There are different real estate sectors that you can invest in: Residential, commercial, and industrial real estate. While the first two sectors are more popular for investors due to its availability and pricing, there are  investors who are earning more and building a stronger portfolio with industrial real estate.

To get more information about navigating the industrial market, Justin welcomes Trace Chalmers and Stewart Toubia of CEG Construction. Together, they talk about the Industrial Market Development Cycle. Trace and Stewart did not only give a glimpse on what the industry is all about, they also discuss the different opportunities that the sector entails as well as the trends in the industrial market.

 

 

 

Listen to more episodes and subscribe to the podcast on Apple.

 

 

Highlights

• Who is Trace Chalmers? – 0:39
• History of CEG. – 2:09
• Difference with other companies: The unique part and their focus. – 8:43
• The spark that got him into the commercial side: Figuring out if he’ll proceed and how many jobs they’ll take. – 13:16
• Is acquisition opening more opportunities for them? – 17:37
• How effected was the business in the last six months? – 21:07
• For the next 90 days, do Trace and Stewart have new opportunities in line? Where are they in the cycle? – 27:43
• Grabbing a good deal at a great rate. – 29:59
• Trends they are seeing. – 33:31
• Is the food producing business still striving in LA? – 39:40
• Ideal deals to bring to Trace and Stewart. – 42:35

 

Episode Resources

Connect with Trace Chalmers and Stewart Toubia

• https://www.cegconstruction.com/
• https://www.linkedin.com/in/stewarttoubia/

Connect with Justin Smith

• https://smithcre.com/ 
• https://www.lee-associates.com/ 
• jbsmith@leeirvine.com 
• https://www.linkedin.com/in/justinbsmith  

 

 

Justin Smith: Hey Stewart, how’s it going? We got you in a moment in the office for a little bit. We appreciate you making the time.

Stewart Toubia: My pleasure.

Justin Smith: Stewart’s been out there banging the drum has been doing a good job.

Trace Chalmers: That’s why we hired him. Even went to USC and we still hired. So that tells you something.

Stewart Toubia: I don’t know if you know, Trace went to UCLA.

Justin Smith: Yes, this can be a problem amongst us friends sometimes. Enough about me how about a little about Trace and CEG.

Trace Chalmers: Yeah, well, Stewart’s been bugging me, so congratulations.

Stewart Toubia: We did it. We got him.

Justin Smith: I feel like you probably don’t need this because you’ve been in the game long enough where you’ve got enough stuff going on, but Stewart needs this. We figured it’s a great opportunity to get the name out. For you to shine on who you are and what CEG is. Then other industrial brokers will find this and say, oh, got it. Super, I didn’t know that’s what they were looking for. Okay, I got something. So, I figured that’s part of why it’s good for everybody.

Trace Chalmers: Yeah, that sounds good to me. We’ve kind of just focused on our relationships with the brokers. We don’t necessarily do a lot of social media because just our history has been to have a very direct relationship. Because of whom we are, we get to look at the deals before most other people do, because we take care of the broker. They know we’re going to close on. I’m using my own cash. They don’t have to go to New York to get the money, you know, blah, blah, blah. But anyway, it’s a new world so here we are.

Justin Smith: No doubt about it. So maybe we can just start with CEG. So, you started CEG. When did you start it and where did you come from?

Trace Chalmers: I’ll give you the history. So, I graduated from UCLA in 83 and I actually got my job at Hager Realty in city of Commerce. It was a little a block building, I think it had one window. Mr. Hager had been running the brokerage company for probably 15 years or so. And the interesting thing was when I got the offer, it was a thousand a month for 12 months and then you go on full commission. I called my dad and told him that I was going to work at Hager Realty, which had like eight brokers or something. It was a tiny company. And it turns out that Mr. Hager had been a hardware store operator retailer before he started doing commercial real estate. My dad had sold him tools. So, like 15 years before he started the company, he offered my dad a job as a real estate broker, but my dad needed like the $1,200 that Campbell James gave him. He couldn’t go full commission. So pretty crazy that I ended up there at that job, 15 years later whatever it was. As a broker, I actually was with Jack Klein at Lee & Associates. We kind of came together from UCLA and we got our start there at the UCLA career guidance center. They had like little pieces of paper and little ID cards for real estate brokerage. So, I pulled that out and called them and anyway ended up getting a job. So, I owe a lot of my success to UCLA because they basically got my foot in the door.

