Industrial RE Masterclass feat. Brent Peterson | How To Find the Best Industrial RE Investments

I think we're going to continue to see a lot of development in the southern part of the United States.

What are the trends that we're seeing kind of from where we're sitting now going forward?

The desire is there for more product, trying to be more strategic about that growth. You have to keep in mind that interest rate increase that affects the guy that's building the building is probably even more impactful for the guy that's running the company that has a $200 million payroll.

So maybe there's a lack of data, but from what you've seen, I mean, cap rates, they've gone up but not a ton, right? Or what have you seen in the market?

It does depend on the asset class. We've seen some of the, you know, the smaller retail strip centers.

If you're active in the market, you have a pretty good sense of what these numbers are going to be, right? You know what your construction is going to be. We're seeing active leases, so a pretty good sense of what the lease rate is. The expectation is there's likely going to be future growth. You can even build an empty shell without having to know who the end user is going to be.

I think in some of the mid-sized markets, you know, stuff we've done down in Wichita is overlooked by some of the larger developers. I think that's a great opportunity to go build in a market like that.

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your host, Ben Frazier, and today we have a fun episode for you. If you've been following us for a while, you know we're very excited about industrial real estate. There's a lot of opportunity here. So we brought on our good friend Brent Peterson, who has been a broker in industrial real estate for many decades, and we've brought him on the show in the past. It's been just super helpful to understand just the broad strokes of what's happening in the industry. So we actually recorded this a a masterclass, uh, for industrial real estate. We want to share with our podcast audience because, uh, we figured this information would be valuable to everyone. So, uh, with that, I hope you enjoy this, uh, industrial real estate masterclass. 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. Hello everyone. Welcome to this industrial asset class deep dive. Call it a masterclass on industrial. It's kind of a fancy term, but Basically, we're going to be talking all about industrial real estate today. And if you've been following us for a while, you know, it's an asset class we really believe in, we're very excited about. And especially in this environment where things have kind of changed a lot over the past really year and a half, as has a lot in commercial real estate, we actually think it's presenting a lot of opportunities in the market. And so we're doing a masterclass today. We've brought on one of our favorite people in the space, Brent Peterson. Um, actually done several deals together and And this is your bailiwick. This is what you've been doing for a long time, been in industrial real estate for a long time. And so I wanted to bring him on. I actually had him on— when was it? Probably a year ago.

Yeah, probably just over a year ago.

Okay. And I thought, hey, it's a good time to bring him back on because we have a lot of things happening in the market and want to get people just seeing what's going on. Because I think there's a lot of questions, a lot of people have seen, especially in the multifamily sector where there's been a lot of just challenges in the short term. But industrial is a little bit of a different animal. And so a lot of people haven't invested in this asset class. We want to kind of help them understand what the drivers are. But for those that aren't familiar with you, haven't watched the last time we did an episode, share a little bit on your background, what you do, and kind of how you work in this industrial space.

Sure. Well, appreciate the intro and it's good to be on again. Yeah. So I've been in Kansas City for 27 years. Went to school in Nebraska at Creighton, got an accounting degree, and spent a little time working for one of the Big Six firms at the time, KPMG, Pete Marwick, on their audit side. And that, that just wasn't a fit for me. And anyway, spent a few years in doing construction and modular and manufactured homes and did some development, learned a lot about finance, learned a lot about construction, and it was a great way to learn about managing people. And in the meantime, I got into buying and selling a little bit of real estate and really enjoyed commercial real estate. And about 20 years ago, I made it my sole endeavor. So I've been doing industrial and investment sales for the last 20 years and work for a shop here in town called NAI Heartland. We're an international firm with local offices, and I joined them about a year ago as a partner with the firm and was at my previous previous shop for about 10 years prior to that, but I've really enjoyed it. And yeah, been a lot of interesting things have happened over the last 20 years in commercial real estate. The size of the product, the investment appetite for the product, and the proliferation of building across the country has been amazing to watch and be a part of. So yeah, it's been fun.

So you pretty much exclusively focus on industrial, is that right?

Yes, occasionally I will stray out of that discipline if I have a good client that is, you know, is invested in a different type of asset class. But I typically bring somebody on that is an expert in that asset class, and I'll go along for the ride. So I learn a little bit about multifamily, retail, office, but I'm never the main driver when that happens. And yeah, I do focus all of my attention on industrial though.

Got it. So talk a little bit about just the evolution of the industrial real estate sector, right? So a lot of people that are investing in commercial real estate, most people are investing in multifamily apartments. It's kind of been the bread and butter for a lot of people. And they've heard of industrial, I've heard of triple net lease investing, other types of things. But what's really made this a pretty sophisticated asset class, a lot of capital, that's seeking to get into it. And e-commerce has been a big trend. Talk a little bit about what's kind of driven this asset class to where it is now and what's kind of taken it to the next level.

