Finding Opportunities in Industrial Real Estate feat. Brent Peterson

Hello, future billionaires. Welcome back to the show. We've got another fun episode today with our good friend.

Real estate fun.

Real estate is fun. And if you're not in love with real estate yet after this episode, you definitely will be. So we brought on our good friend Brent Peterson. He's actually a local Kansas City broker, but he's kind of a big deal in the industrial real estate market. He represents mostly buyers trying to find investments in industrial. And this is obviously an area that we are very excited about, industrial real estate, and we've talked about it in past episodes. And he really dives into what's driving this, a lot of things we've been talking about, but even, you know, one or two steps further where he's finding opportunities.

Is it still good? Is it going to work? So this guy is, this guy's really heavyweight in the space.

And really what's happening real time with cap rates as the interest rates continue to climb. And what triple net leases are, all the things about industrial real estate that you may have heard but may not know yet. So be sure to tune in and, uh, hey, if you're enjoying this show, we appreciate all your feedback and reviews you can leave on any of the platforms of your choice. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host, Bob Fraser.

Bob Fraser.

And today we have an in-studio guest, which is always a treat. Brent Peterson.

How you doing?

I'm doing great, especially spending time with you guys.

So I know this is gonna be, be super fun. We've been talking about this for at least 6 months. We was like, you gotta come on the podcast. And it finally lined up, makes sense. And, uh, so we're super excited.

I'm super pumped about this cuz this guy is a heavyweight in commercial real estate. Um, And so we're going to get an overview of commercial real estate for those of you that want to know, learn about that, but also really the market, what is going on in the market. Yeah.

So before we dive in, you know, Brent, he runs the team at Aria Real Estate Advisors. He's a broker and is involved in all areas of real estate, but most specifically industrial real estate. And wanted to kind of get a market update of what's going on. Right. We've been doing some of these top of mind episodes talking about interest rates, cap rates, how are they all related, what's going on. It's a very unique time in the market.

And obviously everything's in flux now. So a lot of questions, right?

Very much so.

So, but before we get into that, give us your background.

Um, so I was born here in the Midwest. Um, got an accounting degree, um, outta school and worked for one of the Big Six at the time, uh, on the audit side and just did not, did not enjoy it one little bit. So, Um, I liked the people I worked with. I liked the companies, but it, you know, public accounting was not for me. So, um, I had kind of a—

but it's great background nonetheless.

Uh, you know, that has helped me tremendously in evaluating a balance sheet, a P&L, and companies as I look at investments and, uh, manufacturing companies that we might want to do business with.

Totally.

Yeah. Um, after that, I spent, uh, about 10 years, uh, working, uh, selling manufactured modular homes. I did some scattered site development and had some good success with that. Also had some really good failures with it as well. And it taught me a lot about running a company, managing people. And, uh, uh, it, it was, it was a baptism by fire basically. So it was a great learning.

You can identify with that.

We've all been there.

Yeah. Um, but in the meantime, I got into, uh, buying and selling a little bit of commercial real estate and started doing that full-time about 15 or 16 years ago. I dabbled in it before that, but have been solely focused on commercial real estate for the last 15 years. I'm heavily focused on industrial and investment assets. And it's been a really good market. And, you know, Kansas City and the Midwest in general is, doesn't see, you know, the peaks and valleys that some of the other areas of the country do. But it's a, it's a great, great place to be and operate and function. So I'm, I'm very fortunate to be doing what I'm doing today.

Yeah. We found you to be super well-informed as we, we worked with you, just really understand, you know, what, what drives the market, what, what are, what's gonna work for us, what strategies to use. So we found you, it's different than just, you know, you know, you know what I would expect of some real estate agents, you know, but a different level. But, you know, thing I love to hear is the 15 years, right? So you've seen the good times and the not so good times. So what did you learn through the great financial crisis? I see a lot of people, you know, have raised their chops in this market only goes up, you know, kind of mentality.

Yep.

And it doesn't. So what did you learn through the great financial crisis?

Well, from a personal perspective, I would say that, um, I learned that it's all about relationships. Um, you know, there's always people that are making money and finding deals in the market there, especially so in the downtimes, because that's when really good opportunities can present themselves. So you need to be strategically aligned and have those relationships that allow you to take advantage of the market and the situations that are out there. And there's guys that like to buy during the high times and there's guys that like to buy during the low times. And there's always deals being done, but it gets back to those relationships. You want to be the guy that somebody calls when they say, hey Brent, I've got this building or I've got this issue. Can you help me? And, you know, I'm the first one to tell you that if I'm the right guy, I'm happy to help. But if I'm not the right guy, I'm going to refer you to somebody else that is going to give you first-class service in that particular product type.

So, so just real quick, is this 2007, 2008? Are we, are we there right now?

That's a good question. And I, I struggled through economics, macro and micro both. So Bob, you're probably more, much more adept at speaking to this, but in my opinion, it's much different than 2002. 2007 and 2008. You know, we're not overbuilt in inventory, especially in the single-family homes. In fact, if you look, there's— we have some of the lowest numbers of listings for single-family homes on record. I mean, there's a lot of markets where there's just— there's not product for the people that want to buy.

Even growing, the inventory is growing, but still low. Very, very low.