Stewart Toubia: Best decision you ever made picking up that piece of paper.

Trace Chalmers: Oh my God, so lucky. I was a broker for about two years and the interesting thing was I wanted to move to Sealy Company because Paul Sablock, Scott Eaton, all the guys were there, and they were really doing well. Hager was always a nice company, but it just didn’t have the same presence as some of these other company. And so, I went to interview with Warren who’s probably retired now. After a couple of interviews, he called me up and said we’re not going to give you the job. I’m like, what are you talking about? I’ve done well, I’m making some money. He’s goes, nah, you’re too much of a maverick you’re not going to stay around. We want guys to be here for 20 years. We’re not going to invest all that time and energy. Being a maverick sound like a good thing but not for their program. And it was the best thing that happened to me because it did get me to start development sooner than I might’ve if I had gone at Sealy and started making big bucks. Just kind of taking advantage of their scope and presence in the marketplace.

So, I started in ’83 and then in ’87, I started my development company. So, as you mentioned about your book, I stayed at Hager Realty, but I started another company. I got a little office in Downey and when am I Sigma Chi brothers came and ran it for me. He would go out and find sites. And so, we started Chalmer’s Equity Group, that was our development company. CEG didn’t exist at that time. We’d buy a little house and then we’d add like two units to the back because in Bell Gardens, they had a lot of our three property and also in south central LA. So, we’d buy a house, tear it down and then build a four-unit apartment building and that was kind of our gig. We did about probably six, maybe 10 projects. Small projects because I didn’t really have any money. I sold a house or a duplex by the Beverly Center in LA. Where actually Peter Botchy, I don’t know if you know Peter Botchy from Lee & Associates. So, he was my roommate along with another buddy. They had the other duplex, and I had the front duplex. So, the three of us, we had some good times. We’d walk over to the Hard Rock Cafe. So, we were probably in our late twenties, and we were all single. But selling that gave me the money to start buying these little houses and stuff.

Justin Smith: Did you do construction back then or you would just hire like a contractor. Or you would do some of it with you buddies?

Trace Chalmers: Yeah, so what happened was we started hiring local contractors, but then one of them told me how much money he was making off of us. I immediately decided I needed to do the construction. So, I actually partnered up with a contractor who was a clever guy, a guy named Bill Sole. His family had a lot of apartments in Bell Gardens that they had built. And so we started Chalmers and Sole, which was a development company but also a construction company at the time because in 89, the market collapsed with all of the savings and loans going bad. And it didn’t make sense to develop. Fortunately for me, I didn’t lose the properties, but the value basically dropped to where my debt was. I kind of sold everything off because managing apartment buildings in South Central LA and Bell Gardens isn’t really a great opportunity. Sunday mornings I’d go down and get the quarters out of the laundry machine while everybody was still asleep.

So, we sold those off and then Bill and I started doing TIs. I kind of had the choice to go back to brokerage or do tenant improvement. I always thought there was an opportunity in tenant improvements from just being a broker for a while. Mark, Peter, all these guys really helped me a lot get projects and we did a good job. I had an architect right away, so we were designed build really from the beginning. That’s really the unique part about us. We work, we do everything, obviously construction, architecture, engineering. We do the whole package, but that’s what we’re focused on. We’re not really outbidding on projects. We want to control the project.

Same thing when I was a broker, I would tell them my clients you want one guy to represent you because you want that person to find the best building, not just the one opportunity that he has. If you have five guys working for you, they’re all hyping. You don’t know where you’re going to end up. It’s better to have a long-term relationship with the clients and you have to have those kinds of expectations to be successful. If you’re going to allow that work with other clients and you’re going to have multiple brokers working with the same guy, what are you really doing into that situation? It’s not really an ideal situation in the brokerage business.

Justin Smith: No, it’s terrible. It’s like the worst-case scenario. And as soon as you get busy, then you say I’m not working on that anymore.

Trace Chalmers: I had a couple of those when I was a broker and I just like took them and I threw them in the trash. Then the people would call me, and I said, sorry, I took your file and throw it in the trash. I worked a year and a half on this deal, and we’re done. Sometimes you just got to do that. And being a contractor, I didn’t want to just be out there bidding all the time. I want to control the deal and we’re bringing more to the table. So, if you have a deal, you need to get the tenant improvements done quickly.