Yeah, good questions. And I'm probably going to repeat some of the stuff that I've mentioned on our previous podcast, but I think the biggest thing that has changed the industrial market is the amount of speculative industrial development that has happened Kansas City, Wichita, across the Midwest and across the United— you know, the entire United States. Um, you know, people found out that if you build it, they will come. And it, you know, Kansas City is a prime example. Kansas City did not have a lot of speculative industrial development until about 2008 or 2009. And, you know, one guy took a took a shot at it, built a great big industrial building and had no tenants for it and got it leased up pretty quickly. And other people took note and they said, hey, this actually works. And, you know, it was working prior to that in other markets, East and West Coast and some down in the South where, you know, you had bigger population bases, you know, and more of a need. But like Kansas City, Wichita, other Midwest markets, they said, we have a need here as well. And because of the strategic location of a Kansas City or Wichita, you've got great highway access, you're right off of I-35, which is the main north-south, uh, thoroughfare that, you know, cuts, cuts through the United States. Um, it, it makes a whole lot of sense to have a distribution facility in this market, or multiple distribution facilities in this market. So guys said, you know what, I can build a product, I can build a product with certain clear height, certain number of dock doors, certain, you know, decent column spacing, and there's a high likelihood that I'm going to get a user that will come in and take that space and lease it if I just build it. So it took one person to take the gamble, and it was proven successful in this market, and we were off to the races. So again, Kansas City wasn't, you know, if, you know, build it and they will come until about 2008, and it's changed. So yeah, That happened prior to COVID. I think what happened—

it probably benefited from the big boom in e-commerce, right? So at the same time, we saw a huge growth in e-commerce, which was driving distribution needs. So now the Amazons of the world are trying to get their product to the end user, and so they want to have closer access points to where the populations are, at least to the highway systems to get to the population. And that's continued to be a driver. Is that still the main driver right now, or what's, what's kind of driving demand right now?

Yeah, good point. Yeah, people don't go to stores for most of their purchases now, or a lot of purchases, at least. I mean, it's so easy to go shop online and have it show up at your door, and people want it right now. I mean, if you order it, next-day delivery is not unheard of, and you almost come to expect it. So I would answer you with saying yes, that is driving some of the, you know, continued growth in industrial real estate. But I think there's also some reshoring that's occurring. I think COVID did a couple of things. One, it said we need to have better distribution routes and more distribution locations to serve our customers. You know, maybe we have a spot in Kansas City, maybe we have someplace over in Virginia, we have something on the West Coast in California, and maybe someplace north and south. Rather than just one distribution location that, you know, takes us 4 days to get our product to the end user. So that's continued to happen. And whether that's, you know, an Amazon or, you know, some big e-commerce giant like that, or whether it's just a 3PL, a third-party logistics provider that is working for a client that needs to get product out the door quickly. And again, I think, COVID really drove home the point that we need to reshore some of the manufacturing that we were allowing to go overseas. You know, the CHIPS program, I forget the dollar amount, I think it's $400 billion of incentives for development through the CHIPS and the Inflation Reduction Act are being put into play here in the US economy.

Talk about with the CHIPS Act, I think people probably heard that, right? And it's a big deal.

Basically, the US is saying we don't want to be reliant on foreign countries to provide the microchips that run so many of the electronic devices that we have in our world. And they said we need to create more of that here in the United States. We also can control how much we get, when we get it.

Yeah.

And the quality of the product as well. So it's driving jobs here in the US. I mean, there's As you may have talked, there's a proposal for a large facility to be built down in Wichita, close to one of our next projects that we're working on down there. So it's happening here at home and it's happening across the United States too. And same thing with batteries as well. Panasonic is building a huge facility on the west side of Kansas City here. It's going to employ 4,000 people.

It's basically build batteries, right?

They're gonna build batteries.

Yeah, yeah. And you know, we need a lot more of, given all the goals of, you know, all the electric vehicles and other green energy goals.

Absolutely. And I mean, and it's good for the economy when that happens too. So I think people take note of that. So it's not just chips, it's not just batteries, but we're trying to bring a lot of the core products that we need to drive our daily lives back to the US. And I think we're gonna continue to see that as well.