Yeah. Well, what's happened though, you know, I mean, John Smith bought a house 3 years ago and he might consider selling or moving, but he's locked in at a 2.9%, 30-year mortgage. And if he goes—

I'm already locked in.

Yeah. Well, and he may be able to fetch a premium for his house, but he's going to have to go borrow at a 7% interest rate. So a lot of people are just saying, I am happy where I'm at and I'm going to stay.

It freezes movement.

Right. So again, I mean—

What about the commercial side?

I think there's a lot of good opportunities in commercial. The commercial markets overall are still very tight. I mean, I know this isn't really a, we didn't come in to talk about office and retail and multifamily, but just very briefly, multifamily's on fire still. You know, the housing market, because of the increase in prices, the increase in interest rates, it's going to have a continued push on people looking to rent. It gives, right. You know, it gives giving homeowners freedom. You know, they don't have to maintain a house. They can move quickly if they want to.

Yeah, people need it. We just did a Top of Mind on this, and people need a place to live. And if you can't afford to buy, yeah, what do you do?

Yeah, you go rent.

And we, we are still seeing a shortage of available units, right? There's just a housing shortage.

At some point in time, you know, we're going to have the inventory we need, but I don't know when that happens. I— people have been saying it for the last 5 years, but we're not we're not even close, I don't think yet.

So, so you're seeing the market as the guy who's in the market on a daily basis, you're seeing it very tight right now.

Still very tight.

I'm not, not in every category, right? I mean, office is, is soft, isn't it? Yeah.

I mean, my, my two cents on office is Class A office. I mean, you guys are in a Class A type of building here. People appreciate this and want this. I mean, what I'm seeing from our office guys and the, the few office deals that I do is They want walkability to amenities. They want something that has first-class service within the building, you know, nice fixtures, amenities in the building. And they, they want to be able to collaborate when they come to the office. So you need to make the office fun. So Class A facilities that have walkability, those are continuing to do well. I think most office guys would tell you that the B and C locations are struggling more so.

That makes sense.

Retail. I mean, if you look at retail vacancy across the country, fairly historic lows right now. So I mean, the difference is, I mean, Ben, we were talking about this.

And when you say retail, I mean, you know, there's a lot of different types of retail, right?

So absolutely. I paint with a broad brush when it comes to that. You know, when you drive someplace, you're typically driving to a retail location. And so if you see a vacancy, you know, that stands out to you. You don't see vacancies in industrial. You don't see vacancies in office the same way that you do in the retail sector.

So just because you're not driving by an industrial park or that's not usually on your commute to work.

That's exactly right. Unless you work in that area, you just wouldn't know it. So anyway, I think retail, especially retail in high traffic, newer areas, is doing fantastic. And I think our retail guys would tell you that they've done well with that. You know, industrial as a whole, I mean, vacancy rates are extremely low.

Industrial's been insane. I mean, you've seen this is historic what we've been seeing in the last few years during your tenure, and you're, you're an expert in industrial, right? That's your main area.

That is my main area. I do industrial and I do investment assets, and most of those investment assets are industrial in nature. So, um, and it's been nuts. It, it is fantastic. I mean, the overall vacancy rate across the United States is below 5%. There's some markets that are as low as, I looked at a market, uh, on the East Coast, South Carolina, the vacancy rate was 0.2%.

Oh, I saw some data from, I think it was Marcus Millichap. They were saying 2.9 nationwide.

Yeah.

Even, even lower.

It's unbelievable. I mean, so we are in a, which is 2.9 is insane.

That means it's really not vacant.

I mean, yeah.

Functionally, how many, how many of those vacancies are not even available or they're just really obsolescent or whatever?

Absolutely.

Yeah.

And the crazy thing behind that is we have record new deliveries, new construction. Unbelievable.

And yet it's still being absorbed at this massive rate. It's, it's a megatrend. So you, so you're presiding over this one of the most incredible markets in history, really.

Well, I don't know if I'm presiding over anything, but I'm benefiting from what is happening in the market. And, and I'll obviously—

Oh, you're a player in it is what I mean. And, and watching this unfold on your watch, really, it's historic.

Yeah, it is. It's amazing. And I think it's, I mean, COVID helped accelerate some of the, uh, the good things that have happened in the industrial market. Um, but it was happening anyway. I mean, we can talk about the e-commerce and it's going to continue to grow. Uh, we saw a spike during COVID It's come back down just a little bit, but we expect to see continued growth in e-commerce. Companies that were out there and, um, had tons, uh, of orders but couldn't fill them because they were waiting for shipments to come from China or other countries. They just said, we're missing out on huge opportunities for sales right here. So they said, We need to bring a lot of product in, have it ready to go and be ready to ship. We'd rather pay for the inventory carrying costs than be left without that product in the future. So, um, I don't know if you want to segue into—

Yeah, well, I mean, just want to take a quick step back because it's so interesting. I mean, you've been— industrial has been in a bull market for really the past decade because of the e-commerce, you know, e-commerce has been driving a lot of that. And, um, you know, as a banker, you know, many years ago, it was like, oh man, at some point there's gonna be an oversupply. They're just keep building these facilities and at some point it's gonna get saturated, right?

That, that's, that will definitely happen.