We can do that architecture. We can get the permits. You’re going to have resource that to other people. You don’t have any control. And so that’s one of the client things that clients really liked is we got it done fast. We kept to our budget, like in construction, if you show up, you do the project on time and you keep it in budget you’re like the greatest person in the world. Now that in most situations that’s just normal business, but in construction you’re competing against sometimes people that don’t always follow through and maybe they get distracted or whatever the case may be. So, in that company really, we did well for about two years and then Bill Sole actually was doing the construction and the pricing. I was doing all the selling, but he was charging like 25, 30% on top of our costs and I’m like, Bill there’s no way we can get that, we can get maybe 12, but there’s no way we get 30%. So, he had lived in a 30% world and through insurance projects and things like that. So, I bought him out, which was a $5,000 copier. The only asset we really had. Then I went on my own and my first project was $5,000 project with Trammell Crow to add a door and build a little bathroom for one of the tenants over there on Garfield actually. That was the beginning. It cost me like twenty-five hundred bucks, and I made 2,500 bucks. I go, this is pretty good. So, that’s where we started. The funny thing is everything on that building is stainless steel. I didn’t really figure that out. I put in brass. So, whenever I go by there, I know that was my first project the door has a brass handle.

Stewart Toubia: You’re getting all this stuff by the way. This is like deep from the CEG secret history book. I mean, I haven’t heard most of this stuff. So, this is pretty awesome that these stories he’s given out here.

Justin Smith: You’re on a need-to-know basis Stewart. This is new information, but it’s all important to know where Trace came from. When you think of like the days of doing those deals and all the heartache and the time of figuring out like the construction and what the contractor was charging and then like making the jump to doing this first project. Like that’s all baked into what we are here and now. So, I feel like that’s all a super valuable to learn more about that. But then from there, right, that’s the spark that got you into the commercial side. So, then you had to figure out, am I going to do more of this or what kind of jobs do I want to do? Or what’s a good job mean to be?

Trace Chalmers: Yeah, I think from that point of view, we were doing stuff probably between 20 and 200,000 and mostly all TIs. We did our first tilt up SSK Produce downtown on Long Beach and right next to the produce market. Craig Phillips actually got us that project. We hadn’t built a tilt up yet. That’s also where I found my engineer, Michael Leahy, because a lot of my guys used to work at Dynamic Builders.

Justin Smith: Well, yeah sometimes you got to have motivation, right. And not like you were looking for that but that was fuel you then had that you could say, alright I’m going to roll with this.

Trace Chalmers: Yeah, no, that’s super because when I hired their engineer, then I hired Steve Hall, which was their top superintendent. Then I hired another guy, Joseph Siena. But they didn’t take care of their people either. So, it was easy for me to get them and they’re like, wow, you actually follow up and you’re concerned about us and you’re trying to help us be successful. Dynamic at that time was kind of a bit of show. Nobody really knew exactly what was happening all the time. They didn’t have a lot of good leadership, but in any event, it was a good motivator. It made me really get after it and try to be better and try to design better buildings. Hiring their people was a big advantage to me because the guys had a lot of experience building tilt ups.

Justin Smith: Well, I imagine the nerves on your first one. So, you were there watching the panels go up and being like okay, this is me and my crew and here we go. I imagine that was exciting for getting started and saying this is the future and this is where I’m going to go with this.

Trace Chalmers: We were super excited about it. It was a big deal, that’s why I give Craig Phillips credit because we hadn’t built a tilt up before and he knew we’d do a good job and the client loved us. He was from my Thailand. It was a really successful building that kind of put us on the map. We also started to do a lot of produce buildings at that time. So, because of SSK, we did Central Western produce. We did worldwide produce. We did SC Produce. We did Ingardia Produce in Orange County. So that kind of put us on the map for also those buildings. And then at the same time we hired, Richard Lucas, who is a head building official for the city of Vernon for 20 years. He just has a wealth of knowledge being an inspector and plant checking. He literally knows everything about everything when it comes to construction. So, he’s been a big asset to running the construction side of the business.

Stewart Toubia: He was the president of the ICC. I think it’s the International Code Council for some time. So, we’re very fortunate to have him. And I think that just goes to show Trace’s ability to bring people into the fold. And it comes off of the two tenants of Trace’s ideology to success is do what you say and show up. When he shows up and he does what he says, people know he’s the real deal. So, I think that’s ultimately what got Richard, bought into Trace’s playbook is he’s a respectful guy that brought that to the table.

