Industrial Insights with Eric Ruehle

Eric Ruehle 00:38

Yeah, no, I appreciate it. Thanks for inviting me. It's good to be here. We're, know, too, I would say, you know, I don't want to say older, but you've been in the industrial world for a while now. There's been a lot of new entrants here as it's become more of a desired asset class. So yeah, we've come a long way here.

Eric Ruehle 01:07

Yeah, yeah, exactly.

Eric Ruehle 01:20

Sure. So West Harbor was founded in 2017 by my partner Adam Dearling and I. Adam is a former broker with CB and Colliers. He worked focused on the mid counties, but worked throughout Southern California and then went over to Black Creek Group, which is now part of Ares. So we linked up and we've been friends for 20 years, know, kind of similar to our trajectory, done business together. and we're friends personally. so linked up in, prior to 2017, we're talking about it and saw market opportunity, our complimentary skill sets. My background is more on the institution, has always been on the institutional side. All the way back to 2004, I came into the business with AEW and I got some great experience there on the asset management side. And then jumped over to First Industrial. not long after that and have been in industrial since 2005, 2006. so yeah, it's been, I've been always, you know, more, was always more so focused on the acquisition side, Adam on the asset management side and obviously his brokerage experience really valuable. it's, we came together in 2017 and been working hard at it since then.

Eric Ruehle 02:50

Yeah. Yeah, yeah, he was, well, he had left brokerage to go to Black Creek prior to us starting West Harbor. But yeah, he had spent an extensive amount of time in brokerage before that.

Eric Ruehle 03:16

Yeah, it's a great question. We were talking to various institutional partners, kind of trying to perfect the capital side of our business. And then we're able to really put together some great partnerships, both on the institutional and the private capital side. Our first deal was actually with some lead guys out of Orange County, Brad Schneider. led the charge there and did an amazing job and trusted in us, which, you know, as you can imagine, a group without a track record and convincing. Yeah, yeah, just give me a chance. Put me in. So it was it was an adventure and, you know, both Adam and I had good institutional experience, but we were focused on our specific, you know, parts of our business or our skill sets. And all of sudden you're responsible for everything from

Eric Ruehle 04:16

you know, raising the equity to the raising equity and the debt to working through the diligence and, you know, signing on the guarantees and investing our own dollars in that too. So it was some sleepless nights, you know, as I imagine, or as I mentioned, thankfully, it was an interesting deal that we felt confident we were buying right. So yeah, it got off to a good start there with the Forbes transaction in Garden Grove. And then not long after that, closed on our second deal, which is 100 ,000 square feet in the South Bay that we converted from an older 1970s vintage manufacturing building into a final mile or port distribution facility. That one was a heavier lift on the physical side. Again, we were excited about the opportunity and we're really thankful for the brokers who again trusted in us. And again, was ironically another Lee broker. Trugger Alston on the South Bay who entrusted us and did a great job ushering the deal through. And, you know, as you know, as well as I do, no deal goes without surprises or challenges. And so working through those on the diligence side, yeah, we're, you know, thankful timing in the market was good in 2017. And as I mentioned, felt like we were buying it right and had good capital partners and felt like our experience on the. of understanding risk and mitigating some of those challenges, whether it be physical or environmental, leasing or redevelopment, felt like we had those encapsulated. So, was it without flip -flops nights, but thankfully they turned out.

Eric Ruehle 06:24

Yeah, we're working on that now. We're actually exploring some, this is kind of ongoing now, exploring expanding into other mountain west or southwest markets, Phoenix, Las Vegas, and Salt Lake City, to name a few. So we're spending a lot of time on that, understanding the supply demand fundamentals and the challenges. both on the real estate market side, but then also what that means organizationally for our team, are we able to effectively execute? Because there's a lot of smart people in all those markets. There's a lot of capital that wants to be in industrial in all those markets. And so, can we add value for our stakeholders, our investors, and can we deliver attractive returns? Thankfully, we've got past experience in those markets. working with, reconnecting with brokers, introducing our platform, what we do well. As you mentioned in how we look at deals, think part of our, I don't want say advantage, but what we lean on is we make three to four offers a week. So it's a heavy shots on net mentality. And so with that, it's a quick evaluation of, is this an asset we want to own? How do we feel about the risk and how are we properly accounting for that? underwriting. that's kind of top of mind right now in addition to some other deals that we're working on.

