Investor, get notified first when our industrial deal launches: https://share.hsforms.com/1JdTr6KMMR0-YKumCXZEa4Adir9h
This is not a commitment, just a way to give you exclusivity once we launch.
This episode is a masterclass on industrial real estate with Ben Fraser, CIO of Aspen Funds and Brent Peterson, Partner at NAI Heartland. We discuss how to find the best industrial real estate investments in 2024, and much more.
Interested in our upcoming industrial real estate deal? Get notified first: https://share.hsforms.com/1JdTr6KMMR0-YKumCXZEa4Adir9h
Get our FREE 2024 Economic Forecast: https://www.investwithaspen.com/free-economic-report
This podcast is sponsored by Aspen Funds which focuses on Private Credit, Industrial Real Estate, and Oil and Gas offerings for accredited investors: https://aspenfunds.us/
Follow Aspen Funds
LinkedIn: https://www.linkedin.com/company/aspen-funds/
Instagram: https://www.instagram.com/aspenfunds/
Facebook: https://www.facebook.com/aspenfunds/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
Connect with Brent Peterson on LinkedIn https://www.linkedin.com/in/brent-peterson-6944a510/
Watch the episode here
Listen to the podcast here
Transcription
Southern U.S. Development Trends
Brent Peterson: I think we’re going to continue to see a lot of development in the Southern part of the United States.
Ben Fraser: What are the trends that we’re seeing from where we’re sitting now going forward?
Brent Peterson: The desire is there for more product, trying to be more strategic about that growth. You have to keep in mind that the 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.
Ben Fraser: So maybe there’s a lack of data. But what you’ve seen in the cap rates, they’ve gone up, but not a ton, right? Or what have you seen in the market?
Brent Peterson: It does depend on the asset class. We’ve seen some of the smaller retail strip centers.
Ben Fraser: If you’re active in the market, you have a pretty good sense of what these numbers are going to be, right?
What your construction is going to be. We’re seeing active leases to 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.
Brent Peterson: I think in some of the midsize markets, the 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.
Introduction to the Podcast
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host, Ben Fraser. And today we have a fun episode for you. If you’ve been following us for a while, we’re very excited about industrial real estate.
There’s a lot of opportunities here. So we brought on our good friend, Brent Peterson who has been a broker in this industrial real estate for many decades. And we’ve brought them on the show in the past. It’s been super helpful to understand just the broad strokes of what’s happening in the industry.
So we actually recorded this as a masterclass for industrial real estate. And we wanted to share it with our podcast audience because we figured this information would be valuable to everyone. With that, I hope you enjoy this 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.
Industrial Real Estate Masterclass
Ben Fraser: Welcome to this industrial asset class, deep dive, call it a masterclass on industrial. It’s 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, it’s an asset class. We really believe in it.
We’re very excited about it. Especially in this environment where things have changed a lot over the past, really a 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.
Guest Introduction: Brent Peterson
Ben Fraser: We’ve brought on one of our favorite people in the space, Brent Peterson actually done several deals together.
And this is your bailiwick. This is what you’ve been doing for a long time. Been industrial real estate for a long time and so wanted to bring him on. Actually had him on. When was it? Probably a year ago.
Brent Peterson: Yeah, probably just over a year ago.
Ben Fraser: 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.
Cause 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 people haven’t invested in this asset class. We want to Help them understand what the drivers are.
But for those that aren’t familiar, if you haven’t watched the last time we did episodes, show them in your background, what you do and how you work in this industrial space.
Brent Peterson: Sure. 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, Creighton, got an accounting degree and spent a little time working for one of the big six firms at the time, KPMG, Peat Marwick on their audit side.
And that, that just wasn’t a fit for me. Anyway, I spent a few years 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 shop for about 10 years prior to that.
But I’ve really enjoyed it. And yeah, 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 buildings across the country has been amazing to watch and be a part of. So…
Ben Fraser: Yeah.
Brent Peterson: It’s been fun.
Ben Fraser: So you pretty much exclusively focus on industry. Is that right?
Brent Peterson: Yes. Occasionally I will stray out of that discipline if I have a good client that is invested in a different type of asset class. But I typically bring somebody on that is an expert in that asset class.
So no. I’ll go along for the ride. So I learned a little bit about multifamily retail offices, but I’m never the main driver when that happens. And yeah, I do focus all of my attention on industry though.