So, I mean, it's interesting. We've talked a lot about it, um, in previous, you know, episodes over the past few years on the reshoring trend and how kind of big of a deal this is because it's kind of fundamentally rewriting these big decisions that these companies are making. And for so long, when I was in school, you know, and it was all just-in-time, it was all export jobs, it was, you know, create the maximum efficiencies by creating a good supply chain. And the goal is just to minimize, you know, tangible costs. But COVID really put a pretty big wrench into that, showing there's a lot of intangible costs that, you know, political risks, obviously delivery risk, and, you know, shutting down economies and all the things that you couldn't really quantify, but then became very impactful to the bottom line. I remember reading some of the headlines with Ford, the auto manufacturer, At one point, they had billions of dollars of inventory in completed trucks sitting on lots that they could not sell because they didn't have these computer chips.

Correct.

It was one of the huge bottlenecks in manufacturing for a long time and still is a big challenge to hit some of these deadlines. And what's the cost for Ford to say, hey, well, for certain critical components of our manufacturing process, we're willing to maybe pay a little bit more to have control over when we can, you know, complete the construction or complete the fulfillment of this part of the process so that you're not relying on, you know, somewhere overseas that you can't control what's going on over there.

Great point. Yeah. You know, automobiles, because they require so many parts to make, are easy to choose and say, all right, if we can build the vehicle here, and then ship directly from the United States. We don't have the lag time. We have the product here and under our control. To some degree, you're still reliant on the— those suppliers to provide those parts, but when you bring the batteries, uh, manufacturing here, when you bring the chips manufacturing here, or the bumpers, or the tires, or the lugs, or whatever it might be, all those different components that go into making that vehicle, and bring it back home, you can control the quality a lot better. You can have more of it at your disposal more quickly, and then you can get a finished product out that you're, you know, when you're going to get it and what it's going to cost you as well. So yeah, that's right. That's what we're seeing. And we're seeing it not just in automobiles, but in aviation and in all kinds of consumer products. So those are just easy ones to cherry-pick because they're such huge projects to look at and put your finger at.

Big numbers. I mean, Some of the stats we've seen on some of the reshoring initiatives and the capital spent to bring the manufacturing back or inventory back and other things, tertiary industries around that, it's, I think, $1 trillion was spent last year just in reshoring. And it's likely going to be early innings because we're just seeing the rewriting of how these are working, right? So it's shifting a lot of perspective from these companies of You know, how do we want to build our supply chain? How do we want to reconfigure manufacturing? And hey, let's actually look at the numbers again, because it's a lot less expensive comparatively to 15 years ago to manufacture in the US than it was, you know, in China. Yes, back, back then. It's not that much more anymore. And not only do you stimulate the economy and the growth, you have more control and other factors that are very valuable.

Sure, and people like to buy American, and it's easy to sell, you know, American-made product too. So, yeah, it's no doubt, uh, you know, the, the amazing thing about this is we've seen this continued growth in industrial manufacturing and distribution even when interest rates have continued to tick up and make deals more difficult to get done. So it shows you that there's a real need and that people are trying to find a way to make it work.

So, yeah, I mean, we're seeing that real time, right? We've completed some projects, and absolutely, you know, it's— leasing is maybe a tiny bit slower, but But demand is still there, and it's just a matter of, you know, how do we strike a deal here? Because we have a space we need to move into, and it's— it hasn't impacted a whole lot as other asset classes.

Yeah, you're right. Um, we've seen slowdown in leasing without a doubt across the industrial sector, but it still is happening out there. But people are being more diligent about the process, and it does seem like deals are slower to happen. And again, I think that has to do with an election year. There's a little bit of uncertainty with the economy. I mean, I think with that, assuming we get some type of a rate reduction, if the Fed does lower rates, even a small amount, I think we're going to see a very positive movement from the economy out there. So, yeah, it's, it's good. The interesting side of that, though, is the investment side of sales on these big industrial projects has really just slowed down. And it's because guys that have the product and they've got long-term financing locked in, and, you know, they may have done this deal, you know, locked in, you know, long-term debt, and they're looking at their exit cap rate and they're saying, it just doesn't make sense. It makes a whole lot more sense for me just to hang on to this, see what's going to happen in a couple of years, and then look to sell it. So it's made the investment side of sales, you know, slow down quite a bit across the entire country.

Yeah. So obviously we had a big boom in e-commerce. We've had kind of a more recent boom in reshoring. And is the type of product that users or tenants are looking for different than what it was 10 years ago, or is it largely the same but the mix is a little bit different? To me, there's, there's less distributors and more manufacturers, you know, because, you know, obviously there's still growth in e-commerce. It's not as fast of a rate of growth as it has been in the past. What are you kind of seeing from a mix standpoint? Is it changing a little bit from what it was before?