Justin Smith: And the city of Vernon now is changing, right? I just was going over this a re-imagined Vernon and a where it’s bringing more like mixed use onto the west side. I’m sure that’s a changing where there’s opportunity and who there’s opportunity for. Have you gotten to know some of that? Is that a jive with your world or is that open up more opportunities for you? Or if anything, I would think that’s more for owners that are now we got like apartment guys coming into the hood that are now trying to build different things next to these warehouses. That seems like that’s interesting to see how that’s going to affect things over the next couple of years.

Trace Chalmers: Yeah, I think there’s a lot of different opportunities out there, but we’ve tried to stay very focused on what we’re good at and what we do. People go, you should do this. You should go out to Riverside. You should go to Arizona. I have like a 60-mile radius around my office in Pico Rivera. I don’t want to say where the king of that area, but we kind of are. So, there’s no reason for me to go someplace else because if I go out and focus on Ontario, then guys will come behind me and grab the deals here in LA. So, I’m like, I want to do exactly what we’re doing. We have five buildings coming out of the ground right now that we just finished. Two or three others and then we have like 10 buildings in the works. We just keep buying now that land’s gotten ridiculous. So, we’re having a bit of pause on that. But we’ve been fortunate in the last acquisition period, which we sold a couple of office buildings downtown that we developed. We basically bought mostly industrial land but that was probably eight months ago, and our basis is probably average is $42 a square foot.

Justin Smith: Now you got to put another hundred bucks on that I imagine.

Trace Chalmers: Yeah, unfortunately construction’s going up but we’re in a very good situation land wise. So, now we’re trying to, Stewart’s bringing me some things at 65 and 78.

Stewart Toubia: This is as good as it gets right now.

Trace Chalmers: We have to make a decision, if we’re going to start spending that much money or we’re going to maybe sit on the sidelines a little bit see what happens.

Justin Smith: Yeah, we have to use our imagination. Hope and dream and pray and then you can know when the music’s going to turn off. So, it sure seems pretty wild. Seeing it go as high as it is and thinking what your final construction cost is. And if that’s like you have to exit it 400 bucks, a foot or 500 bucks a foot and is that real? And if it doesn’t happen, then what happens to you if you’re left holding the bag?

Trace Chalmers: Well, I’ll tell you from the development side, we were talking about CEG Construction, but when we got back into buying our land was just before SSK was like our first tilt up. And then we built the little tilt up on Industry Avenue where our office was. And then we built another tilt up on Industry Avenue. And actually, Oltmans built the first one because we were just a GI company. But we actually, our office was in that building. So, it looked like we were in our own building even though Oltmans built the building. And it was a beautiful tilt up. So, my client did need the office. So, we officed out of that and it was a good spot to start the company.

Justin Smith: Yeah, without a doubt. Then thinking through construction and like Amazon buying up all the roofs or thinking through like steel shortages, and now you’ve got all these containers at the ports. How has that affected the last six months? Has that changed kind of how you look at deals and how you finish what you already have in the pipeline? And what you underwrite going forward if you’re looking at a project today?

Trace Chalmers: I would say for the first time in my life, I don’t know how much an industrial building going to cost, but I do know that I made one mistake buying 20 acres of land in Indio and next door was going to be a Target. And the guy that owned the land I guess grinded Target too much. So, they went two blocks down and I ended up with vacant land on the freeway with out of road because the road was supposed to go in. I paid five and a half million for that property, still own it. But the bankers are like, hey, you got to pay this down because the value is not there anymore. I paid 35,000 a month for 10 years, 450,000 a year because of that one mistake and that’s a lot of money. So now going into say pay 15 million for something putting seven and a half down and then financing the rest, it’s seven and a half million. If things go sideways, you’re going to be stuck with the bag. And I don’t want to get stuck with the bag. I think, when the recession in 2006 and 2007 started, I stopped buying into that situation. I didn’t know exactly what was going to happen, but I do that there was something going on and it’s hard when you let your competitors buy the land, like Dynamic, like Kendrick. But fortunately for me, like I said, I only had my hand in one cookie jar, which was that Indio property. And for like two or three years in LA, literally I was the only buyer. I bought 27 acres on Garfield did that 600,000 square foot building. But there was everybody else was running for their lives. Trying to save their house. Trying to keep their car. That was a pretty significant downturn that actually kind of catapult us quite a bit because we were able to do a lot of projects. And we didn’t have a ton of money, but we had enough that we could get the loans and the financial.