Ben Fraser: Got it.
Evolution of Industrial Real Estate
Ben Fraser: 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 multi family apartments. It’s been the bread and butter for a lot of people. And you’ve heard of industrial, I’ve heard of triple net lease investing, other types of things, 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. Let’s talk a little bit about what’s driven this asset class to where it is now. And what’s taken it to the next level?
Brent Peterson: Yeah, good questions. And I’m probably gonna 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, the entire United States. People found out that if you build it, they will come.
And Kansas city is a prime example. Kansas city did not have a lot of speculative industrial development until about 2008 or 2009. And, one guy 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, it was working prior to that and other markets, East and West coast and some down in the South where, you had bigger population bases and more of a need like Kansas city, Wichita, other Midwest markets, they said, we have a need here as well. And because of the strategic location.
In Kansas City or Wichita, you’ve got great highway access, you’re right off of I 35, which is the main north south thoroughfare that cuts, cuts through the United States. It makes a whole lot of sense to have a distribution facility in this market or multiple distribution facilities in this market.
Guys said, you know what? I can build a product, I can build a product with a certain clear height, a certain number of doctors, a certain, 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, if they built it and they will come until about 2008 and it’s changed.
Ben Fraser: Yeah.
Brent Peterson: That happened prior to COVID. I think about what happened.
Impact of E-commerce and COVID-19
Ben Fraser: 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 driving demand right now?
Brent Peterson: Yeah, good point. Yeah. People don’t go to stores for most of their purchases now, or a lot of purchases at least. It’s so easy to go shop online and have it show up at your door and people want it right now. If you order it the next day, delivery is not unheard of and you almost come to expect it.
Reshoring and U.S. Manufacturing
Brent Peterson: I would answer you with saying yes, that is driving some of the 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 said we need to have better distribution routes and more distribution locations to serve our customers. 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. You know, it takes us four days to get our product to the end user. So that’s continued to happen. And whether that’s, an Amazon or, some big e-commerce giant like that, or whether it’s just a three PL, 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 allowed to go overseas. The chips program, I forget the dollar amount. I think 400 billion of incentives for development through the chips and the inflation reduction act are being put into play here in the U S economy.
Ben Fraser: With the chips. I’ve probably heard that, and it’s.
Brent Peterson: Yeah.
Ben Fraser: Big deal.
Brent Peterson: Basically, the U. S. 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 and the quality of the product as well.
It’s driving jobs here in the U. S. There’s as you may have talked, there’s a, 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 building batteries.
They’re going to build batteries. Yeah.
Ben Fraser: And you need a lot more given all that. The goals of electric vehicles and other green energy goals.
Brent Peterson: Absolutely. 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 U S and I think we’re going to continue to see that as well. So
Ben Fraser: It’s interesting. We’ve talked a lot about it. In previous episodes over the past few years on the reshoring trend and how big of a deal this is, because it’s fundamentally rewriting these big decisions that these companies are making. And for so long when I was in school, that was all.
Just in time, it was all export jobs. It was, create the maximum efficiencies by creating a good supply chain. And the goal is just to minimize tangible costs, but COVID really put a pretty big wrench into that showing there’s a lot of intangible costs, political risks, obviously delivery risk and, shutting down economies and all the things that you couldn’t really quantify.
But then it became very impactful to the bottom line. I remember reading some of the headlines with Ford, the auto manufacturer at one point 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.
Brent Peterson: Correct.
Ben Fraser: 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 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 complete the construction or complete the fulfillment of this part of the process so that you’re not relying on somewhere overseas that you can’t control what’s going on over there.
Brent Peterson: Great point. Yeah. 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 relying on those suppliers to provide those parts.
But when you bring the batteries at 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, when you’re going to get it and what it’s going to cost you as well.
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 the easy ones to cherry pick because they’re such huge projects to look at and point your finger at.
Ben Fraser: Big number. Some of the stars we’ve seen on some of the reshoring initiatives and the.
The capital spent to bring the manufacturing back or inventory back and other things, tertiary industries around that. I think a trillion dollars was spent last year just on reshoring and it’s likely going to be early innings because we’re just seeing the rewriting of. of how these are working, right?