Yeah, I would say from 10 years ago that we are seeing more manufacturing buildings and construction going on. You know, as far as the distribution side of things, I think the product has changed a little bit. I mean, it started smaller, it became big, and we, we had a lot of a lot of groups looking for these huge bombers, you know, 500,000 to 1 million square feet. And, you know, that market has slowed down quite a bit actually over the last 12 to 18 months.

Right.

So we, you know, Kansas City's got a few million-plus square foot buildings sitting on the market. So I'm sure that gives some angst to some of the, you know, guys that have built those larger buildings. But the smaller product in that 100,000 to 300,000 square foot range has continued to do extremely well in this market and, you know, across the country as well. So I think guys, I think companies that are looking for new locations have maybe said, I can downsize a little bit and still make, you know, make it work, and I don't need a million square feet to house this operation. Or even if they feel like they may need that, they put that on hold for the current time.

So yeah, some of the data I've seen recently is if you bifurcate the vacancy in the market by size of the building, if you kind of take out the 500,000 square feet and above from the sample you're looking at, it's less than, I think, 4% vacancy across the entire market for the properties in that 100,000 to 200,000 square foot availability.

I mean, there's just, which is pretty much functionally, you know, I mean, that's a great, yeah, I mean, that's a great story to tell and it gives you a reason to say, you should continue to build product. Yeah, I was going to tell you some stats. Kansas City, let's see, we've got about 12 million square feet under construction right now. Most of that is already spoken for. You've got the Meta data center that is up by the airport. That's a million square feet. You've got Panasonic, that's 4 to 5 million square feet. And you've got Ace Hardware, which is a million and a half square feet, all under construction right now. So you've got close to 7 7.5 million square feet that is already spoken for just in those 3 buildings, not to mention some of the other build-to-suits that are going out there. And, uh, you know, the deals in that 100,000 to 300,000 square foot range, there are— there's very few speculative construction, uh, that's, that's going up right now that isn't spoken for. Um, you know, something like 60% of those or 65% are already leased in this market. So, wow. You know, another thing though is, is interest rates have gone up We've seen a lot of the large, um, you know, nationwide develop— developers really slow down. And they haven't completely put their pencils down on new construction, but they have been very selective about what they've built and where they've built it. And they'll continue to do build-to-suits, but we're not seeing nearly as much, uh, speculative construction now as we did 18 months ago. So, right, it's kind of like carry forward with the projects we had But we don't need to push it to try to, you know, just keep the, you know, keep the machine working. So they've hit pause or at least slow down on some of the projects out there for sure.

Yeah, I mean, it's a pretty similar story we're seeing in multifamily as well, where there's a huge construction boom a couple years ago, and when you had the cheap financing, demand was just rip-roaring, economy's on fire, you know, everyone's just building anything they could do. And a lot of that product has hit the market or is going to be hitting the market this year, beginning of next year. But sure, the starts have really fallen off a cliff, which is the, the new projects that are being started. At least you're saying the speculative ones. So there's build-to-suits that are happening all the time that are basically building this building for a specific user, and it's already agreed upon before you even start.

Absolutely.

Um, but there, a lot of times, like The developers are not going to go build a build-to-suit for a smaller user because the numbers don't work as well. That's right. And it's a lot of big numbers. And a lot of the bigger developers are just wanting to pull back because, you know, they have some of these bigger properties that are sitting vacant. And, you know, it's more difficult to get deals done because financing is way more expensive. Capital's hard to find, but now might be the best time to be starting projects because by the time you're completing them, you're bringing them to market, there's not going to be much competition, both likely what's been in the market is not absorbed yet. Most projections are that absorption is going to— or demand is going to absorb all the remaining product over the next 18 or so months. And now you have no competition from other new product that you're competing against, and you might be the only, only girl at the dance that, uh, you have the product for.

That's exactly right. I've talked to 3 of those larger developers, uh, that build nationwide, and all 3 of them have said right now is probably the time where we should be building even more product, or we should still be, you know, churning away because there's some real opportunity. The guys that are doing it are probably going to see the benefits from it. So it is a little scarier though because financing is tougher.

Yeah.

And, you know, the exit strategy is a little bit uncertain right now. I mean, you may have to hold that product for longer because you may not want to dispose of it once you've got it leased, you know, at the cap rate that you can today. But you mentioned, you know, multifamily and comparing it to industrial. And I think those two are very similar in a lot of ways. And the reason I say that is they've almost become a commodity to some degree.

Yeah.

