Industrial Insights with Chelsea Levane

Chelsea Levane 00:28

Yeah, thanks for having me on. I'm excited to be here. My first podcast experience.

Chelsea Levane 00:42

Yeah. Yeah, for sure.

Chelsea Levane 00:52

Yeah. Yeah, absolutely. So I have a I guess a great experience at Cabot thus far, 10 years. Actually started at Cabot as an intern in 2013 when I was going into my senior year of college, sort of fell in love with the business, the company, the people, the culture. And after college worked out that they had a job opening for me. And I started as an analyst at Cabot on the asset management team, did asset management with Cabot for about two and a half years. and then yes in Boston yep at our headquarters office in Boston prior to 2020 we only had a Boston office in the US we had a satellite office in London that we opened I think in 2015 and so

Chelsea Levane 01:58

We went to college in Boston, interned at Cabot, started on the asset management team about two and a half years in, moved over to the investment side, was working on some of our separate accounts, and then sort of integrated more fully into the investment team and the fund business and have been doing that ever since. In 2020, we started opening some regional offices across the US. So we brought property management in -house, which we had previously had. third party managers and so we brought property management in -house in Chicago and Dallas. And then end of 2021, I moved out to Orange County. We opened our office out here, brought property management in -house out here and have since hired a great team out here. So our office out here is now seven people. The company overall is about 130 people across 10 offices, domestic and international. So. We've grown a lot since my intern days back in 2013. I think there was probably 35 employees at that point. So it's been a pretty cool ride to see over the last 10 years.

Chelsea Levane 03:13

Yeah, you know, I say all the time, I got really fortunate to land at such an incredible company, like right as we were heading into the best real estate cycle for industrial that we've ever seen. And so it's been awesome to be a part of and, you know, Cabot's just... a great company to work for and has been, like you said, has been in the industrial space since 1985. And so to sort of be a part of this company and watch it grow when we've gone through this industrial boom has been awesome.

Chelsea Levane 03:52

Yep. Yeah, yeah, so we, our first international office was in London and the thesis there, I guess, and the thesis in all these offices really is how can we take the success that we've created domestically and reapply that in international offices and then maybe in some of these markets where there's a little bit less institutional presence and a little bit less sort of capital being placed in the way that we like to place capital on. gives our investors good exposure to international markets. So it's been really exciting to watch it grow. And I haven't quite made it to the Tokyo or Sydney offices yet, but it's on the bucket list.

Chelsea Levane 04:49

Yeah. Yeah, so I joined NAIOP National Forums as a developing leader, gosh, I think in 2020 did a sort of two year developing leader stint and then we took a bunch of the folks from that program and created an industrial focused forum. And so that's been an awesome experience getting to know people kind of doing the same thing in different parts of the country helped me really build my network when I moved out here because I already had a couple inroads with people I'd met through NAOP. It's been awesome. When you asked me to be on the podcast, my first text was to Jordan Nathan at Faropoint. said, hey, I saw you were on Justin's podcast. What's it like? She gave me all the tips and pointers. It's always good to have people who've been through the same experiences as you and can provide guidance.

Chelsea Levane 06:01

Yeah She's great. She's a great friend of mine that we met through the NAIOP Forum. So it's been awesome. A lot of good friendships and connections. And then ULI joined a local product council, Orange County, LA based, with just a bunch of people who are local here. We meet once a quarter, kind of talk about trends we're seeing in the market, different things. And so that's been really fun as well. Have to have you come join in on a meeting give us some insights.

Chelsea Levane 07:02

Yeah. Yeah, it certainly helps to have, you you sort of do these off the cuff networking things where you're meeting people for lunch, coffee, cocktails, whatever, but to have that sort of regularly scheduled once a quarter meeting where you get to hear a lot of insights from a lot of different people, you know, in a two hour window, I think is, it's just easy and super creative.

Chelsea Levane 07:37

Yeah. Yeah. So I oversee the West Coast for us. So for us, that's basically Phoenix West, our active markets, Phoenix West right now or Southern California, which is L .A. Inland Empire, San Diego for us, Phoenix, obviously, and then Seattle up north. We have been active in the Bay Area historically, but haven't in the last couple of years. I'm still trying to work our way in on that one. And then we've looked at it.