Justin Smith: Stewart hasn’t ridden one of these. I’ve only ridden out that one. And so even in brokerage that was a tough stretch where we did okay but when I compare it with what’s going on now to then. Or even just like the middle years where things were like okay, that was a tough time for me. That’s brokerage where you’re not in a risk position. That’s just like deal velocity slowing down and then chasing the bottom. So, at some point in time, you had to have the confidence at the bottom to say, okay, I’m going to start buying in again. And so, I’m sure that’s its own challenging to know, but that’s way better to assess that than to know when to stop. That’s also another like inflection point.

Trace Chalmers: Well, you need to have that experience. So having the experience in ’89 when all my property basically kind of collapsed in, I saw that coming in and I had the discipline to stop buying. That was a big part is the CEG and the fact that we were so kind of dominant from that point forward. When these marketplaces were the term, we were lucky I guess, but we were also thoughtful. Because in real estate development there’s periods to develop and there’s periods not to develop. And that’s the problem if you’re a developer, is your periods that you cannot develop. What do you do? So, you have all this money. People are giving you money, so you just keep investing it, right? Most of the developer are not really owning a lot of the assets because they’re using other people’s money. So, they’re basically paying fees on stuff and then, because they’re getting fees, their fees aren’t that much because the guys in New York say, we’re going to give you this money, but you’ve got to cut this fee and got this fee and this fee. Then, so the developer goes to the broker and say hey, you’ve got to cut fee and cut this fee. You’re making more than I am. That’s kind of where, that was a good place for me to take advantage of the other developers, because I would never cut anybody’s fee. I gave a guy $150,000 who wasn’t even in the business anymore on one of the projects that we did because I told them that’s what I’d pay him. We’ve always been very straight up with the brokers and for me, every time I do a deal with somebody that building’s yours for life. I’m never going to say, oh well, I’m going to shift everything to Cushman & Wakefield, or this guy is doing it cheaper. I know him better. No, once you do a deal with me that’s always your asset. So, it gives the broker an ability to have some reoccurring income and they know, hey, I’m going to handle that building. It’s not like I’m going to get some run around down the road.

Justin Smith: I’ll tell you what that is so huge. It’s the code of the west, knowing that you subscribe to it, and you know, that we all like live and die on that kind of stuff. So, I feel like that’s huge to know you’re protected when you submit something like that. And so, what I was telling Stewart was for this next 90 days, we’re trying to generate new opportunities like everyone else and thinking where we’re at in the market. And so, we’re looking at covered land plays. Which is an older building that are seventies vintage and older eighties vintage and older, and then a low coverage building and looking for other opportunities there. And so those are the types of opportunities that you and Stewart need to know about. And those are the opportunities were knowing that we’re protected on the backend makes us want to bring them your way. So, I feel like we have only gone through not even half of that vintage of building, where there’s still a ton of opportunity there, but it’s interesting to think through of like, where are we at in the cycle on those? And if I really do bring you one at a hundred bucks a foot or 120 bucks a foot like where does that work for who? And so, it’s been interesting to start to kick over those kinds of opportunities and just think through like, where are we at in the cycle? And is that a good time to be digging up those covered land plays? Or has that ship kind of sailed already on those?

Trace Chalmers: Well, I think there’s one thing you could do to cover yourself a little bit is buying the site and then lease it out as is. I provide what three acres in Monrovia, and that was kind of our high watermark for land purchase. I think it was like $60 a square foot but it had existing buildings on it, and we plan to tear down an old tilt up that was low clear and kind of in the middle of everything. So, we could rent it as land play. I think we’re out at like 48.50, 48 triple nets on the land. We got an offer today, that we’re going to be working with. But then you can justify a little bit higher price when you have some buildings that have some value because not everybody needs 50% coverage tilt up. There are other types of businesses that industrial properties. That’s something that we’ve done and, been successful.

Justin Smith: Rents are through the roof right now.

Trace Chalmers: Well, we also bought a site on Clark and Arcadia, and it was a little business park, like 2,500 square feet each, little units. But it had a big lot next to it. So, we were going to build a new tilt up and I said, you know what, we should look at just leasing this land because you could take a couple units and sure enough, we got frontier in there and they’re only paying 35 triple nets now, but at that time that was a good number. They got a 10-year lease and stuff. You can buy stuff and figure out how to lease it as it is because it may have some other intrinsic value. Then that’s an opportunity to pay a little bit more and then you can always build in the future.