So it’s shifting a lot of perspective from these companies of, how do we want to build our supply chain? How do we want to reconfigure the manufacturing? And Hey, let’s actually look at the numbers again, because it’s a lot. less expensive compared to 15 years ago to manufacture us than it was, in China 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.
Brent Peterson: Sure. And people like to buy American and it’s easy to sell, American made products too. So yeah, there’s no doubt. 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.
Current Market Dynamics
Brent Peterson: So it, it shows you that there’s a real need and that people are trying to find a way to make it work. So.
Ben Fraser: Yeah, we’re seeing that real time, right? We’ve completed some projects and.
Brent Peterson: Absolutely.
Ben Fraser: It’s leasing is maybe a tiny bit slower, but demand is still there and it’s just a matter of. How do we strike a deal here?
It’s because we have a space we need to move into and it doesn’t. Impacted a whole lot is other asset classes.
Brent Peterson: Yeah, you’re right. We’ve seen a 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 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.
Yeah 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, they may have done these deals, locked in 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 slow down quite a bit across the entire country.
Ben Fraser: So obviously we had a big boom in e-commerce. We’ve had 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 less distributors and more manufacturers, because 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 seeing from a mixed standpoint? Is it changing a little bit from what it was before?
Brent Peterson: Yeah, I would say from 10 years ago that we are seeing more manufacturing buildings and construction going on. As far as the distribution side of things, I think the product has changed a little bit.
It started smaller. It became big and we had a lot of groups looking for these huge bombers, 500, 000 to a million square feet. And, that market has slowed down quite a bit actually over the last 12 to 18 months. So we, 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 guys that have built those larger buildings. But the smaller product in that 100 square foot range has continued to do extremely well in this market and, 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 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.
Ben Fraser: 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 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 to 200, 000 square foot availability. This is pretty much function functionally,
Brent Peterson: That’s great, yeah. That’s a great story to tell. And it gives you a reason to say you should continue to build products.
I was going to tell you some stats about Kansas city. Let’s see. We’ve got about 12 million square feet under construction right now. Most of that has already been spoken for. You’ve got the meta data center that is by the airport. That’s a million square feet. You’ve got Panasonic that’s 45 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 77 and a half million square feet. That is already spoken for just in those three buildings, not to mention some of the other buildings that are going out there and the deals in that 100 square foot range, there are very few speculative construction that’s going up right now that isn’t spoken for.
Something like 60 percent of those or 65 percent are already leased in this market. Another thing though, is as interest rates have gone up, we’ve seen a lot of the large nationwide developer 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 build the suits, but we’re not seeing nearly as much speculative construction now as we did 18 months ago. So it’s carry forward with the projects we had, but we don’t need to push it to try to just keep the machine working.
So they’ve hit pause or at least slowed down on some of the projects out there for sure.
Ben Fraser: Yeah. It’s a pretty similar story. We’re seeing multifamily as well, where there’s a huge construction boom a couple of years ago. And when you had the cheap financing demand was just rip roaring economies on fire, 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 the stars have really fallen off a cliff, which is the new project that is being started. At least you’re saying the speculative one. So there’s building 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.
But there are a lot of times like the developers are not going to go build a suit for a smaller size. User because the numbers don’t work as well and it’s a lot of big numbers in a lot of the bigger developers are just. Wanted to pull back. ’cause they have some, these bigger properties that are sitting vacant and it’s with the more, it’s more difficult to get deals done.
’cause 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 ’em to market. There’s not gonna 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 remaining product over the next 18, or so months.
And Now you have no competition from other new products that you’re competing against. And you might be the only girl at the dance that you have the product for
Brent Peterson: that. That’s exactly right. I’ve talked to three of those larger developers that build nationwide.
Opportunities in Product Building
Brent Peterson: And all three of them had said right now is probably the time where we should be building even more products, or we should still be 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.
Ben Fraser: Yeah.
Brent Peterson: And the exit strategy is a little bit uncertain right now. You may have to hold that product for longer because you may not want to dispose of it once you’ve got at least at the cap rate that you can today.
Multifamily vs. Industrial Real Estate
Brent Peterson: But you mentioned multifamily and compared 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.
Ben Fraser: Yeah.
Brent Peterson: Because 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.
You’re building so many of these buildings to similar size, specifications, highway access. It’s a pretty simple template of what you need to do in order to meet the demand out there. And if you just build that, 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 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 really similar to what you’d find in multifamily too.