Because you can, you can really monetize, okay, what is my true NOI on that asset? I can put my own management group in. I may be able to nuance the numbers a little bit by either improving the efficiencies of how I manage it, or I may be able to boost the actual occupancy rate within that building. But I know roughly what I can make in multifamily if I buy this asset and I just continue to let rates go up a little bit. Industrial is not much different. Yeah, you're building so many of these buildings to similar size specifications, you know, highway access. I mean, it's, it's a pretty simple, simple template of what you need to do in order to meet the demand out there. And if you just build that, you know, whether a buyer is looking at an industrial building that's an investment type of industrial building in Indianapolis or Kansas City or Chicago or LA or or wherever, they can look at that market and they say, all right, I know what my NOI is. I can give it maybe a little plus or a little minus based upon the location, but here's my strike price for that asset. So I think it's real similar to what you'd find in multifamily too.

Yeah, so absolutely.

Um, just a numbers game really, you know.

Talk a little bit about, you know, as the demand is shifting a little bit, the use case may be a little bit different. If reshoring, if manufacturing has become a bigger component of the US economy again, how does that change some of the shifting from a broader perspective of where the big industrial hotbeds are? You know, historically it's mostly been coastal because of all the imports that we would do, and it's not necessarily going to go away, but it seems to be shifting a little bit more to the nearshoring like Mexico and the other trade relations we have. And more Midwest that are now— a lot of, uh, users are wanting the ability to be close to most major markets in a, in a, you know, certain distance to where you have access, right? So talk about how maybe perspective has shifted a little bit on where a lot of the new opportunities are relative to the kind of old world of the big coastal gateway markets.

Sure. Well, the manufacturers, um, you know, have more than just distribution in mind when they look at a specific location. They're focused heavily on workforce a lot of times and maybe workforce incentives. So, you know, cost of that labor, quality of that labor, you know, the education level, the unemployment rate is really, really critical to those folks. And then they will, you know, obviously factor in, can I get my product from the small town America if that's where the best labor market is? To all of my end users in an efficient manner? And, and they'll do that equation as well. But I, I think, you know, by and large, I think there's probably more readily available labor in the South that will attract or continue to attract more manufacturing companies as they're considering the U.S. I think Mexico is going to continue to be a huge provider of product to the United States. I mean, it's— I think it's overtaken China as the major importer to the US, and I think we're only going to continue to see that grow as time goes on. You know, I, I was at a convention 3 or 4 months ago and met with another broker down in Laredo, Texas, and I was astounded by the fact of, you know, how much product comes through that market. And how busy their distribution hubs are in that location. And it's because it's an easy corridor to get from, you know, Mexico to the United States and distribute from there. So again, I think we're going to continue to see a lot of development in the southern part of the United States. Also, the weather's more conducive to working all year round. You don't have sick days, you don't have the cold that you have to fight. Yeah, people I think would rather deal with the heat than, you know, 2 feet of snow on their roof and roads, you know, frozen up where they can't get product out. So I think those manufacturers are going to look for markets like that and factor all those little, little items that matter to them into that equation and, and then continue to make decisions on where they want to be. But I would look heavily in the south, southern part of the United States, if, if I were trying to, you know, bet on that.

So yeah, I mean, it seems like a different calculus that users are using to determine location, right? Where historically, if it's just an import market and you're just trying to distribute as quickly and as far as you can, you know, the coastal markets make sense. But now, if you're a manufacturer and your biggest cost, you know, aside from maybe the, the product itself or the raw materials, is your labor, right? And so you want a place where, like you said, you have good work, workforce, but also reasonable pay. And, you know, if you go to the coastal markets, those are the most expensive markets. So you have to pay a lot more. And if you have a good workforce with more of a blue-collar workforce, plus the ability to have good distribution access, that's kind of the sweet spot, right? Where a lot of these people are— users are looking at that as a core part of it.

Absolutely. Absolutely. There's no doubt. And it's interesting to be on the tours with those manufacturers, to hear them talk about things that you don't hear from the same guys that are looking that are distribution users for a building. So they just, they have a lot more questions for the local economic development folks, a lot more questions for, you know, people in politics there because it matters a lot to them because that workforce is so critical to what they do. So.

Yeah. Let's shift a little bit to just bigger picture. You know, what are you seeing in the market, right? So you've been in this asset class for a long time. You've seen, you know, ups and downs in different parts of the cycle. You know, what are you seeing? We've kind of hit on a little bit here, there on absorption. You know, we've hit the, the bigger spaces are sitting empty. A lot of developers are pencils down right now. Um, you know, cap rates have gone up a little bit, so values have been impacted. What do you— is it all negative? Is it, you know, all bad time right now, or what, what's what are the trends that we're seeing kind of from where we're sitting now, kind of summer of 2024 going forward? Obviously there's some unknowns with the election, with interest rates, but you know, what are you seeing just with some of those conversations with the manufacturers, with the users of, you know, how are they thinking about making decisions as a business and, you know, growth and those kind of things?