And it will happen, but it's, it's now it's kind of been like, you know, the booster rockets got out of orbit and now there's all these other factors. Not, not only is e-commerce gonna continue to drive more need for it and maybe at a slower rate because it has taken over more market share, but as you were gonna talk about here, there's kind of two other big trends that we've addressed in other Top of Mind episodes of reshoring and manufacturing. So, you know, first of all, before we dive into it, I'd love to kind of set the stage of what types of properties make up industrial, because that's again, a broad description. So there's different types when you're talking about industrial. You can just break those down for us real quick.

Sure. I mean, I typically break it down into 3 major categories. You've got distribution space, which is the you know, the million square foot or 500,000 square foot Amazon type of facilities or Walmart or Target.

FedEx.

Yeah, whatever. Um, so you, you'll see those wrap it in, wrap it out, and they're trying to get as much product through there as, as they can. And those are typically located next to intermodal hubs, whether it be a rail yard, an airport or a seaport, or even a, you know, an inland port along one of the major rivers. Uh, that's where you see a lot of those distribution facilities, especially the mega ones. Besides that, you have manufacturing facilities, and those can be of all shapes and sizes. And I mean, you may have a 30,000-square-footer, or you may have a 500,000-square-foot manufacturing facility, whether they're building engines or engine parts or implements, or you name it. If it's assembly or manufacturing, those buildings are typically different. They have heavier power. They may not need to have nearly as tall clear heights in the buildings. For storage of materials. Typically have a lot more lighting in those buildings. You have a lot more car parks. So there's a lot of, that's taken into account besides just the semi-truck traffic that's coming in and out. And there's other variations in that, but any place where they're putting parts together or manufacturing, we consider that a manufacturing facility. And then we have flex space. And flex space is, can be single or multi-tenant. Typically that's 50% or more office roughly. And that's where you'll have your small, like an HVAC contractor or, you know, a plumbing contractor or, you know, a car shop.

It's what most people see when they drive by. It's the flex, right? It's the little, the spaces that are next to the freeway here or there. And it's not the big box industrial that you're talking about.

Absolutely. Absolutely. So those are the 3 main categories that we get into and there's subcategories of all of that, but that's where most guys group it.

Yeah.

So, so let's dive into some of the drivers again of kind of this next phase of industrial boom, right? And, and what you're seeing is we're, we're bringing record deliveries of, of new construction of industrial that we haven't seen before. I mean, if ever. I mean, so the numbers that I'm seeing and we're having record absorption, so vacancy continues to remain at historic levels.

Something's going on here.

So there's, there's something driving that. And, uh, so talk about reshoring as a, as a kind of, uh, primary driver here.

Sure. Well, I, as we talked before, uh, this podcast, the, uh, you know, the time that it takes to get a container from seaport in China to western port in the United States has gone from 35, 40 days up to, in some cases, 80 days. So that's a huge timeline.

I think just doing circles or what? What's the problem?

Pretty much getting stuck in the ports, right? The carriers and sailboats.

Well, I mean, we've all seen boats that have turned sideways through narrow canals and that's, that's, that's just one point. But the difference is that you have huge ships with thousands of containers on them that are showing up to these seaports and there's not enough people to take them off of those container ships quickly enough, get them onto the trains because that's what they do. They lift them directly from the the boats onto the trains and then get 'em to the, one of the inland warehouses where they need to be taken apart or, you know, torn down from there and then shipped out. So that's part of it. The other part of it is there's been a lot of pent-up demand because people are in the United States, especially with the stimulus we got through COVID, people have been spending more money. And so there's been more demand for goods here recently than we've had in the previous few years. So. Those two coupled together have created real supply chain issues. So a company that needs a part to, you know, manufacture their widget can't stand to wait, you know, an extra 30 or 40 days to get that part. They need it right now. So instead of having just-in-time inventory, like a lot of companies have, you know, practiced in the past, they've said, we'd rather store up extra inventory, pay a little more carrying costs, but be able to deliver the goods.

So we talked about some car companies because theoretically those carrying costs are now going to be cheaper than the carrying costs of, you know, delays in the boats, the additional shipping costs, and, and then just the unknowns that, you know, something else, the supply chain goes wrong. Now you have intangible costs you couldn't even account for.

So it's inventory costs are nothing compared to not having the inventory. Exactly right, right. To a business.

Yeah, talk about Ford. That's a great case study of what's going on with specific issue.

Yeah, great question. Um, and I've seen it firsthand and I've also seen it, you know, on a global scale, just from what I've, I've read and heard about, but you know, I have a friend that ordered a Ford F-250 over 9 months ago and he still doesn't have it and it's not going to be delivered for another month or so, assuming everything goes well with it. But, you know, and that's a 2022 model. Typically at this time of year, they're delivering 2023 models. The product's not there. So one of the big issues that you've heard that it's talked about, but the, uh, the computer chips that they have in the vehicles. Yeah. So a, some very basic model cars will have as little as 300 of these little microchips. Some of the, especially some of the electric vehicles, which require a lot of those chips, have up to 2,000 chips in the vehicles. So you have a huge demand for that and we're not able to keep up with the production for that. Now, The US has got a couple of chip plants that are being constructed, but it's going to take a while to build those and then streamline the manufacturing. So that's a big problem. But Ford right now has somewhere between 40,000 to 50,000 large size trucks sitting in inventory waiting for parts to complete them. They're in essence done. Well, if you figure that the average cost of those is around $51,000, according to the stat I read, you've got over $2 billion of inventory sitting there.