Justin Smith: Yeah. I love how that deal seemed like a good rate. And now everybody liked the story of the year, eight seconds after you’ve signed the deal, you feel like, oh my God what was I doing? What was I thinking? The rent’s gone up so much since then. Yeah. It’s interesting.

Trace Chalmers: A great story about that. So, we have five buildings that we just finished on valley and Walnut. They’re all 30,000 square foot buildings, approximately 27 to 30. And they’re all free standing, really nice projects. CP brought us the land a long time ago. I don’t want to brag, but we only paid $14 a square foot. So that, that was a pretty good deal. Any events, we started at $1.25 triple net. So, we do our first deal. We’re basically just asking you don’t you either take it or leave it. Then we go to $1.35, but we got like two deals done. And then we go to $1.45, and we get one deal done. And then the last two, I think we’re $1.50, in like three months. They’re all moving in this week. But I mean, we went from $1.25 to $1.50, and they were fighting over it at $1.50 too and we were also looking for a good credit. We had a lot of offers where the credit was not experienced or wasn’t around for a while. Didn’t have the cash to kind of support what they were talking about. But I think we got pretty good tenants, but that’s another thing you’re a lot of these guys will come in and they’ll say, yeah, yeah, yeah. And then they get in like one guy, he left us in on a Hixon. He just like disappeared in the night. And he sent me a picture of where he put the keys in a planner, outside the door. He was just gone.

Justin Smith: And a picture of his sailboat in Mexico, or something.

Trace Chalmers: A little video here’s the key and off they go. We had that deal done at like .98 triple net, probably a year ago. And now we released it at a $1.30 triple net. So, it wasn’t a big problem for us.

Justin Smith: And not in my backyard right. And you have some cities that are saying no to e-commerce, or we don’t want fulfillment centers. Have your experiencing like more pushback from cities or you find cities, are any of them like more welcoming as like e-commerce is something we need. Where are you seeing like the city stack up in terms of industrial and finding a place for it, like finding the right amount of it? Is that anything you’re seeing any trends there? The only one I see is that comes to mind is in Rancho Cucamonga and just sold a project there. There’s a big portfolio. And then they were just coming down on e-commerce and how they ended up coming down was they picked us arbitrary size range, and it was like 20,000 and greater, and everyone was up in arms so you’re going to kill small business. So, they made it 50,000. And then for certain types of businesses, it was a hundred thousand and greater, you had to get a CUP from the city to get your certificate of occupancy if you’re going to run an e-commerce business. And the general idea was like, they’re just trying to get like businesses that have more people doing more jobs that weren’t trucks that were driving around. And so, imagine you’re on the front end of like entitlements and approvals. And so maybe you would see some of that as a trend or not a trend, or it seems like a, that’s always a challenge in the development game, I would imagine.

Trace Chalmers: Yeah. I mean, to answer your question, yes. Every city is getting more and more arduous and because of COVID, they’re not working and they’re losing people. This Walnut project, literally it took us five years to get approved. And there was a reason because part of it was in LA county, part of it was in Pomona. So anyway, it just took a long time to address all those issues through the CCNRs and everything to get approved by both cities and blah, blah, blah. But so that’s a little bit unusual. And like south El Monte is good. Santa Fe Springs is good. Vernon is good. Commerce is good, but there’s like El Monte is something you just want to stay away from. So, but like we were in La Verne, we built a project there like three years ago and we met with planning, and he said, oh yeah, we should be able to do this in like six or eight weeks. Me and my architect, Ignacio look at each other and go wow that’s great. Eight months later, we got approval.

Stewart Toubia: They’re getting more ambitious now the official I was talking to said, they’ll get it done in 10 days. Approval done in 10 days.

Trace Chalmers: All my clients go to the city, and they’d say tells them all this great stuff. Oh, we love you. I’m glad you’re improving your city and blah, blah, blah. And then you leave and five minutes later, they can’t even remember your name, you know? So yes, the process is difficult, but we’re very good at it because of all of our relationships with the cities, they all know us. They know we’re going to do a good job. It’s hard. We have a job we just started in Chino. Two little buildings, like 20 and 30,000 square feet. They hired another architect five years ago and after two and a half years, they had no approvals. They brought us in, it still took us like two years to get approval for these two buildings because the city wanted us to put a sidewalk in the neighbor’s property and we going to have to get agreements with that and they wouldn’t respond. I mean, we literally like went there and like, I think, Stewart got his backpack and hang out in the front of the planning official’s office trying to get approval. Put up a sign, please give me a permit.

