Three is we have people coming to us who in fact, do you want to demolish the building, but here’s the kicker. They don’t want to build anything on the on the site. They want to pave it and fence it and light it and they want it as a yard.
Justin Smith
There’s a value in there, there’s enough value in there.
Rob Neal
A lot of value. Why? Because of this new iteration we see in terms of supply chain. Where so much of it is so highly mobile and there’s so much throughput. Remember, we use that analogy of the pump. How do you get more power out of a pump? Well, one of the things is just to have it. move quicker, right? Do more cycles in a minute than it was doing before and so as a result, products moving in and out of these facilities much quicker, but that has a greater need for trucks and trucks need to be stored. So we’ve had in this year alone, we’ve had three of our larger properties, and for us largest 6, 7, 8, 9 and 10 acres in infill Los Angeles come up and these are buildings, they’re my children. So you love every one of your children. I know some of the best looking. But by God, your children, you know what I mean? Some were not that good looking, but some were not bad and every one of them we had tenants coming to us saying we want to turn this into a yard and we had to walk away. We’ve walked away actually from several of the deals because there’s just something about it that doesn’t sit so well with me.
Justin Smith
You don’t think of your yard is your physical asset.
Rob Neal
We’re getting rents that would made it a no brainer to knock it down but why not to do it? Well, I’ll tell you why because Jeff Bezos talks about one-way doors. You ever heard that conversation, one way door. Yeah, interesting. So, he said, life has a lot of two-way doors where you can go through the door, if you make a mistake you come back. But he said there’s a few one-way doors where you go through once you never come back. And it dawned on me, so he says, obviously you need to be very, very careful. It dawned on me knocking these buildings down, it’s a one-way door. I’ll never get that asset back and especially with the way things are changing with so many of our friends in the municipalities so much of our local city governments. They’re not going to allow us to build even excuse me what we might have been able to build even five years ago. That’s another challenge.
Justin Smith
You will turn into a residential developer, right. Possibly.
Rob Neal
That or they don’t want to see so many truck trips, those darn trucks. Well, what do you want to do give us life sciences buildings? I love you but the name of your city is industry. The name of your city is commerce. It is not life sciences. It’s not going to happen. All the planners went to a conference a few weeks ago, and that’s all they talked about is building Life Sciences in your city. So, at the end of the day, we’re left with a situation of doing knock this down for what appears to be a very strong demand today, how sustainable is the demand? And there’s just a part of me that says, I don’t know, I don’t know how long this last. So rightly or wrongly, we opted not to go through that one-way door.
Justin Smith
I’ve seen a couple examples by the ports of 18-foot clear buildings, where they knocked half of it down and they pave it all. Then the rents they achieve are maybe not double and this is on half the building. There’s some economics there, but it’s amazing. It’s not $2 rents, but it’s not too far from it.
Rob Neal
We’re getting we’re getting 50 cent land rents all day long. I think even if we had something in that South Bay market, we’d probably easily get 60 cents.
Justin Smith
just on a parking lot?
Rob Neal
Yes, just on the dirt. You got to basically the formula is it has to be paved and so you could have heavy traffic. So, you need the spec for that it has to be lit, one foot candle kind of a rate and then has to be fenced and secure. But again, I’ve been through enough cycles, and I’ve seen enough kind of demand come and go. You know who else is kind of powering this is Amazon. Amazon seems to continuously tweak their spec we just finished our first Amazon deal. It wasn’t a big one but down in Texas, actually, along the board. We ended up with a building that’s about, I would say that it’s about 20% covered.
Justin Smith
So you go to the Amazon shareholder meetings and you’re one of 50 Industrial developers that are there. Just to like keep tabs on what they’re doing. I would imagine we should all be taking a closer look. And some people already take a pretty close look at what they’re doing and what they’re budgeting and what they’re planning and how many they’re looking to open.
Rob Neal
There is a there’s a concern within the industry that their rate of absorption has been phenomenal. Is it sustainable? And then you hear people say, look they’re just getting started. Then is it healthy? Is it appropriate that a quarter of our national absorption go to one company? I’ll leave your viewers to mull that one over. I think we touched on a couple of hot subjects. I’m not going to get into that one.