Chelsea Levane 08:11

Yeah, yeah. So it's an interesting time in the Bay Area, I think. And they deal with a lot of the same struggles that we deal with in terms of municipal oversight and regulation. And so you've got to really understand it and be familiar. so it's something we're working on, but not quite there yet.

Chelsea Levane 08:48

Yeah. Yeah, I think for us, as we've gone through time and gone through multiple funds, both on investing and on exit, you get a better look at what's important to institutional investors. And we sort of want to continue to build the best portfolios that we can for our investors and for future exit, something that's the most marketable to potential buyer. And I think as we go through time, what we've found is that these core coastal markets are so much more in demand than some others. So as a company, we really do try to focus a majority of our activity domestically on the top six markets in the country. And there are plenty more markets that we invest in, but if we can do a lion's share of our activity in those markets, we're probably gonna be able to build a pretty successful portfolio. The things that I think we focus on for markets is people within markets. We're trying to make sure that even is obviously proximity to people within markets. We are trying to make sure that is obviously proximity to people within markets. We are trying to make sure that if the way goods get delivered changes, whether it's the ports or air cargo or truck routes or whatever it is, rail, all those things are obviously important. But if you can get close to where the people are, it's a lot harder to move the people. And people tend to sort of move around. Yeah.

Chelsea Levane 10:28

So we run a stat all the time about our portfolios proximity to city centers and population centers. And so that's something we certainly try to focus in on. In Southern California, I think if you're close to the people, you're obviously close to the transportation hubs because there's a lot of them here. And so this market's obviously super critical to us and important in building a portfolio, I think, to be able to buy scale and develop scale. here is challenging and so you've got to be really disciplined about how you do it and it typically pays off.

Chelsea Levane 11:21

Yeah. Yeah.

Chelsea Levane 11:41

Yeah, we do. Yeah, we try to spend as much time as we can out in front of brokers. I think the brokers are the ones who are seeing it every day. I think particularly in Southern California over the last two years, the climate changed so quickly and so having direct contact with all these different brokers who have different exposure to tenants, how they're thinking about things and and the different you know, just... trends with landlords, know, I think we've obviously seen some of bigger landlords in the market quickly moved to drop rates when activity slowed down and so you have to you know be on the pulse of that bit that all that and for us that's you know Immediate, know regular conversations with brokers regular conversations with our peers We do track a lot of research, you know, whether it's you know, different brokerage shops costar a bunch of different places where we're trying to stay on the pulse and as I think we get to a point where we, I think we're nearing an inflection point in the market and hopefully things are heading in the right direction now.

Chelsea Levane 12:54

We, you know, I think we're really focused on the data because I think that that can, you know, that can help you build a thesis around what, you know, where recovery is going to happen first. And so, you know, one of the things we're tracking right now is in Q1, from Q1 to Q2 in the Inland Empire West, the vacancy rate actually went down. And so do we see that trend continue and has vacancy in the West peaked? You know, vacancy in the Inland Empire overall still going up, it's primarily driven by new deliveries in the East. so, and I guess, you know, lack of leasing demand in the East as well. And so if we can, you know, sort of be at the forefront of that and see that we think the West is going to improve and continue to improve, you know, is it the right time to be, to be buying more opportunities there and sort of, you know, separating ourselves a little bit from the pack herd mentality about you know, rents are just going to continue. to decline and continue to, you values are going to continue to drop.

Chelsea Levane 14:06

Yeah. Yeah. Yeah, I think a lot of different sources, you can kind of use a bunch of different, you've got sort of come up with your thesis, there's a bunch of different data sources and different factors that you can look at to come up with the sort of answer that all these things sort of support the thesis you built or a majority of them do. I think hopefully that's enough to give you some confidence in the market long term.

Chelsea Levane 14:53

Yeah. Yeah. Yeah, I don't know. Maybe it's right now. Maybe it was six months ago. Who knows? Maybe it's a year from now. I'm hoping it's not that. I'm kind of sick of how slow it's been.