Stewart Toubia: Three cupcakes for people who give me permits.

Trace Chalmers: Oh my God, we don’t need a spot. And we finally got it a few weeks ago, but I don’t know the cities are nuts.

Stewart Toubia: I don’t know if you’re familiar with Laverne. He got another site, a little over four acres in La Verne. We are redeveloping into a nice new 85,000 square foot tilt up and it’s going to be multitenant building, 40 units. There’s Carvana actually recently moved in. Are you familiar with Carvana? Yeah. They recently moved into 200,000 square foot site, literally a block away from the site that Trace acquired. And that’s just by Fairplex, kind of were Pomona and Laverne, there’s the separate in the boundary line there. And you see all these, I spend a lot of time there because I’m helping manage that project, but you see signs in everyone’s front yards that say, no Carvana. Carvana is a tech company technically, and it’s not. I mean, if you want to throw it in the ring of e-commerce, I guess you

kind of can because you are buying the car online on your phone and it’s getting shipped to you, right. You’re not going to target or Walmart. So yeah, they’re all up in arms about Carvana because you have all these trucks delivering cars like all day and night. I think they said like there are 7,000 deliveries coming from this site a week. And all the people that aren’t liking it. So, with all these 3PL guys or anyone really who services e-commerce yeah, definitely affects the local neighborhoods in that way just from my experience with the increase in traffic and noise. Not having it set to dedicated corridors like shopping centers have dedicated areas where that can be contained too.

Justin Smith: You buy online, I buy online Trace buys online, everyone and their mothers buys online and that’s a one-way ticket. That’s just where the future is. So, it’s been interesting to think through how can cities be more accommodating for industrial, knowing that it’s part of what their residents end up wanting even if they don’t think they want it right there.

Stewart Toubia: Every person in the US has like 52 square feet of warehouse space.

Justin Smith: Yeah, if you took every warehouse in the US and every person. Everyone would have their own 50 square foot warehouse. The other thing I’ve been seeing food producers. Like I’ve got a couple that are in Vernon. A couple that are in LA and they’re all doing well. And then they’re all having a hell of a time trying to figure out how to grow in LA. Then they start thinking like okay, should we keep what we have in LA and then get our next one in Utah or in Dallas or in Louisiana or in Kentucky or something? When you do work on food buildings, I also like there’s so much more detail there in terms of like all the climate control and the insulation and the roof. Have you found the food producing business, it still seems like it’s thriving in LA and there’s still so much of it? I’m assuming that’s just like proximity to ports, proximity to the population and not everybody’s got to think like multi-state or national. So, what do you think like the future prospects are for that business in LA?

Trace Chalmers: I think they should move to Texas. So, the problem with food buildings now is the land is so expensive. The buildings are so expensive and then you build out the interiors. I mean, we’re always doing a food building. We always have two food buildings going up. We have one right now. What street is that one on main street?

Stewart Toubia: In Gardena?

Trace Chalmers: Yeah. It’s a Showa Marine anyways, they’re a cold storage company. We’ve developed a lot of industrial and food buildings in Vernon. There’s been a good market for us, but if you look at the costs. I have a freezer on Soto Street that I released two years ago, and the guy screamed bloody murder because I wanted a $1.65 for a freezer. And so now a normal building’s $1.65. So why would you want to go and spend all that money on freezer and this and that and cold storage? Because also those buildings are all unique, right? Every food guy is unique. So, if it’s cold storage distribution, that’s one thing you can move some walls and change the horsepower, the compressors but if you’re a food processor and making food, you have all these little rooms. Somebody else comes in and it’s all garbage. So, what I’ve found with most of the food guys now, unfortunately, it’s just too expensive for them to expand. It doesn’t mean they’re not because I’m doing food buildings, but you really have to make good money. Your company really has to make good money to be able to afford a food building now.

Justin Smith: That’s more the exception than the rule. And with cold storage, it’s a funny there’s a lot of talk of like a cold ready building. And then I feel like you now see one or two people where they’re looking to focus just purely based on buying cold storage buildings. And so, I’ve started to see a couple of projects pop up in Phoenix. Projects pop up in Houston. You know all over the place, but not in SoCal so much. That’s interesting to like to see that trend and know that that may be possible but then to not see as many that are around here, and I’d take it there’s a place in the market for some of them but not for like a big spurrey of them or a mass of those types of products.