Justin Smith
Yeah, but those are all important inputs into our world and our community and decision making and figuring out how to understand what investments are prudent. I recognize we’ve gone through a lot of our time, and I appreciate you making yourself available. You are one of the pack and the pack is so large, sometimes you withdraw from the pack, sometimes you explore new frontiers and it seems like contemplating the land is one of those frontiers. Texas is our frontier we are very familiar with looking at multi-tenant as opposed to single tenant and thinking if that’s something that’s underneath the radar and worth the management. What are their frontiers do you explore? Or do you think of like geographically as another way or to specialize in a different product type, or just to kind of wait it out a little bit? Inaction is hard to have as an action, but sometimes that’s appropriate.
Rob Neal
Well, you raise a very good question. I remember when I first got started, and at the time I was an acquisition guy with about 10 years of experience. I’ve done over a billion dollars of real estate in those 10 years and that was pretty good clip for that that that time. But I remember my partner, David Haye, who is a very wise man, I have two amazing partners, David Hager, and Anna Milstein. They taught me many things. But David said, Rob, you’ll be your own worst enemy and I said, what do you mean? He goes because you’re going to know you’re not supposed to buy. You’re going to be sitting in your office and you won’t have done a deal for like six months and then you’re going to look in the mirror, and you’re going to go, what’s the matter with you, Rob, have you lost a step? Is it over? This is the issue. The fact of the matter, I there have been a series of periods in my real estate career, where I could have made more money getting onto a boat and sailing around the world for three years in a row, but I didn’t do that. I stayed and I fought it out and the periods that we’re talking about the early 90s was one of them, 2009 and 10 was one of them.
Justin Smith
that was my first one, I’ve only experienced one.
Rob Neal
Well, the early 90s, I think was actually the worst of all, frankly for real estate. I think it was worse than eight, nine and 10. But the fact of the matter is that it is important to be able to sit out some of these marketplaces. As you might expect, we’ve turned to a little bit of a harvesting of some of our portfolio, but not much. I mean, again because we only assets internally, you’re looking at one of three owners in the properties, it gives us great flexibility. And if I did nothing today, the properties would continue to throw off cash. But there’s that deal guy in me still very, very competitive but I realize for a principle that can be that can be very, very challenging and very, very dangerous. For intermediaries, your job is to transact mine is not mine is to create wealth. Transacting and creating wealth sometimes can be absolutely different ends of the spectrum. We really are to a great degree unless you are unbelievably bullish and long. We’re at a point in our cycle right now where you should be cautious doesn’t mean you can’t buy it. We’re still buying. We’ll probably buy $100 million this year but a lot of that is through exchange funds where we think we can sell at a certain rate and then arbitrage to a higher return. And their assets also that are more or less fully depreciated. But I believe in all of the assets, those that are the people that our buyer assets, we always think that there’s more meat on the bone, and I do in large part because they’re exceptionally well located. But this is a time to be a little bit careful. There’s no doubt about it. And so the question is, what should we be doing at a time like this? If you can find a deal that stands on its own, do it and you should be able to. There’s always opportunities, you can buy a lot in bad times, and you can buy less in good times, but you can still buy. The question is, what kind of product and where and we believe in location? Obviously, we still like this asset class, but I think the lights are flashing, you’d be crazy not to. Every day, I hear about a deal where somebody is going to pay. They’re buying second generation warehouse product, in the IE West for $40 a foot for a very, very large warehouse. Second generation, less than 36 foot clear, less than 34 foot clear. So you’re just like, Wow that’s a lot of dough.
Justin Smith
Yeah, you shouldn’t have first, second or third wave of caution when you’re waiting in that territory. Cool. That’s awesome. Rob, I feel like we can do this forever.
Rob Neal
Well, I admire you, you’re a great student, as I said, and you work on your craft, and I respect that. Unfortunately, there are people in this industry that are just trying to make a deal. But someone like yourself is really unique in the brokerage industry is an intermediary. I really respect you and I appreciate the energy that you spend on this. So anyway, look forward to seeing the final product and hopefully it came out okay and you found this an interesting conversation.
Justin Smith
I love it.
Rob Neal
All right my friend, good to talk to you.
Justin Smith
Thank you, Rob. That was great.