Eric Ruehle 08:13

Yeah.

Eric Ruehle 08:29

Yeah. Yeah. Yeah, SoCal is definitely our bread and butter and will be our primary focus. You know, not only because of size, but market fundamentals, think, you know, the barriers to entry are really attractive and they're, you know, they're attractive for those of us who are in the market who know it have, you know, really good relationships. And so we feel like we have that competitive advantage against some of those that are maybe coming into industrial, coming into the market. With that said, It feels like anybody and everybody has a presence in office, definitely a dedicated investment and asset management professional for the market. So it's definitely becoming more efficient, but it will always be our favorite. I'll get back to you on that. think there's pros and cons of each. think Phoenix is a very dynamic market with what's going on with not only on the logistics and e -commerce side, the population growth.

Eric Ruehle 09:36

Yeah, the high -tech manufacturing and the amount of investment that's going on with some of the top -line news with Intel and TSMC. But then also, that's the top -line news. with that, there's 10 to 12 other manufacturing companies. For every one big one, there's 10 to 12 other ones that are popping up that are either related or are just moving there because of some of the demographic trends. or advantages. So I Phoenix is really interesting on that front. Phoenix has a large amount of new supply still coming out of the ground. And we'll continue into 2025. That in some ways doesn't directly affect our strategy because as you know, we're more of a infill value add shop and not as much of a path of growth developer. But it always has some trickle on effect.

Eric Ruehle 10:35

And Salt Lake has much less of that new supply challenge relatively speaking compared to the size of the market. It's a smaller market, more of a...

Eric Ruehle 11:04

Yeah, I mean, it has, I'm definitely not the person to ask. I'm just learning. I'm spending a lot of time on it now in addition to executing on our existing portfolio and some of the deals we have in the pipeline. so I will by no means pretend to be the expert, but our read on it is they're a little bit different than Phoenix. There are barriers, physical barriers, the mountains. Salt Lake zoning that not as, doesn't create, creates more land constraints than if we're comparing it to Phoenix and or even Vegas for that matter. It's a much smaller market both in population and industrial base. And so I think it operates more as a local hometown market where there are local investors who are there who do really well and. done well there for a long time, whereas Phoenix, think, probably because of its size, is more of an institutional market. Again, comparatively speaking, they're both institutional markets. And then Las Vegas is a bit in between there. Las Vegas has got, again, all three have the population growth. I think all three are two to two and a half, if you look at the projections for population growth, two to two and a half times, growing two two and a times faster than projected US population growth. So some demographic trends that are interesting. But we like all three. And like I said, I'll let you know as we go along. Probably where we buy deals, I'll say those are our favorite markets because you got to support the home team. Yeah.

Eric Ruehle 13:35

I think you hit the nail on the head. It feels like we're coming around the corner here in the capital markets. Rates started to climb in the first half of 2022, and they've started to now taper off in the first half. They bounced around, but generally the trend has been up and started to come in a bit here in the first half of 2024, I think the 10 years down, like 90 bips in the last four months. Powell's comments today, Jackson Hole seemed to solidify a a drop in the federal funds rate at their September meeting. So it feels like we're coming around the corner there. Cap rates on the industrial side seem to have stabilized here in the first half of 2024. Hopefully that remains the same and provides some clarity on underwriting to your point on the exit. think we went through this period where Starting 2022, everybody felt good about their leasing assumptions and they were really uncertain about where the cost of capital is going to be, where the cost of debt was going to be, where their ex -acap was going to be. it's not an absolute, but it feels like we're almost turning the corner on that where leasing fundamentals remain stronger for longer after 2022. They are now softening a bit, if we're talking about Southern California especially. you know, less certain about lease leasing assumptions in your new underwriting, maybe more certain about your debt assumptions, comparing the two, not absolutely certain in either. And so I would say just to kind of close the loop on the capital markets, it feels like, know, debt's coming back and the originations are up. The capital markets feel like they're stabilized. There's plenty of equity on the sidelines ready to pile in to industrial, especially the allocations for industrial. within the real estate sector are up big time. It's been a substantial leap even since we started the company in 2017. So capital markets net -net look like they're heading in the right direction. On the leasing side, the story is playing out here a little bit later.

Eric Ruehle 15:56

Yeah, exactly. Exactly. My grandfather was a farmer and he used to always say, if it's not one thing, it's another. So yeah, that definitely rings true today too in industrial real estate world.