Just a numbers game, really.
Shifting Industrial Hotbeds
Ben Fraser: Talk a little bit about, 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 U S economy again, how does that change some of the shifting from a broader perspective of where the big industrial hotbeds are?
Historically it’s mostly been coastal because of all the imports that we would do, and it’s not going to go away, but it seems to be shifting a little bit more to the nearshoring, like Mexico and the other trade relationships we have in more Midwest that are now a lot of users are wanting, you The ability to be close to most major markets in a, certain distance to where you have access.
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.
Brent Peterson: Sure.
Impact of Workforce on Manufacturing
Brent Peterson: The manufacturers 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.
Cost of that labor, the quality of that labor, the education level, the unemployment rate is really critical to those folks. And then they will, obviously factor in. Can I get my product from America, if that’s where the best labor market is for all of my end users in an efficient manner, and they’ll do that equation as well.
But I think, 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 products. To the United States.
I think it’s overtaken China as the major importer to the U. S. And I think we’re only going to continue to see that grow as time goes on. I was at a convention three or four months ago and met with another broker down in Laredo, Texas, and I was astounded by the fact that 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 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. People I think would rather deal with the heat than, Two feet of snow on their roof and roads, frozen up where they can’t get product out. I think those manufacturers are going to look for markets like that and factor all those little items that matter to them into that equation and then continue to make decisions on where they want to be.
But I would look heavily on the South Southern part of the United States. If I were. Trying to bet on that.
Ben Fraser: Yeah, it’s, 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, the coastal markets make sense.
But now if you’re a manufacturer and you’re, Biggest cost, aside from maybe the product itself or the raw materials, is your labor, right? And so you want a place where, like you said, you have a good work workforce, but also reasonable pay. And, if you go to the coastal markets, those are the most expensive markets.
So you’re going 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 the sweet spot, right? Where a lot of these people are users are looking at that as a core part of it.
Brent Peterson: 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 those, the same guys that are looking for 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 people in politics there because it matters a lot to them because that workforce is so critical to what they do.
Ben Fraser: Yeah, let’s shift a little bit to just the bigger picture.
Current Market Trends and Predictions
Ben Fraser: What are you seeing in the market? I see you’ve been in. This asset class for a long time. You’ve seen ups and downs and different parts of the cycle. What are you seeing? We’ve hit on a little bit here, there on absorption.
We’ve hit the bigger spaces sitting empty. A lot of developers are pencils down right now. Cap rates have gone up a little bit. So values have been impacted. What do you think? Is it all negative? Is it all bad right now? Or what’s, what are the trends that we’re seeing from.
We’re sitting now, the summer of 2024 going forward. Obviously, there’s some unknowns with the election with interest rates. But what you are seeing is some of those conversations with the manufacturers, with the users of, how they are thinking about making decisions as a business, growth and those kinds of things.
Brent Peterson: Sure. 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, 500 million worth of product that he has, on hand.
At any one point in time. So that increase in the rate that they’re borrowing really impacts the amount of product that they can get and how quickly they have to get it out the door. So there, guys that are, making widgets really want to knuckle down and keep a very tight rein on my 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 do I need to grow right now, especially with the thought that interest rates may go down in the next three months or six months or whatever. 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 four years in commercial real estate, just because there’s some uncertainty out there in the market. I will tell you this though. One of the asset classes that we haven’t really talked about is that mid size, flex space or smaller industrial, building buildings that are somewhere between 15 to 50, 000 or maybe even 75, 000 square feet and being willing to demolish those to smaller users.
That is a 3000 or 15, 000 square foot user. It’s hard to build that product and have it pencil today. But if somebody’s able to figure that out and build a quality product at a reasonably fair price, lease rate wise, there is almost 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.
Ben Fraser: Yeah. What do you see from cap rates right now? 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 is pretty, pretty crazy. So 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.
So maybe there’s a lack of data, but from what you’ve seen, cap rates, they’ve gone up, but not a ton, or what have you seen in the market?
Brent Peterson: Yeah. It does depend on the asset class. Again, I dabble in retail and some other asset classes, and we’ve seen some of the smaller retail strip centers, the cap rates have gone up, A little bit, but not a tremendous amount.