Chelsea Levane 15:21

Yes.

Chelsea Levane 15:35

Yeah, I mean, I try to take a lot of notes. I try to be as informed as I can be about what's going on in the market. We've got a great team out here. So I work very closely with Stephanie Wilson, who oversees our asset management out here. And she's in touch with the leasing brokers way more than I am. I'm in touch with the capital markets brokers more than she is and we try to share notes and make sure that we're on the same page about what we're seeing in the market. We've been fortunate, I think, the last, call it six months, we have one vacancy remaining in our portfolio of, I don't know. were six million square feet in Southern California. So that's it. I think we sort of took a look at what was going on in the market and tried to make the best possible deals that we could at the time. And I think we saw for a period of time that every deal you didn't make, you looked back on and wish you did. so we...

Chelsea Levane 16:47

Stephanie's done a great job getting our portfolio leased up and it gives us the opportunity I think to go out there and find more opportunities. I won't say we're diving into buying vacancy quite yet, but the opportunity I think is going to be there.

Chelsea Levane 17:29

You

Chelsea Levane 17:51

Yeah. Yeah, was, the vacant buildings were pricing more expensively than the leased buildings for a long period of time there. So you felt like things were bound to slow down. I guess I say that in retrospect, but now it's obviously the inverse and people are really interested in cash flow that... and they'll pay a lot more for that because the vacancy risk right now is just so challenging.

Chelsea Levane 18:54

Yeah. Yeah, I I think, you know, I I think back in the run up 21, 2022, we spent a lot of time on off market opportunities. I I think, you know, and I I think a lot of people were right, just trying to shake stuff loose because the widely marketed processes were so competitive and, you know, the pricing was getting so aggressive. so we that was where.

Chelsea Levane 19:28

Yeah, exactly. Yeah, it was like you would just, you know, you'd submit guidance and then you'd get a callback saying, guidance, you know, moved up another 10%. Do you still want to participate or resubmit? And so, you know, there was, we weren't, we weren't winning a lot of widely marketed processes at that point. You know, I think with the core capital primarily out of the market right now, the widely marketed processes give us a little bit more opportunity to be competitive. I think that the off -market opportunities are still really quiet because the people who didn't sell in 2021, 2022, aren't going to sell for a valuation that's currently lower. slower, right? Particularly those private owners who saw a number and, you know, sort of got hard eyes and are probably now kicking themselves that they didn't sell. you know, I think those people are, it's going to take a lot longer to come around unless there's, you know, some substantial change in their life or business that requires it. And so there's a lot fewer of those opportunities. But where we are finding success is widely more

Chelsea Levane 20:42

opportunities. There's you know there's a lot less bidders in the pool things are I think you know there's there's guidance and some of the deals are pricing to guidance and some of the deals aren't and so I think what's helpful for us right now is in these widely marketed processes you know you have a seller you know it's you're not just sort of firing off these LOIs at people who have no interest in selling And so that gives you a little bit of surety that if you find a deal you like and you're spending your time on it, it's going to amount to a transaction. We might not be the winning bidder, but ultimately that deal is going to sell in most cases. So I think that... that right now staying on top of the capital markets activity and just understanding how things are pricing helps us sort of refine our thesis even more. We're not gonna win every process. We're trying to win a couple. And seeing how they all play out certainly helps understand what the market looks like and where you need to be to win out on certain deals.

Chelsea Levane 22:01

Yeah. Yep, so we've got sort of our base cabot assumptions that we use in every underwriting model to make sure that our underwriting compares apples to apples to other deals across the country or even internationally. That's, you our analysts are working on that, taking feedback from me, other market officers, you know, on what assumptions should be, what pricing looks like, how things are moving, and then, you know, sort of first blush at market rents. And then as we sort of work our way through a process, we kind of refine that a little bit more, take more input from the asset management team and brokers in the market and come up with a list of assumptions that we can get comfortable with, but it's all fluid and there's way more deals that don't make it to that stage than there are that do. so we try to keep it high level to start and as we sort of make our way through a process, really drill in and make sure that we have a rock solid thesis to feeling comfortable with what we're underwriting.