Eric Ruehle 16:20

Thankfully, we don't have a lot of vacancy. We are, we had a couple vacancies in our portfolio. One of those just got hopefully inked here this week. I don't want to jinx it, but I think we're there. So yeah, Friday close out the week. And so our vacancy across our portfolio is pretty low, but we are looking at...

Eric Ruehle 16:45

You know, a number of deals in our portfolio have existing vacancy or near near term or all tip. So paying close attention to the fundamentals, you know, I think high level and we're coming off a bit of a hangover from the COVID spike and we're working to normalize, I think the market is working to normalize where those rates should be and it's gonna be painful for a period of time here. So I think Southern California has been an early mover on that relative to some other markets that will maybe feel it a little bit later. But long -term, we're bullish on Southern California because of the mid to long -term trends. The ports have been doing well as of late, here in 2024. think July, they just announced they had their best July in the history of the Port of LA. And total volumes are up in the high teens over the last 12 months. So all that's heading in the right direction. E -commerce will continue to grow, especially as millennials. answer more of their spending years and are definitely active on buying online. So I think long -term trends would feel good. Short -term, we got some work to do.

Eric Ruehle 18:15

Well, yeah, we maybe missed out on the pain today, especially, I'm sure you're referring to the Inland Empire, but they had a great run. You know, don't think it was tough to go broke if you were investing in bulk space over the last five to 10 years. So in the current moment, it's tough, but if you bought a deal five years ago, I would imagine well ahead of your underwriting.

Eric Ruehle 18:42

No, Yeah, yeah, exactly.

Eric Ruehle 19:06

So sizing our bread and butter, I would say we're call it a middle market investor and to us that means total deal size of 10 to $50 million. We can do bigger. We've got institutional partners that are more than willing to go bigger and bigger is better. But as you get bigger, as you know, the market gets more competitive from some larger reads and private equity funds. So I would say bread and butter is 10 to... 10 to 50 million. From a strategy standpoint, we're a value ad shop that's in our DNA. So we're always looking to add value by solving a problem more on the buy. So first and foremost, look, first leg of the stool is look at on the buy, are we buying it right? And that's not always just buying it cheap. Are we setting the right business plan and the right capitalization structure? For example, we acquired a deal. This isn't honestly a plug for Lean Associates, but again with Lean Associates. I know, I know. Our most ideal in City of Industry, we closed right at the end of last year with Stephen Morris and Eric Parkhurst in City of Industry. They're out of your office, great guys. Again, did a great job of shepherding the deal through, but.

Eric Ruehle 20:33

closed that, had in -place vacancy below market lease rates. So when I speak about capitalizing, right, closed that all cash, are able to be nimble in regards to the execution of the business plan, and were able to close quickly because the seller had a year -end focus and some tight constraints on that. our team did a great job of moving quickly and completing our diligence and closing it on, I think, the final business day of year, think it was the 29th of December. So, buying it right, setting up the right business plan, capitalization, and then executing the business plan post -closing. whether that's a redevelopment, repositioning, or writing out a bull market lease, or buying vacancy, one of the things, our success is primarily driven by our relationships in the market. first and foremost, our relationships with the brokers in the market. Many of the brokers I work with are called personal friends. So that helps with the first component of it, of finding the right deal. In some cases, getting attractive pricing. But yeah, exactly, exactly. And then second, once we close and they're representing us on the leasing side.

Eric Ruehle 21:59

their network is valuable to us and seeing around the corners of who are the tenants in the market and who needs this kind of space and maybe position it well so it's a win -win for the tenant on their timing, their TI's and build -out. So you're investing dollars that they see value in and hence you may be able to enhance your lease rate. So our relationships on both the buy and execution are driven by the brokers. We're entrepreneurial when it comes to the third leg of the stool here and adding value beyond the buy and execution and the business plan is the exit. So our general hold period is three to five years. We're typically buying asset, solving a problem or executing the business plan and then selling. so whether that's a user sale, you're rolling up into a portfolio with other like kind assets or just a one -off transaction to interested investors in the market. Making sure we hit on each three of those is really our focus and looking to drive above market returns for our investors.