Completed trucks sitting on a parking lot somewhere waiting for the chip.

People are waiting to buy them, but they can't deliver 'em. So that's a real problem. So Ford and these other auto manufacturers are just one example of how we need to reshore products so we have it in our country. It's able to get to the manufacturer that needs it in a timely manner, and we can actually control our own destiny to some extent. Now, we can't control all the raw goods that go into some of the products that we need, but at least bringing the manufacturing back home is going to be good. The other thing that I should point out too, those containers that I was talking about, the 40-foot boxes, you know, 2 and a half years ago, it cost $1,500 to ship one of those containers from China to the United States. During COVID at the peak, it was $20,000 per container. So it's dropped back down to about $15,000 per container, but that, but that widget that costs you cost you $1 to ship, you know, 2 and a half years ago, now costs you $10. So you magnify that by all kinds of product. It becomes cost prohibitive in some situations.

Exactly. Maybe it starts to make sense to manufacture here. Yes. And where you get rid of the security risk and other kinds of risks. See, I think the world's kind of waking up. Yeah, I've been, we've been talking about some of the trends out there and there is a, there is a deglobalization trend. There's been a globalization trend that's been going on for 30 years. And it now, it's, it's peak. We are, we are, we are post-peak globalization and people are realizing, hey, we don't want all this globalization because it creates too much risk. And there is, there's a, there's a, there's a right balance between globalization and localization. Right. So, so that's what's happening right now. Basically 30 years of manufacturing that's not been in the United States is now returning. I actually saw a chart recently. Of manufacturing jobs in the United States. And it's just this, as you might imagine, this trend down, down, down, down, down. All of a sudden it's reversed. Yes, manufacturing jobs are actually increasing slowly.

Yes.

And, and planned jobs for manufacturing, uh, from several big companies are huge numbers.

Add, add to the fact that, you know, America is actually an energy superpower, and in fact the only energy superpower in the world. We're the number one producer of oil in the world. And we're the only industrial power that is also an energy superpower. We're the only one. So if you have an energy-intensive industry, there's only one place you want to be.

Absolutely.

And so we're seeing huge amounts of— Wall Street Journal just had an article a couple weeks ago or a week ago on Europe. You know, Europe's energy-consuming businesses are moving to the United States. You know, now the headwinds on that are a strong dollar, which means that, you know, all of a sudden it's more expensive, gets more expensive to export.

So, so you also had an interesting chart that we talked about the other day and looking at wages. So the globalization trend was, hey, it's so much cheaper to manufacture overseas where it's cheaper labor, lower cost of living, et cetera, et cetera. But the largest place obviously where we've done that is China and what the wage is. I believe it was a 10x, 15x over the last 30 years in wages, right?

It's leveling the playing field as well.

It's only going to get worse as I think by 2050, uh, they say they got a gray tsunami hitting. Something like, uh, only 55% population is working age. So you've got half the population that's retired.

Yeah.

And guess what? Retired people consume but do not produce, you know. Sorry about that. But, but what that does, it creates wage inflation. As you have a shortage of workers and a lot too many consumers and not enough workers. China's, China's got huge problems going forward. They've basically neutralized their future. But, but back to real estate, it's, these are all massive megatrends for industrial in spite of, you know, in spite of the, the building that's been going on, there's just an insatiable demand at some point. We will overbuild and that's going to be, you know, not good. But for now, we have a huge shortage still because of these giant trends that are just getting started.

We— I mean, if you look at all the major brokerage houses out there, they're all indicating that they expect to see continued growth for the next few years, at least. You know, most of them don't look at— industrial, in industrial. Yes. Specifically in industrial. So a lot of 'em are very bullish still about the industrial market and it seems to continue to, I mean, we can't build it fast enough. Like you said, at some point in time somebody is gonna get caught, but you never know when that end is coming.

So, yeah.

Any other trends that you're seeing on the manufacturing side of things that we talked about? Obviously wage with energy usage and just de-risking from a political standpoint of, you know, these countries that you know, maybe we don't want to put too much stock in them planning on being democracies and acting like that. You know, what, what other factors are contributing to this? Uh, kind of seems like the tides are shifting, bringing it back.

Well, I mean, this is my own personal theory about this, but you know, we have a, a population in the US that has kind of peaked, it seems like. So I think we're almost at, you know, negative population growth in the US. I think the only thing that may fuel that is the future. It's slightly positive. Yet maybe the, you know, immigration into the US. So at some point in time, we're not gonna, we're gonna have similar problems and we're seeing it now, but similar problems that China has, which is there's just not enough workers for the jobs that are out there. So I think that's gonna push us. My feeling is that that's gonna push us to an area where we are focused more on quality of construction, quality of goods. Stuff that lasts longer, and that's going to cause companies to focus on that. They'll pay a premium for it, but they know that they're going to get the best product at the best price by doing that. So I don't know how that affects the overall manufacturing in our country, but I think that'll— I think that's going to bring back a lot of American pride in the products that you buy because the US can build very, very quality products and has very stringent controls for what we do.