Chelsea Levane 23:33

Yeah, we're doing both. our, we're still doing our guess. That's our, our first sort of pass throughs than our guests. then, you know, as things change and we manipulate more scenarios and look at it a bunch of different ways, that's all Excel.

Chelsea Levane 24:17

Yeah. I think, you know, in a lot of ways, the intangibles help us justify the sort of base case underwrite, right? And so. not every comp that comes out right now is going to make your case and not every comp that comes out is going to, you know, not make your case. And so it's sort of finding that balance and knowing the story behind certain comps. You know, I think one of the things that we have spent a lot of time on the last couple of months is like, okay, like let's break out. real lease comps from sublease comps. And if you take the sublease comps out, how much can we say the average market rent is higher? That doesn't work for all size ranges because some size ranges have been softer. And then with that, if you can say there's a meaningful difference, then okay, how many sublease spaces are there left on the market in this size segment? And so it's using a lot, pulling a lot of different things to sort of justify where we think the market is. where we think it's heading and as I think over the last. you know, two quarters, it's been really active on the leasing front, but before that it was pretty anemic. And so you're sort of backing into some of this data, you know, based on what you're hearing and what brokers are saying and things they tell you they're working on. And so it's not always as clear cut as, okay, the comp says this is market rent, let's underwrite that. You know, there's a lot of different factors. And so I think for us, you know, if we can get comfortable With the thesis and the story, that's what we bring to our investment committee and senior leadership. And if they buy off on it, then I think we hit the ground running. And that's not always the case. And we were pretty quiet investing on the West Coast for the last two years. And we're now just starting to pick our heads up again as we hopefully see some of these trends pointing in the right direction.

Chelsea Levane 26:33

Yeah. Hahaha

Chelsea Levane 27:15

Yeah.

Chelsea Levane 27:32

No. Yeah.

Chelsea Levane 27:52

Yeah. Yeah, I think In a tougher leasing environment, it's sort of like, I feel like what we've seen over the last six months is a lot of tenants are just like, building attributes don't matter to us. It's all rate driven. And so you end up in a scenario where you've got a brand new class A building, you're competing with a 20 year old class B building that's lower clear, less functional, less doors. It's all that we know about real estate feels like, know, it's like, why did I, why do I spend all this time like focused on access and location and doc count and truck court depth and like all these things when all the tenant cares about is the cheapest deal. you know, so, so some of that frustration certainly,

Chelsea Levane 28:52

But I think that that's part of a down market, right? These tenants are using those. In the ideal world, they want the Class A building, but if they can force a landlord down by comparing it to a Class B building with a sublease rate or whatever it is, it's a win for them. So it's just, I think that... Even though it feels like it doesn't matter right now, when we look at deals, building attributes are still top of the list in terms of priority, in terms of making sure that we have a building that differentiates itself in the market and has unique things that tenants need and want to future proof. I think that that's going to, we're going to continue to see that these tenants doing more automation, needing more clear height, needing more power, needing trailer storage, all these different things and you know we're not gonna buy the old class B building just because we can offer a lower rent and you know grab a tenant right now. I think it's not, I think it's more short -sighted and we have a much more long -term positive view on what's gonna happen in this market.

Chelsea Levane 30:12

Yeah. Yeah. Yeah. Thank

Chelsea Levane 30:50

Yeah, I think a lot of time, or I would say more recently deals we've worked on, we've had institutional sellers and so those are a lot easier. There's a lot more sort of market norm standards for these things and the sort of window of variance on those is pretty small.

Chelsea Levane 31:13

back in the run up, we were doing a lot of off market deals with private sellers and those were a little bit tougher for us. Just more things that we kind of require that private sellers are not as attuned to. We did a lot of... a lot of deals on the AIR contracts and we would have, we had a boilerplate addendum that we would attach to those to kind of cover all the things that we would cover in a standard contract and that that contract doesn't cover.

Chelsea Levane 31:47

Yeah, we try to not do that. yeah, I mean, I think our contract forms 25, 30 pages. We try to keep it simple. We're primarily buying a single asset at time, typically one to two tenants. It doesn't have to be all that complicated. So we do try to make it as seamless of a process as possible.