Trace Chalmers: Yeah. It’s just there’s too many. Everything’s too expensive here now for food buildings, to be honest.

Justin Smith: Well, Trace and Stewart, I appreciate it. You guys are awesome. That was fun to talk shop and think through what’s going on out there. But if someone’s listening to this and can bring you deals, what’s the ideal deal they bring you?

Trace Chalmers: It’s probably 20 acres and less. We’re fortunate because we’ve been doing this for 25, 30 years. We have a few buildings that we’ve literally paid off the loan on. So, we also have the opportunity now to refinance that at extremely low interest rates. So, we’re sitting on a good chunk of cash. It’s just a matter of whether we want to put it back in the market in which ways. But built to suits, if you guys have land where you’re controlling it and somebody wants to sell it and you know somebody that wants the building then we can come in, price it out, design it and then give you a commission on the whole thing. So, the land and the building. So, for a build to suit, we’re doing one of those right now on Temple in the City of Industry. So, we’ll close on the land, but in some cases, we’ll just sit a little bit, and we’ll get all the entitlements and then go to the marketplace. So that kind of reduces our risk a little bit but then we can afford to pay a little bit more. Again, we’re not exposed to all super high costs on the land.

Justin Smith: What’s the small size is like five acres or three acres or where would you say you draw the line?

Trace Chalmers: No. I mean, we’re doing 38s and 40s so we’re doing two acres. When we bought an acre in Industry and lease it out for car parking because it was a little investment deal. And it was actually in LA county since Industry their taxes are double. So, it’s really difficult to buy stuff there because the taxes go through the road. Like the Temple building, I’m only selling it for $255 a square foot, but their taxes are going to be 50 cents per square foot. Just for the taxes, isn’t that nuts. 50 cents for taxes.

Justin Smith: That’s nutty. So, you could be like a $2.10, like $2 rates are out there. Yeah. When you’re all in gross.

Trace Chalmers: Yeah. I don’t know. I hope it goes up because I got a lot of square footage. But in terms of how much risk we take, I haven’t really answered that question yet. We’re still buyers, but we just like a little bit of a deal. Doesn’t have to be free, but we like a little bit of a deal.

Stewart Toubia: Also, TI construction projects. We’re always doing those. It’s a great way to get your foot in the door with us.

Justin Smith: What’s like a bread and butter, TI project look like? That’s like a 5,000 feet office in a big warehouse building?

Trace Chalmers: Well, it could be TIs but it also we were building out a lot of buildings with food freezers and coolers. So, people were actually leasing buildings because they can’t find it and then we’re going in and building all the improvements. And then bam, they have their cold storage, they have their distribution, they have their processing room. If somebody is related to food, then you should talk to us, or they should talk to us because we can shorten the process. We can keep control of the process. We can keep control of costs. You know, we’re doing it all the time. So, it’ll happen much quicker. Whereas if you put a team together you might be two years before you have a building. You just never know.

Justin Smith: I love how you control the process, and you build the team. And when you can do that then you can be accountable for delivering a successful project.

Trace Chalmers: We got a new motto now. Thank you.

Stewart Toubia: Justin thanks for cracking us, again, your first one. So, thanks for bringing us on board here on this podcast. It’s great. I think you’re a great person to open up to for this first one. I always see you all over social media, so I connect you in my mind with king of social media and in our industries. Just a good job for everything you’re doing. I notice it.

Justin Smith: I’ll see if I can pay my mortgage with the king of social media. I’ll see if they’ll take that.

Stewart Toubia: Can you cash in likes for dollars.

Justin Smith: However, though, with us looking at these covered land plays, I’ll have my associate and my assistant that will be kicking over opportunities and it would be great if they could reach out to you and just get your take Stewart on when you guys are looking at buildings how you underwrite them and just kind of help them. If they’re going to help us hunt, help them know what to look for and kind of how to size things up. That’d be helpful.

Trace Chalmers: Yeah. That’d be great. We’d be happy to work with them.

Stewart Toubia: Absolutely.

Justin Smith: Cool. Awesome guys. We’ll catch you later.

Trace Chalmers: Okay, Justin bye-bye.

Stewart Toubia: Take care. Talk to you soon.