So So I love that your focus is on investment sales and you're looking at these opportunities and these trends from an investment perspective. So, you know, a lot of listeners, us included, are more familiar with, say, residential housing, that's single-family or multifamily housing, and kind of the drivers of value and the things you look for to evaluate a good property. But talk about what do you want you know, to see in an industrial property to make it really appealing? What, what are some of the, the drivers of, of value and of appeal in industrial?

Sure. That's a good question actually. First thing is location.

Yeah.

That's the, that's the, the ABCs of real estate is location, location, location. So you, you want it close to a highway if possible. If you're, you know, close to one of those intermodals, that always typically helps you, uh, you know, from a location standpoint as well. Um, and, and, and then you start looking at the functionality of the building. Um, are the ceilings high enough? We talk about clear height and that's how, how high it is from the floor underneath the structural steel in the building. So if I—

why does that matter?

If you're racking goods, you know how high you can rack and it depends on the size of your pallets, how tall they are, cuz different companies will rack, their pallet heights might be different, but it allows them to put shelving in it. They can determine if they can go 4 high or 5 high or 6 high, depending on whatever that clear height in the building is. Sometimes power can be a big factor in what a company is looking for, and they may need, you know, a 480-volt with 3-phase power that allows them to operate heavy, big machinery. Um, number of dock doors and drive-in doors is really important. You know, markets like Kansas City or Denver or Indianapolis, just to name a few here in the Midwest, dock doors are way more important than drive-in doors are on these larger warehouses because we're seeing a lot of trucks in and a lot of trucks out. You go down to Oklahoma City or Dallas or Houston, not Dallas as much, but Houston and Oklahoma City, a lot of drive-in doors there because there's a lot of oilfield service-related companies. They, they do a lot of trucks that'll drive in and out of facilities and get loaded that way. So drive-in doors are more important to them. Um, you know, besides, besides that, uh, and the access, um, you know, typically you're looking at storage yard or storage space outside. If you have a, a strong amount of extra outside storage, that can make a big difference for a particular user. So those are some of the, the basics when it comes to those industrial buildings.

So there's also like spe— special use type properties like cold storage and what, what's the one? I think it's a cold storage property, but the one that's like completely black inside and it's just, it's super high ceiling height and, and all that. But what is that cold storage?

It's cold storage.

Yeah.

So they have some dark warehouses where they only have, yeah, they only have, uh, robots that work in there basically.

Yeah.

So pallets are getting picked off by, uh, machines and then they're delivered to an area where you know, people can assemble.

Is that for energy savings?

Is that what that's?

Yeah.

I mean, you, you know, there's a little bit of heat that's created by some of the lighting and, you know, machines don't need, you know, any light to see what they're picking and shipping. So yeah, it, they can do it for that standpoint.

I'll feed them a little bit of fruit.

Um, so yeah, there's some companies that do that. And you know, when you get into cold storage, especially if you're doing a lot of bulk distribution, they like to go high rather than go spread out because They, they found that it's a lot cheaper and more efficient to cool just the square footage and you can go vertically cuz they just simply keep that air rotating.

Mm-hmm.

Up and down. And so they'll go really high. So there's places on the East and West Coast that they'll go 100 feet high with cold storage because that maximizes the amount of product that they can store.

Is there a big demand for cold storage?

Uh, if you listen to all of the forecasts, there's a huge demand and a huge need for cold storage. And, and I've worked with a number of cold storage users, and they have all told me, I need to buy more product. I need to have more inventory. I need to buy it when I can because I can't count on it showing up when I need it. So they're in a similar situation like the Ford Motor Companies of the world. They need the product in order to be able to distribute it. So yeah, huge demand for that. Yeah.

So let's talk about the, just the, from an investor's point of view, one of the things these things are priced, the cap rates the price of this industrial is very much related on the leases that are there.

And so, and the tenants, right?

The tenants. So if you have a credit quality tenant, that building is actually worth more. Talk about that.

Yeah, great point. I mean, Bob, you've seen it and Ben, you've seen it as well. The quality of the credit of the tenant and the length of the lease term is something that most companies will look at before they even look at the building itself, because they're simply buying that credit. And it's almost like a commodity, basically. You know, if you have a AAA-rated credit tenant and you have a 15 or 20-year lease, that property is going to trade for premium, a premium, a 4 cap, a 5 cap, depending on what it is. And you know, if you have a shorter-term lease, less quality tenants, then you're buying that building more based upon the quality of the structure itself.

Makes sense.

So, so give us an example. So Amazon, you know, probably one of the strongest credit tenants there is. What, what would they trade at, at a cap rate level?

Well, they don't like to talk about that, but sure. I mean, we've seen Amazon and Amazon-like companies trade in the low 4s in this market here. Even still, even still. And well, the crazy thing is, even though we've seen a 300 basis point jump in commercial rates, we're not seeing a big movement in the cap rates for industrial investment product out there.

That's nuts, isn't it? It's just huge. The, it just shows how much demand there is.

There is a lot of cash is what it amounts to. People need to deploy that cash and they can't sit on it forever. So they're willing to make, you know, skinnier deals for those quality deals.

Mm-hmm.