Chelsea Levane 32:21

I would say the biggest risks are zoning and environmental are sort of the two that immediately come to mind. I think, and there are two things that get harder, right? It's sort of every step of the road. so while you could buy a building where the zoning's fine, it could change overnight on you like in Rancho Cucamonga and other places. And so it's sort of under.

Chelsea Levane 32:52

Yeah, as we head into a soft leasing environment, those challenges are hard to overcome and make management really challenging.

Chelsea Levane 33:32

Yeah.

Chelsea Levane 33:50

Yeah. Yeah, and then, you know, we obviously have AB 98 working its way through and, you know, those things, I think, just create additional challenges that you kind of, you have to pivot a little bit and, you know, rethink how it impacts your strategy and what you're doing. And I think that, you know. being as on top of it and well informed as we can be certainly helps, which is where NAOP and some of these other organizations provide a lot of movement. Yeah. So all that is factored into your decisions ultimately on how you're thinking about deals. And then on the environmental side, I think same thing, environmental regulations are...

Chelsea Levane 34:41

becoming more stringent, which I think is probably the right way for things to be done. We certainly should not have buildings that are not safe or tends to operate in or have harmful chemicals or whatever it is. Just making sure that you've done your due diligence, you've checked the boxes, you fully understand the environmental situation at some of these properties is really important. And usually, hopefully, that's just a box check, but sometimes there's a deeper dive required. And so that's something that we don't take lightly.

Chelsea Levane 35:24

Yeah, yeah, that's exactly right.

Chelsea Levane 35:31

Yep. So we typically do financing post -closing and our strategy primarily is to pool assets from different parts of the country to diversify the risk and the tenant role and all the different things. And so that's something that happens for us post -closing and we've got a great capital markets team in Boston that runs our financings for us.

Chelsea Levane 36:03

Yes, yeah, well, I think it's already priced into all the rates. So if it doesn't happen, who knows? We might be in trouble. Yep.

Chelsea Levane 36:44

Yeah, so I think one of the, I guess, riskiest but best ways that we create values through development. I think that that provides you with class A real estate that for, I would say, from 2016 through 2021, we did a ton of development in the Inland Empire because it's the only way you could buy.

Chelsea Levane 37:10

class A or own class A real estate in the Inland Empire competing against all of these core funds. And so that is a big part of our value add strategy. I think right now it's a smaller part, but we're hoping that we're turning the page where we can start developing again. But I think we've got to chew through a bit more supply in the market before that really becomes a... a feasible strategy. So that's a big one. I think leasing is a huge one for us, obviously. We have spent a lot of time buying vacant buildings and sort of taking it from a non -institutional landlord to our ownership. It comes with a lot of sort of make ready work and different things that these buildings require to get it to a point where it has that institutional level of quality and you can compete with with other institutional investors and hopefully outperform some of these private investors who are spending less money and sort of less focused on it.

Chelsea Levane 38:25

I was, we were third party property management up until 2020 and we still do have third party managers in certain areas of the country where we don't have offices just because our scale and some markets isn't large enough to dictate it but here in Southern California we do have in -house property management.

Chelsea Levane 38:52

Yeah, I I think it's, I I think the primary... I guess... great part of it for us is that our team here is solely dedicated to our properties, right? So a lot of times with third party manager, they've got your portfolio plus other owners' portfolios. And so they're pulled in a lot of different directions. And that's certainly challenging and there's different reporting requirements and all different things that different landlords want. And so having somebody that's really focused on our portfolio, I think is value add to us. It's value add to our investors. And it, I think, you know, it's people that I'm in the office with every day. I have much more intimate knowledge of the challenges that they face with tenants, with properties, with, you know, repairs and all these things. And so it's stuff that I feel like we think about more top to bottom as we look at deals. And so we're having, you know, more of a sort of holistic discussion around acquisition through management, rather than like, okay, I buy this asset and I kind of pass it off to this property manager that I talk to here and there, but I'm not really having day -to -day interaction with. so I think I've learned a lot from our property managers and they're awesome and really, really great people and great people to have on our team.