Eric Ruehle 23:14

Yeah, exactly. Yeah, and you mentioned, would you be an investor? The call to the broker, would you be an investor in the deal? The other part to really solidify that partnership is the brokers that bring us off -market transactions, we give them sweat equity in the transaction, and then also the ability to invest in it. So that's one focus of ours going forward. We want to make sure we're putting our money where our mouth is. God willing, we're gonna be in this business for a long time and we wanna be able to celebrate those wins along the way with the stakeholders, the brokers, the partners that drive the performance.

Eric Ruehle 24:05

Yeah.

Eric Ruehle 24:38

Yeah, you know, I don't, I've mentioned this already. The best way to add value is through relationships. And really, the best way to add value is in areas where there's high barriers to entry because, for example, doing paint and carpet is, you know, could be defined as adding value, but anybody in this business can find a good contractor, a good general contractor, have them come in, monitor the work, and make sure it gets done on time and relatively on budget. And so you're adding value there, but the barriers to entry in that aren't high. Conversely, the barriers to entry and having great relationships, treating people right, and then seeing the next deal add value for many years to come on a lot of other future deals, whether like we've talked about with sourcing or the execution of it. So I don't want to belabor that point, but I think the high barriers to entry pieces are the ones that we really focus on, the other ones that are becoming more more, yeah, exactly.

Eric Ruehle 25:52

Yeah, exactly. then beyond that, and it's becoming more critical in Southern California, Southern California infill markets, but entitlement and zoning. We've seen things like the green zone and other.

Eric Ruehle 26:09

challenges, I'll call them, come into play. so understanding those, having a working relationship with the local municipality, and, or, you know, we have some, we've done transactions where there were zoning issues on it. We were able to sit down and really lay out a plan and help the city visualize here are the options that play. And here's why we want to, you know, reposition it. And maybe it's a logistics repositioning and most cities first. response is that's a lot more trucks. And so, you know, but there's things that come along with not having more trucks and not doing the redevelopment to a logistics facility. And so, you're making sure that the city or the municipality and all the stakeholders understand the options and it's not just selfish, we want to do it because we want to make more money, but, you know, brings jobs, tax revenues and improves.

Eric Ruehle 27:08

the visual aesthetic to the community. Yeah, you're balancing, you're balancing, again, some of these things do bring more trucks, but they, in addition to that, bring some of these other positives. So I think that's one way where we've added value as well. And then, last thing, and it's probably more selfish, really enjoy doing redevelopment projects, not only because we've done well with them and we have some good experience in them, but

Eric Ruehle 27:38

It's always good to see, you know, take old to new, moving, you know, many cases, a big part of our strategy is buying older manufacturing buildings and repositioning those to modern logistics facilities, whether last mile or port logistics facilities. And so it's always fun to see personally, you drive by and, you you get that personal satisfaction, but more importantly and long, you know, last much longer is the benefits to future occupants. Again, the jobs brought to the community and pride from the community and turning some of those things around. And so that one's maybe a little bit more selfish, but I think it really goes more broad in who it impacts.

Eric Ruehle 28:32

There you go. Yup, yup.

Eric Ruehle 29:16

know, it's definitely a challenging time, as we've already talked about some of that. But when it comes to industrial logistics assets, the mid to long -term tailwinds in Southern California, we're still really bullish about some of the things going on at the ports, e -commerce growth, manufacturing growth, and the barriers that coupled with the barriers to new development. And I think that the long term supply demand imbalance will continue to play in our favor. And I that's why you're seeing equity investors line up and want to come into industrial and logistics is those tailwinds. And so our job is to source attractive investment opportunities and execute on them. And if I'm speaking for West Harbor, if we do that right, then we're gonna do just fine. There'll be capital out there to do those deals and we'll play a part in executing on those. So, you know, think that's where I'm excited. I think that's where a lot of people across the industry are excited. Now, it's gonna be really hard because the field has become more crowded. we're not disillusioned about being the only ones that know this. It's no longer a secret, as you mentioned early on. And so we're going to have to work really hard and continue to grow. But I think if we do that, the opportunities are going to be there. And so we're excited about having our piece in that and continuing to grow the business and grow the team and hopefully deliver attractive performance for our stakeholders.

Eric Ruehle 31:47

No, I appreciate the time. It's always good to chat whether it's on or off camera. And we're all looking for deals. we're just back to work, continue grinding away, and excited about the opportunities ahead of us.

Eric Ruehle 32:06

All right, take care. Thank you. Bye.