So I, yeah I think we’re seeing a lot of that stuff still trade at numbers just slightly above where they were during COVID.
Ben Fraser: What about industrial specifically though?
Brent Peterson: Yeah. Industry has slowed down dramatically. We’ve seen a 75 percent increase. Decline in investment sales in the last 12 months. And
Ben Fraser: But that’s pretty much the same for multifamilies, at least that. And yes, retail, others might not be as much, but it’s not abnormal relative to other real estate, right?
Brent Peterson: Sure. Absolutely. I think it’s become from the investment side, I think the product that is traded that has. 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 it. tenant with a lower cap rate. Some of the smaller industrial or flex products have gone up to some degree, but if it’s a good product in a good location and the fundamentals are still there, we’re still seeing those trade at, maybe a hundred basis points, maybe 50 basis points over where they were at 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 own a good asset and you sell it, where are you going to place your capital?
Ben Fraser: Yeah.
Brent Peterson: Yeah. That’s what a lot of guys are asking themselves, so I’ve got something good. Why would I go try to do something else with my ass, with my cash right now?
Ben Fraser: What are the expectations that come on a go-forward basis ? Obviously you don’t have a crystal ball and no one knows the future, but what’s the market?
Expectation on what, where do we go from here from investment sales, from transactions again, from there will be another development boom where we kind of everything’s on hold right now.
Brent Peterson: Yeah. I think most guys would say that, when we start seeing some. rate reductions by the Fed.
They’re going to slowly start getting back into the market, building more products. And I think we’ll start to see a deal flow on the investment side. Pick up when that happens too. Cause when guys are investing more, they need more capital in, so they’re going to sell existing assets so they can keep the machine moving.
So I think from a crystal ball perspective, it depends on how quickly rates drop. And I think the election plays a lot into that. Obviously the economy, how it is, what happens with unemployment rates, 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 during COVID, but I think it’s going to be slow, steady growth, which is probably more healthy for the economy anyway.
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.
Ben Fraser: Yeah, that makes sense.
Development Risks and Rewards
Ben Fraser: Let’s chat a little bit about industrial development, right? This is yeah, 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 construction risk, you have interest rate risk, you have 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 either you’re doing it with the aluminum side and you’re doing the concrete side. And maybe there’s a few different things you change here or there, but it’s not rocket science. As long as you have a good location, it’s really determining what the potential primary use will be, but you can even build it.
An empty shell without having to know who the end user is going to be. And that’s the cool thing. A lot of times you can build it to work and actually fit both a distributor use it 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. You can. Many times get gross max contracts from the construction parties to where they’re locking in their costs. You know what your actual hard costs are going to be. And from my perspective, looking at lots of different investments, lots of different asset classes, the golden metric in my opinion is yield on cost, right?
What’s the, Kind of net yield that we can generate on an asset with all the costs in, it’s the great normalizer from a development standpoint, as well as, value and other things, but looking at, how can, 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 right are much, much higher than multifamily from really any other development.
real estate that I’ve seen and you. 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? What your construction is going to be, we’re seeing active leases happening right now. So we have a pretty good sense of what the lease rate is.
And, 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 so you have this kind of max flexibility in, 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 there’s not a whole lot of competition.
Talk about your perspective of seeing some of these developments go full cycle and, how do you lose in these situations? And, when do you win in these situations?
Brent Peterson: Sure. Is where I think multifamily and industrial vary pretty significantly. Yep. The risk is you build a big building, you put it in a good location and then you don’t fill it up with the tenant right away.
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.
Ben Fraser: So sometimes it can feel. Challenge because in multifamily, you’re leasing, 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, there’s no leases.
And so it can feel like it’s, you’re taking a lot longer.
Brent Peterson: Feast or famine. That’s correct. And you’re right. Cause that, that multifamily, a failure in multifamily is if you get to 60 percent and you just can’t. You can’t get 100 percent occupancy and it takes longer than you expected. But, when you’re, when you sit in 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 there is risk involved with it. But, if you plan for some potential vacancy and know that, it may be a longer road to hoe, Then you can make some great returns in this.
So 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, construction costs have gone up dramatically. Since when we first started doing some stuff down in Wichita, even prior to you doing stuff down there, the cost of construction has gone up pretty significantly, but, I just looked and saw that rental rates in our market, here in the Midwest have gone up about 31 percent over the last five years.