Chelsea Levane 40:31

Yeah. 100%. Yeah.

Chelsea Levane 40:50

Yeah. Yeah. Yeah, so I think our historic exit strategy and something that I think we still believe is the most accretive to our investors is portfolio level exit. So we are typically trying to sell a whole fund at once. We've done that with a couple of our value add strategies funds, core fund. So we've seen it work out and play out over time. I think that We do have, we will make opportunistic sales throughout a whole period for different reasons. And I think that ultimately, the decisions behind that come down to have we gotten everything that we can get out of this property to make it, that it added its value to our fund. And if not, is there a strategic reason to exit? One thing that we'll think about as we're building out a portfolio or rounding out management of a portfolio is is market allocation. So if we've got a bunch of buildings, you know, in our top six markets, and then we've got one building in Phoenix or Seattle or whatever it is, maybe it makes more sense to sell that as a one -off because we don't have enough scale in that market where it really becomes accretive to the portfolio. And so those are some. you know, some different ways I think we analyze exits in terms of, you know, asset level, but also portfolio level and how it, you know, how it adds or detracts from a portfolio.

Chelsea Levane 42:49

Yeah. Exactly.

Chelsea Levane 43:18

Yeah. I mean, I I think that... I think that one of the things that we try to do is have regular contact with our tenants so we understand their use of a space, their stickiness in a space, their desire to stay or potentially leave if they have plans to go elsewhere. And I think that if you can fully understand that before you enter a sale process, it either gives you an opportunity to maybe talk to that tenant about an early renewal or maybe you know think about another strategy around you know if they do plan to leave how to you know expand another tenant or something else and so I think a lot of times people maybe shy away from having those conversations with their tenants because they don't want to hear the the bad outcome you know the tenants leaving and so I think we try to stay as in tune with our tenants as possible so that there aren't many surprises on things like that.

Chelsea Levane 44:33

Yeah. Yeah, yeah, or if a tenant says, hey, you I want to renew or I want more space. And you, know, you don't know that. And a buyer figures that out going through a sale process. You know, you, you probably left some money on the table. You do that. Never.

Chelsea Levane 45:39

Yeah, I mean, I think that it's actually funny. I have a couple of peers of mine, we put... We put a calendar invite for today in all of our calendars. Six months ago, I said the market would be in a better place today than it was six months ago. And I think we're, still sort of, you know, waffling on whether that's true or not. I think in a lot of ways it's better in a lot of ways it's not. and so I think, you know, I've been, I've been pro recovery, for a long time now. And I think that, that what I'm most excited about is, know, sort of

Chelsea Levane 46:18

getting to that point where it... During 2020 to 2022, it was fun buying real estate. I think right now, when you buy deals, it's a lot scarier. You have to really have conviction and you're certainly doing something different than everybody else or a majority of your peers. And so I'm excited for the point where we know that the deals we're buying make sense. And we're not sort of in this limbo where We don't exactly know what's going on with the economy and with tenants and with rate cuts and all that. I think that that's one thing, know, sort of on day to day for me that I'm looking forward to. And then I think, you know, more sort of Cabot macro. You know, we continue to grow our platform, continue to open offices in different places. We're hiring great people. We're building out different initiatives. We're, you know, building out an ESG team to make our buildings more sustainable and future -proof long -term. so I think industrial still has a lot of runway in the future. And I think that we've built a great team to sort of invest and manage through that. I think that Cabot's an awesome place to be. And I'm excited to be part of the team and excited for the growth that we've got coming up.

Chelsea Levane 48:03

No. Yeah, yeah, it's not as easy as you think it is to call it. if we're not, I I think it feels like we've gotten there on the capital markets valuation side. I don't know if we've gotten there on rents, but I think we have to be close.

Chelsea Levane 48:44

Yeah, you can find me on LinkedIn, Chelsea Tamek Levain, or via email, clevane@cabotprop.com And Justin, thanks for having me. This was awesome. It was fun.

Chelsea Levane 48:59

Alright, you too, thanks.