Sure. I mean, there's still a need out there. So the desire is there to expand. The desire is there for more product. And again, it's just trying to be more strategic about that growth, because you have to keep in mind that interest rate increase that affects the guy that's building the building is probably even more impactful for the guy that's running the company that has a $200 million payroll and has to buy, you know, $500 million worth of product that he has, you know, on hand at any one point in time. So that increase in the the rate that they're borrowing at really impacts the amount of product that they can get and how quickly they have to get it out the door. So they, you know, guys that are, you know, making widgets really want to knuckle down and keep a very tight rein on, am I being as efficient as possible with that product? So again, yeah, people want to build it. And there's the desire to grow, but they have to have a compelling story why I need to grow right now, especially with the thought that interest rates may go down in the next 3 months or 6 months or whatever. So, and again, it seems like we do hit pause a lot of times during this election year. It seems like we do have a little bit of slowdown every, uh, 4 years.

Yeah.

Um, in commercial real estate, just because there's some uncertainty out there in the market. I will tell you this though, I mean, one of the asset classes that we haven't really talked about is kind of that mid, mid-size, you know, flex space or smaller industrial you know, building buildings that are somewhere between 15,000 to 50,000 or maybe even 75,000 square feet and being willing to demise those to smaller users, that is a 3,000 or 15,000 square foot user. It's hard to build that product and have it pencil today. But if somebody is able to figure that out and build a quality product at a reasonably, you know, fair price lease rate-wise, there is almost, uh, an unlimited supply of people that will consider that product, and the vacancy rate in that product has remained extremely low, at least in our markets here.

So yeah, what have you seen from cap rates, uh, right now, right? Obviously interest rates have gone up fastest rate in history. It's put a lot of pressure on cap rates. We've seen transaction volumes just plummet, right, from the amount of deals that were done the year before to now. It's pretty, pretty crazy. So it's, it's hard to get good data, right, because a lot of people aren't willing to sell because they're saying, hey, the expectation is interest rates will go down at some point and capital will come back and that will drive down cap rates. Um, so maybe there's a lack of data, but from what you've seen, I mean, cap rates, they've gone up but not a ton, right? Or what have you seen in the market?

Yeah, uh, it, it does depend on the asset class. Um, again, I dabble in retail and some other asset classes, and we've seen some of the, you know, the smaller retail strip centers, the cap rates have gone up a little bit but not a tremendous amount. Um, so I, yeah, I think we're seeing a lot of that stuff still trade at numbers just slightly above where, where they were at during COVID What about industrial specifically though? Yeah, uh, industrial has slowed down dramatically. I mean, we've seen a 75% decline in investment sales in the last 12 months and But that's pretty much the same for multifamily, at least that.

And yes, I mean, retail, others might not be as much, but it's not abnormal relative to other real estate, right?

Sure. Absolutely. I think it's become from the investment side, I think the product that is traded that has, you know, investment-grade tenants in the particular property has continued to trade at a very low cap rate. To the point where it's negative leverage and people are looking to deploy capital, but they know long-term that having that Fortune 200 company in my building with a long-term lease, at some point in time, I'm going to be able to refinance and produce a better return for myself. So they're still willing to take a gamble on a, a pretty sure tenant with a lower cap rate. Some of the smaller industrial or flex product has gone up to some degree. But if it's, if it's good product in a good location and the fundamentals are still there, we're still seeing those trade at, you know, maybe 100 basis points, maybe 50 basis points over where they were at, uh, 12 to 18 months ago. But those numbers have still held pretty strong over the last 12 months. So there is a desire, and I think there's a lot of capital waiting to go out there and acquire more assets. But again, like you said, if you sell it, if you, if you own a good asset and you sell it, where are you going to go place your capital?

Right.

Yeah, yeah. I mean, that's what a lot of guys are asking themselves, you know. So I've got something good, why would I go try to do something else with my ass, you know, with my cash right now?

Right. What are the expectations kind of on a go-forward basis of— I mean, obviously you don't have a crystal ball and, you know, no one knows the future, but what's kind of the market, you know, expectation on what— where do we go from here from investment sales, from transactions again from the development boom where we kind of— everything is on hold right now.