So for the quality credit tenants. So, wow. It's amazing.

So now flex seems like it would be a very different thing. So these are maybe smaller square footage, you're chopping it up and you're probably never gonna get a credit tenant in there, right? So, are they, are they as good at deals? Are they, because this is, I'm seeing a lot of deals come up that are for sale, but I don't know if it's that appealing. Are they, are they good as a, from an investor's point of view?

Well, it's a little more like multifamily. It requires hands-on and a lot of times it requires hands-on from the buyer itself. I mean, you can, you can employ a property manager if you want, but those are value-add a lot of time situations where you can take a you know, 5 or 10 or 20 tenant flex building, continue to bump rents as the renewals come up, make improvements to the property, and you can see better appreciation of that asset in a shorter period than you can from that single tenant.

Gotcha.

That lease deal.

So from a value perspective, potentially it's a good deal, but it's, it is a different, it's, it's apples and oranges, isn't it?

It is. It, it requires that hands-on. That's not just a coupon clipper that you're getting.

It's interesting cuz one of my good friends, I'm just thinking about who's been in flex, industrial small flex for 30 years, saying just how volatile it is. Like when the recession comes, that stuff just goes, evaporates because these little marginal businesses all disappear and you just end up with vacancy. So he said, you know, just be super conservative on this. And that was his perspective of, you know, small flacks. Yeah. What is your, what is your thought? Have you seen any of that?

Well, I, I think it depends on where you're located in the country. You know, the East and West Coast, when 2007, 2008, a lot more vacancy, a lot more volatility in that market. You know, the Midwest, you know, looking at Kansas City, they're a good example of what happened here in the Midwest. We had single-digit vacancy rates even in 2007, 2008. Yeah, absolutely. Now the rent appreciation in a market like Kansas City is a slow methodical slope. You know, you're on a, a gradual incline on the treadmill. You know, California, you may see some huge wild swings, so there's some real opportunity to make huge money in a short period of time. But we, we've kind of been, been slow and steady in the past, and I think Kansas City will continue to do that. So investing in a market that's more moderate in their rent increases, and less volatility, I think is a great place to go if you want to buy flex property.

And I would imagine too that the Midwest is, from a strategic standpoint, operational standpoint, where you can be by several highways or intersections of highways, it creates more access for distribution and, um, there's some attractive dynamics around those types of markets, right?

Absolutely. Yeah. Yeah. For example, I mean, Kansas City is a lot like Indianapolis and Um, you know, St. Louis, I mean, Kansas City boasts the most interstate miles per capita of any city in the United States. You can get to something like 85 or 90% of the continental United States within a 2-day drive time of Kansas City. You have one of the largest airports in a 6-state region based right here in Kansas City. You have 5 of the 7 Class I rail lines that come into Kansas City. We have huge intermodal yards in the Kansas City market, which is similar to some of the other Midwest cities. So we get more tonnage of freight by rail through Kansas City than any other market in the United States. Chicago gets more cars, but we have more freight that comes through Kansas City. There's a lot of reasons to want to be in the Midwest because you can get product here fast and you can get product distributed throughout the country very easily from here.

And there is a huge land premium because there's, there's, you know, this city has spread horizontally unlike some of the coastal cities that they're only, they can only go vertical. It's, it's, yeah. Density and cost. So we haven't seen the—

great point.

It's very affordable, right?

Absolutely.

As well as affordable workforce. I mean, the workforce is, yeah. You know, so one of the, one of the strategies we've been really looking at and where we may, we may put some deals together here next year, but I've been seeing a value-add opportunity in big box industrial where you see short-term leases and you see, you know, we're looking at potentially being able to get into some spaces that are you know, people want out and getting in at decent prices based on existing leases and seeing that we could bump the leases and, you know, depending on your timeframe to hold, really a good opportunity, I think.

Yeah, that's a great point. I, 2 years ago is a time I took my first call, at least in recent memory, that somebody said, I'm looking for short-term leases, like you said, because they want the opportunity to create that value add by being able to bump rents.

And we've seen lease rates. Rents go up significantly. So anybody that's got an old existing lease, there's real opportunity there. They're going to, they're going to get some increases.

Absolutely. Absolutely. It's a prime time to do that. Now, getting somebody to part with that asset may be more difficult, but if it is coming to the end of the term, there can be some real value-add created there.

Yeah. Well, it seems like a really good strategy. You know, you got to be able to hold the property until the leases are up. You know, you know, but it was like, so we're, we're, uh, we're kind of getting juiced over some things, those kind of things.

Absolutely. What other opportunities have you seen? I mean, it's obviously a hot market. It's, you know, projected to be a hot market for many years, and there's some big macro trends that are driving that. You know, what are the opportunities as an investor? How do you, you know, where, where are the areas that, that you're seeing investors most interested in, um, in placing capital into industrials?

Yeah, you're putting your own money.

Well, I mean, I've bought and sold some commercial and industrial assets and it's been good to me and I'll continue to do that. I think candidly, we're kind of in a unique window here where we're seeing very little product hit the market because people haven't realized that, hey, these interest rates have really affected the cap rate. So I think there's going to be some real buying opportunities. I don't know if that's 3 months down the road, a year, 2 years, but, but there's going to be some real opportunities. Yeah.