That is, that’s tremendous. A testament to how valuable this market is, how strategic it is and why it makes sense to do this type of development. So yeah, construction costs have gone up, but there is a real user out there willing to pay what it costs to build this product.
And frankly We’re extremely cheap compared to other markets across the United States. And you throw on top of that, Kansas and Missouri both offer incentives for developers to go out there and take a risk in building products. They’ll, 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.
It’s very advantageous to build at least in the Kansas and Missouri areas without a doubt. So.
Future Opportunities in Industrial Real Estate
Ben Fraser: What are you seeing, just as final thoughts where the big opportunities are, right? Where do you see, as an investor, you’re putting on the investor lens ? It’s difficult to want to go take risks right now because it feels like there’s a lot of challenges right 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, right? To be fearful when others are greeting. Greedy. One of those is fearful. And, from our perspective, we see a lot of opportunity, other asset classes, but industrial is far away. The number one real estate for us asset class from where we think opportunity is because of the yields 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 America American economy, but getting a little more micro, where are you seeing, you mentioned.
Southern markets, Midwest markets, smaller spaces, right? The ability to demolish, which is another kind of cool thing with development is you can go build a large building, but then you can go and demolish it down into smaller sections of a building and lease those out. And so you can de risk some of the, all or nothing lease risk a little bit, but yeah.
Where is the opportunity that you’re seeing?
Brent Peterson: From a product type, I think there’s going to be some opportunity to buy existing assets that have some upside to them, some built in upside, maybe with rental increases for existing products here over the next 12 to 18 months.
Cause I think you’re going to see some developers that say, all right, I’ve held onto it long enough. My cost of capital is high enough. I’m ready to dispose of those. So I think if you have cash.
Ben Fraser: I take a little discount to what I got a couple of years ago, but hey, I’m still gonna make money and.
I got some maturing debt, or I’ve got other things I gotta do. Absolutely. I’m willing to.
Brent Peterson: I’ve already been clipping the coupon for two years. They paid me enough rent, so I’ve adjusted my basis down. I’m gonna go ahead and move on to the next one. And they realize that they can build a new product and probably, create a better return than sitting on that existing asset.
. So I think we’re gonna see that. So there is gonna 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-size markets, I think the stuff we’ve done down in Wichita may really be 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. Decent rail access is not a bad thing to have in a market.
Ben Fraser: Workforce, you mentioned.
Brent Peterson: Good workforce is really important, but if you can check those boxes, when you find a midsize 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 giant buildings or corporations that have already located those areas. I think that’s a good place to focus. I looked, 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.
Dallas is a monster market with a ton of new products that’ve been built. I think there’s an opportunity to go build there, but I don’t know how you differentiate yourself. When somebody is looking at 25 different buildings that all could meet their needs that are somewhere between 100 to 250, 000 square feet.
It’s a little ominous to go into a market like that.
Ben Fraser: It’s very market specific of where the opportunity can be.
Brent Peterson: Absolutely. Like maybe you say Colorado Springs is where I want to be next or, something like that, that, that checks the box for having a decent size population, decent highway access.
And maybe even if it’s got a high barrier to entry, some of those markets I’ve dabbled around and sell Salt Lake a little bit, where the cost of ground is extremely high and there’s limited opportunities to develop. Those are great markets to look at as well.
And that’s not, that’s true in a lot of those states that fall along the great divide, Colorado Idaho Utah Arizona, New Mexico, those are all good markets to really give some serious consideration to as well, I think so. That’s awesome.
Conclusion and Final Thoughts
Ben Fraser: Brian, this has been super helpful.
Any other final parting thoughts or.
Brent Peterson: It’s fun to talk. It’s hard to believe that we can spend an hour and it feels like 10 minutes. But yeah, industrial real estate’s great. It’s fun to be involved with it and glad we’re partnering together on it. So awesome.
Ben Fraser: Thanks for coming on. This is always fun to do in person and get to have you on and share the update, so hopefully you guys all get value out of this definitely want to encourage you to get on the mailing list if you’re not already.
Stay tuned. We do have some exciting opportunities coming down the pike that we think are really well poised for this current economic environment. And with that brand, thanks so much for coming on.
Brent Peterson: Appreciate it. Thanks a lot.
Ben Fraser: This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.
The tools 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 successfully.