Yeah, um, you know, I think most guys, um, I would say that, you know, when we start seeing some rate reductions by the Fed, they're going to slowly start getting back into the market, you know, building more product. And I think we'll start to see a deal flow on the investment side pick up when that happens too, because when guys are investing more, you know, they need more capital in, so they're going to sell existing assets so they can keep the machine moving. So I, I think from a crystal ball perspective, it depends on how quickly rates drop. And I think the election plays a lot into that, uh, obviously the economy, how it, you know, what happens with unemployment rates, uh, inflation. That's all going to factor into it. But I would say that we're not going to have a boom like we did with, uh, during COVID But I think it's going to be slow, steady growth, which is probably more healthy for the economy anyway. So, um, So yeah, I think 2025 is going to be a good rebound year, but it's not going to be double what we did in '24, right?

Yeah, so it makes sense. Let's chat a little bit about development of industrial, right? This is, um, you know, for a lot of people that may be newer to industrial and then even newer to development investing, right, it can be a little scary because it feels like you're taking a lot of risks, right? You have, you know, construction risk, you have interest rate risk, you have, uh, tenancy risk and other things. But one of the cool things that I think is so unique about this asset class as compared to other real estate is you can build these— like you said, they're pretty templated a lot of times. I guess it's not— it's a big box, right? And you either you're doing it with aluminum siding, you're doing concrete siding, and maybe there's a few different things you, you change here or there, but there's— it's, it's not rocket science as long as you have a good location. It's really determining, you know, what will the potential primary use be. But you can even build an empty shell without having to know who the end user is going to be, right? And that's the cool thing a lot of times is you can build it to work and actually fit both a distributor use and/or a manufacturer use or some combination thereof without having to spend a whole lot more on the front end and taking that risk. And so you can eliminate a lot of risks I mean, you can many times get gross max contracts from the construction, uh, parties to where they're locking in their costs. You know what your, your actual hard costs are going to be. Um, and from my perspective, looking at lots of different investments, lots of different asset classes, the kind of golden metric, um, is in my opinion is yield on cost, right? What's, what's the kind of net yield that we can generate on an asset with all the costs in, right? It's kind of the great normalizer from a development standpoint as well as value-add, other things. But looking at how much yield will this project generate relative to other asset classes with a similar risk type. And industrial, from my perspective, at least the deals we're looking at, are much, much higher than multifamily from really any other development-focused real estate that I've seen. And You, you know, if you have a— if you're active in the market, you have a pretty good sense of what these numbers are going to be, right? You know what your construction is going to be. You know, we're seeing active leases, you know, happening right now, so we have a pretty good sense of what the lease rate is. And, you know, the expectation is there's likely going to be future growth, and you can actually build some of that growth into your rental agreements. And, um, so you have this kind of max flexibility, and so you are taking some risk But you can eliminate or at least reduce a lot of these risks and potentially step in at a good time where, you know, there's not a whole lot of competition. I mean, talk about your perspective of seeing some of these developments go full cycle and, you know, how do you lose these situations and, you know, when do you win these situations?

Sure. Um, well, this is where I think multifamily and industrial vary pretty significantly. Yeah. So, you know, the risk is you build a big building, you put it in a good location, and then you don't fill it up with a tenant right away.

Yeah.

And how long is that hold period? I think if you build a good asset in a good location with the right amenities, it's not a matter of if, it's just a matter of when you're going to fill that product.

And so sometimes it can feel challenging because in multifamily you're leasing, you know, unit by unit. So you see it start ticking up, but it's really binary many times in these industrial big buildings where it's one lease or no leases. And so it can feel like it's— you're taking a lot longer.

Feast or famine. That's correct. And you're right, because that, you know, that multifamily— a failure in multifamily is if you get to 60% and you just can't, you can't get 100% occupancy, and it takes longer than you expected. But, you know, when you, when you sit on an industrial building for 12 months or 18 months and you don't have a tenant in there, it becomes nerve-wracking. So big risk, big reward. That's why it takes a special group to go and build and develop this type of product, because, you know, there is risk involved with it. But, you know, if you plan for, you know, some potential vacancy and know that, you know, it may be a longer road to hoe, then you can, you can make some great returns in this. So that's, that's why the returns are so good in this industrial product, because it takes a lot of cash, one, and it takes some risk in order to make this work. So From a development standpoint too, you know, construction costs have gone up dramatically. You know, since when we first started doing some stuff down in Wichita, even prior to you doing stuff down there, I mean, the cost of construction has gone up pretty significantly. But, you know, I just looked and saw that rental rates in our market, you know, kind of here in the Midwest, have gone up about 31% over the last 5 years. That is a— I mean, that's a tremendous a testament how to how valuable this market is, how strategic it is, and why it makes sense to do this type of development. So yeah, construction cost has gone up, but there is, you know, there is a real user out there willing to pay what it costs to build this product. And frankly, we're, we're extremely cheap compared to other markets across the United States. And you throw on top of that, you know, Kansas and Missouri both offer incentives for for developers to go out there and take a risk in building product. They'll, you know, you can get tax abatement, you can get some sales tax abatement off of raw materials that are used in the construction of the building. So it's very advantageous to build, at least in the, you know, Kansas and Missouri areas, without a doubt.