So if you ask me what we've been saying, that it's, this is a countertrend move. If there's softness in the market, big, big massive megatrend going up and to the right. And if the market moves against it, well, that is, you know, this is a gift, right?

Absolutely. That's when people can make real money in industrial or any type of investment real estate. So yeah.

So we're not seeing the softness yet, but maybe we will because, you know, cost is going up because the interest cost.

Absolutely.

Is going up.

Yeah. And, and just the uncertainty in the market is gonna cause some deals to happen as well. Because you're, you're right. An owner has a large asset that has a lease that's ending and they're scared to live with that uncertainty. They may take the cash in hand.

Recession may be coming.

Yeah, absolutely.

Let me get out while the getting's good.

Yeah.

Yeah.

So there's gonna be some, some real opportunities that guys that have cash that can sustain a short downturn or vacant property in order to put the right tenant in there.

So, you know, one of our, one of our passions with this podcast is to train our investors to not be fearful because that is the time you make the most money. Absolutely right. When everyone else is vacating the market, but there's nothing wrong with the market in the long term. Absolutely. That's you. I'm sure you saw this in 2008, right? There's people that just They stepped up because they weren't emotional. They weren't invested in someone else's emotions. Mm-hmm. Right. And they stepped up and made a killing.

Yes, absolutely. Again, it's, it's when you make the most money is when those opportunities present themselves. If you can simply take the perspective that I'm going to buy this asset and I'm going to own it forever, you will not lose on that 99% of the time. And so. You have to be able to withstand some of those downturns. But if you buy an asset with good principles in mind, you are going to do very well in this market. And there's so many reasons to buy real estate. I don't know if I get a chance to talk about why.

Before you do that, do you have a story for 2008 for us? Give us a couple examples of like some deals that were made.

Oh man.

Yeah, we didn't prep you for that question.

No. Well, and that's like ancient history there. I mean, I worked for a company at the time that liked to buy big industrial buildings in small markets and that were very patient. They'd come in and pay cash for the property.

Wow.

And they would sit on it. And the idea was if they had to sit on it for a year, 2 years, 5 years, they would do that until they had the right tenant that they could put in place there. And they had some huge successes by doing that because they did exactly what you talked about, Bob. People that either had a vacant property or one that was coming vacant, and they said, we'll buy it. Those guys were thankful to get rid of the property. My guys came in and improved the asset and sat there and waited for the right user. And they had a, they hit a couple of home runs with that by bringing the right user to that market. And they were unique because they started looking at smaller markets. They didn't have to go to a Chicago or Kansas City. They could look at those you know, third and fourth tier markets and say, we can find a way to make this work. So, right. I saw that happen with several deals back, uh, during that timeframe.

It's the way you make the big bucks. And it's like JP Morgan said, he said, you know, when the blood is in the streets, that's, that's when you make the money, you know?

And absolutely.

I was looking in 2008, I was seeing Miami beachfront condos for $35,000. You know, nobody wanted this stuff.

Yeah.

And I'm thinking, oh my gosh, they're not making more beachfront.

Yep.

You know, and sure enough, you would have done a 10x. I was part of the dot-com crash, and I remember being offered data center, brand new built data center, their completed data center, 20 cents of cost.

Wow.

No one wanted it. There's too much overbuilding, too much data, too much internet. No one's going to—

Internet's over.

Internet's dead, or at least the high growth, and yet it's instead. And I would have made— it would have been a 10x.

Yes.

You know, you just have to, you just have to take the long view.

It's such a mind game when it comes to real estate because people— I mean, perception becomes reality for so many people. And if you can just look past that and see that it is a cycle, we are going to come out of that. And you have to be able to withstand that cycle. But if you can do that, there is huge opportunity.

And the key to withstanding that is just, you know, making sure there's margin, being super careful with your debt, your debt service, because that's when you get creamed is when you can't service your debt. Absolutely.

Right?

You got to make sure you can service the debt. And beyond that, just hold it. You know? And I remember even my daughter, this is a funny story. I'll tell a story of my daughter. You know, she bought a condo, a 3-bedroom condo, and it was out of foreclosure. And she paid $65,000 for this condo. And she was terrified she was going to lose money on it.

Doubled it or tripled it or tripled it. Yeah.

I mean, like 2 years. Yeah. And, and I said, but honey, and you, we didn't know if the market was going to keep going down, going down. Zillow could say that's worth $1,000 tomorrow. Who knows?

Right.

But I said, honey, you can rent it for $1,500 a month.

Right.

So if you're, if you put down $6,000 or $12,000 and you buy this and you're earning, you know, $12,000 a year, Do you think that's a good deal? She's, that's a good deal.

And she, well, you did the right thing. You had a plan. You just had a plan when you went into it. If this works, we do this. If this doesn't work, then we do this. That's, that's the whole key behind it.

You need to be able to flip the switch to the plan A is short-term. Plan B is long-term. Flip and be able to flip a switch to have a long-term flip to your long-term business plan if you need to.

Yeah.

I heard a good quote the other day. You probably have heard this, but it says, uh, Don't wait to buy real estate, buy real estate and wait.

That's exactly right. Yeah.

Right.

So it's, I mean, patient capital and long-term capital is, is gonna win, you know, especially if you're investing with a long-term trend in inflation. You've got those tails behind you.