So yeah, yeah. What are you seeing, just kind of as final thoughts, where the big opportunities are, right? Where Where do you see, as an investor, you're putting on the investor lens and it's difficult to want to go take risks right now because it feels like there's a lot of challenges across the economy, across real estate in general. But many times you have to be a little contrarian to get in at the right point of the cycle, to be fearful when others are greedy and greedy when others are fearful. And From our perspective, we see a lot of opportunity in other asset classes, but industrial is far and away the number one real estate for us asset class from where we think opportunity is because of the yield you can generate on your costs and the long-term drivers that are going to be continuing to create demand for this kind of fundamental shift in the American economy. But getting a little more micro, where are you seeing— You kind of mentioned Southern markets, Midwest markets, smaller spaces, right? The ability to demise, which is another kind of cool thing with development, is you can go build a larger building, but then you can go and demise it down into smaller sections of a building and lease those out. And so you can de-risk some of the, you know, all-or-nothing kind of lease risk a little bit. But where is the opportunity that you're kind of seeing?

Well, from a product type, I mean, I think there's going to be opportunity to buy existing assets that have some upside to them, some built-in upside, maybe with rental increases for existing product here over the next 12 to 18 months. Because I think you're going to see some developers that say, all right, I've held on to it long enough, my cost of capital is high enough, I'm ready to dispose of those.

So I think if you have cash, you know, and take a little discount to what I got a couple years ago, but hey, I'm still going to make money and I got some maturing debt, or I've got other things.

Absolutely.

I'm willing to—

I've already been clipping the coupon for 2 years, they paid me rent enough, so I've adjusted my basis down. I'm going to go ahead and move on to the next one. And they realize that they can build a new product and probably, you know, create a better return than sitting on that existing asset. So I think we're going to see that. So there is going to be some opportunity for guys with dry powder to go out and make a deal. The other thing I would say is I think in some of the mid-sized markets, I think like, you know, stuff we've done down in Wichita may really— is overlooked by some of the larger developers. I think that's a great opportunity to go build in a market like that. And not all are created equal. You need to have great highway systems.

Yep.

You know, decent rail access is not a bad thing to have in a market. You know, workforce— you mentioned good workforce is really important. But if you can check those boxes when you find a mid-sized market, I think there's a great opportunity to go build in a lot of those because the workforce is there and they're not already sucked up by a lot of other you know, giant buildings or corporations that have already located to those areas. So, right, I, I think that's a good place to focus. I mean, I looked, um, so Dallas, Phoenix, Savannah, the Greenville-Spartanburg area, and San Antonio have the most available new inventory based upon historical absorption that they've had within those markets. So, I mean, Dallas is a monster market with a ton of new product that's been built. I think there's an opportunity to go build there, but I don't know how you differentiate yourself, uh, when somebody's looking at 25 different buildings that all could meet their needs that are somewhere between 100,000 to 250,000 square feet. It's a little ominous to go into a market like that.

It's very market-specific of where the opportunity can be.

Absolutely. Like, maybe you say Colorado Springs is where I want to be next, or, you know, something like that, that, that checks the box for having a decent-sized population, decent highway access. And maybe even if it's got a high barrier to entry, some of those markets, you know, I've dabbled around in Salt Lake a little bit, you know, where, you know, the cost of ground is extremely high and there's limited opportunities to develop. Those are great markets to look in as well. So, and that's not, that's true in a lot of those states that fall along the Great Divide, you know, Colorado, Idaho, Utah, Arizona, New Mexico, those are all good markets to really give some serious consideration to as well, I think.

So yeah, that's awesome. Well, Brian, this has been super helpful. Any other final parting thoughts, or—

it's fun to talk. It's hard to believe that we, we can spend an hour and it feels like 10 minutes. Yeah, but yeah, industrial real estate's great. It's fun to be involved with it, and, uh, glad we're partnering together on it.

So awesome. Well, thanks for coming on. This is always fun to do in person, and, uh, good to have you on and share the update. So Hopefully you guys all got value out of this. Um, I definitely want to encourage you to get on the mailing list if you're not already. Uh, stay tuned. We do have some exciting opportunities kind of coming down the pike, um, that we, we think are really well poised for this current economic environment. And, uh, with that, Brent, thanks so much for coming on.

Appreciate it. Thanks a lot.

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