Inflation is the one sure thing right now. Absolutely. It's the one sure thing. Absolutely. We are going to see inflation. We don't know how much, but we are for sure gonna see it.

Yep.

And inflation is real estate's best friend.

So, and industrial is so attractive because we haven't done this a lot, but the lease structures, especially right now because it's so competitive, you get triple net leases.

Yes.

Right.

And so as a triple net lease, yeah. Give us the break there. Why are they so cool?

Well, a triple net lease, well, is, is what I referenced earlier, a coupon clipper. That means that That tenant pays you rent for that building and you simply collect the rent. They pay the taxes, they pay the insurance, they do the maintenance on the building, they do the janitorial on the building. You have zero responsibilities there. And typically we call that an absolute net lease, but a triple net, sometimes that requires a landlord to still maintain the roof and structure. But so many of these industrial buildings have brand new roofs, right? The exterior structure is a concrete building. There's very little or nothing to do there.

So I love it. I mean, it's really the ultimate, you know, you just de-risk so many levels when you're putting the risk on the tenant.

Absolutely. Especially if you have a quality tenant that's there. So again, you need to buy with good principles. I mean, you mentioned that earlier. If you buy with good principles and you know what you're getting into, you can weather just about any storm. So, um, okay.

Well, I'm sold. I want to go buy some real estate.

Okay. Let's do it.

Let's go do it. Let's go. Loosen our pocketbooks, man.

Now you told me I was going to get to tell people why you should buy real estate. And there's so many factors. I mean, I wrote some of them down, but real estate gives you reasons to make money, pay less taxes, and then grow that asset as well. So for example, appreciation. If you buy an asset—

and we appreciate you.

Well, and I appreciate you. And so does that real estate if you take care of it. If you simply do the things to keep it up. Maintain the landscaping, maintain that roof, maintain the structure. The envelope of the building is the biggest key. But if you maintain that real estate because of the inflation that you talked about, that building's going to appreciate in value over time. So something that's—

it's a for sure thing. You don't know what it's going to do this year or next year, but you, you can be assured over 10 years it will appreciate.

Yeah. Yeah. If you were in the market, in the stock market, you've lost 20 or 30% of your net worth that's in there. This year. If you had owned a piece of real estate, you likely have not lost anything and maybe even gained value in that real estate this year. So anyway, appreciation is a big plus for it. The depreciation side of things, the IRS lets you depreciate that asset over either a 27 or 39-year useful life. They also have what's called bonus depreciation. So you can do a cost segregation on the building. Break out different assets of that real estate and then take accelerated depreciation on that in a shorter period of time. The Tax Cuts and Jobs Act is winding down now, but through 2022, you can take bonus depreciation on, like I said, certain parts of a piece of real estate and pay a lot less in property tax and a lot less on your income tax for that year. Big reason to do it.

Other reason, let me just explain that for a sec. So we've done this and it's very cool. Cost segregation. It's actually what the IRS says you're supposed to do. It's not a, it's not this thing that you can kind of get by with it. And what it is, it's like, it's saying that, okay, your building depreciates over 27.5 years, but maybe your bathroom fixtures, you depreciate over 5 years. And I'm just making this up, but you get the idea. Or your light fixtures and your, your electrical system all depreciates faster. And so what that means is it generates tax deductions right out of the gate. So you pay a firm and they go in and do this study for you and tell me, well, your fences and your gardens and your—

Absolutely.

All depreciates this much and this much, this depreciates that much. And they build a depreciation table for you that you literally just put on your tax return and boom, you get pretty big write-offs pretty quick. And as to your point, that's all going away or part of it's going away in 2023.

Right.

So this is a really good time to stick to 4 cap.

Yeah. And you still have opportunities in '23 and '24. I mean, it reduces by 20% unless they make some modification to the laws each year. But yeah, it's a great time to take advantage of that. Cash flow. Hopefully that tenant that's in the building that you have leased out is paying you more than your debt service and the cost to own that. So you get positive cash flow out of it. The other thing is, you can do that cost segregation, Bob. You can write that building down to, you know, the bare minimum, whatever the land value is. And then you can sell that asset and do a 1031 exchange and buy something that costs more money and do that same process on a larger asset.

And this is where you shift your basis in that one, in the asset, you, the original asset into a brand new asset and you don't pay taxes as when you do that. So you carry forward your basis, which is like, what?

It's amazing.

Yeah.

You're, you're in essence playing with the government's money. They're allowing you to defer your taxes, you know, until your ultimate demise, if you want, until that asset passes to the next generation. And, you know, so you're growing tax-free income in real estate by transferring from one asset to the next. It's a wonderful way to grow net worth.

That's kind of real estate.

Okay. You really sold me now.

Okay. Yeah, it is. It is unique asset class and a lot of, a lot of great Great reasons to be in it, especially now.

Absolutely. It's always a good time to be in it.

So just don't wait to buy real estate.

If you wait, you're going to end up waiting too long. So awesome.

Well, Brent, this is awesome. Super, super fun to have you in and kind of sharing all your nuggets of wisdom here. And thanks so much, listeners, for tuning in. Please join us again for next episode of Invest Like a Billionaire. Thanks so much.