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Ben Fraser: Hello, Future Billionaires! Welcome back to another episode. Today we brought on one of our friends, Brian Adams of Excelsior Capital, and he comes to share some really interesting insights on asset classes that we haven’t focused a lot on. So a traditional office, medical office, and flex industrial.

So he has some kind of contrary opinions and thesis on that. So it’s really cool to dive into that. But it’s also fun. We didn’t plan doing this, but went into this little trail of thought on. How the ultra wealthy invests. So his wife had a family office that he kinda got exposed to and saw how they were running it.

But it has some really cool nuggets that you’re not gonna wanna miss on secrets of growing your net worth he shares in this interview. Tune in and enjoy the episode. 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.

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We focus on macro driven alternative investments, so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to the Invest Like a Billionaire podcast. I am your co-host, Ben Fraser, joined by fellow co-host Bob Fraser. And today we have a really fun guest, Brian Adams.

He’s the founder and president of Excelsior Capital and a good friend of ours and wanted to bring him on the podcast today to talk about this current environment. So Excelsior Capital, they’re an operator in several asset classes. Mostly industrial medical office and traditional office. And some different asset classes that a lot of our investors maybe haven’t invested in.

And obviously a lot of headlines around office especially. And so we just wanna bring ’em on and talk about state of the market, what they’re seeing how they’re navigating this challenging environment with interest rates and, where they’re trying to find value. So Brian, thanks so much for coming on the podcast.

Brian Adams: Yeah. Thank you all for having me. It’s always fun to actually have met the people that you’re talking to. We grabbed lunch in Kansas City not too long ago, and I appreciate the opportunity to to come on and chat with you guys. 

Ben Fraser: Yeah, no, it’s awesome. It’s fun because I’ve been following your group for several years.

I ended up on was it the Capital Club? I can’t remember the name of what you did. These virtual. Basically you bring on, maybe a venture capitalized firm or unique opportunities and just creating connections for people, both LPs and operators, and just thought it was so cool what you’re doing and you just really have similar to us at Aspen where you’re going after, trying to raise money from individuals, accredited investors, and really have a passion for educating around these types of investments as we do as well.

So it’s great to, it’s fun to meet you in person and have you on here. Talk a little bit about your background. Obviously you. Didn’t go the traditional route of going straight into multi-family class B or Class C value like everybody else. You went into some other asset classes within private equity and talk about your journey in this space and we’ll get to the current environment here.

Brian Adams: Yeah, absolutely. So I’m from upstate New York originally. I grew up out in the country. I went to a very small private military school in Albany. Went to college in Connecticut. Where I met my wife, who is from Nashville. So we met in school, we did the northeast thing for a little bit, went to law school up there and then moved back to Nashville about 15 years ago now.

And at the time I was practicing law, but my wife’s family has a family office that’s based in Nashville. And so through our c I o and my father-in-law, I got exposure to private equity, commercial real estate, venture capital. Mostly on the LP side, although we did have some Cog P relationships and we’re doing some direct deals as well as being fund investors and just learned about that world and became enamored with commercial real estate.

Specifically, I connected with my business partner who has a Wall Street kind of finance background, and we started the company back in 2010 initially to source deals for the family, and then it became friends and family. Now we have a, like you alluded to, A broad network of investors, all private individuals families high net worth individuals, RIAs, et cetera.

We don’t work with institutional folks anymore, but that’s been the journey the last 10, 11 years now. 

Ben Fraser: Very cool. Then you have take a quick minute because Our whole thesis of this podcast invests like a billionaire, is, the ultra wealthy invest differently, right? They don’t invest like the average high net worth, which is mostly stocks, bonds, mutual funds, the ultra wealthy, the family offices, the pensions, endowments.

They’re investing large portions of their portfolios into private alternatives and. Sounds with your wife’s family office, they were doing the same thing. Talk a little bit about that. Cause that’d be the coolest perspective to hear, coming from not that background and then seeing how they were doing it.

Was that kind of a eye-opening experience to see, hey, they’re doing not traditional ETFs and, stock portfolios. What was that like? 

Brian Adams: Sure. Yeah. I grew up very comfortably, right? My father was a very successful attorney. My mother is retired, but was a child psychologist, which is totally different.

Can of worms we won’t get into on the show. But I never had any debt. I went to the best schools that I could go to throughout my whole life. But it’s a different world, right? And so when they made the disclosure, the financial disclosure, when they negotiated the prenup, I was very much like an oh shit moment of, oh my goodness.

What does this mean? And I, I didn’t know that world directly, right? And I thought about this before I came on the show. One of the stories that I have about why I started the firm, I was a member of an, of a men’s organization, like a networking organization in town when I first joined, or when I first came to Nashville.

And we had the opportunity to attend a class that was taught by an adjunct professor at Owen, the business school at Vanderbilts, and it was called Launching the Venture, and the professor’s name was Michael Burham. Super successful. Healthcare venture capital investor had multiple exits and he did like an abridged version of this class.

So over the course of eight weeks, one night a week, we would go for two or three hours and he would teach this. But the first day of class it’s 35, 25 year old dudes, right? They’re all like, ready to take over the world. And he says I assume you’re here because you want to make money.

And everyone’s yes, of course. And so he said I want you to go through an exercise. I want you to look at the Forbes 100, and if you take away folks who inherited the money or married the money, you’re left with three main buckets of capital, of how people actually got on that list. One of them is they had a great idea, like you invent Google or Apple into your garage and you ride that.

Another is you do the corporate grind and you get kind of shares and ownership of a corporation, and that stock appreciates and you do really well. And the third is really real assets, and it could be commodities, oil and gas, timber real estate, et cetera. And I just thought that was like the smartest thing I ever heard in my life and I didn’t have a great idea.

And I had come from a law firm background and I had seen that corporate grind and I didn’t really want to do that. And so I thought, go into real assets. I know a bunch of people have done really well in real estate and that got me on this train. But when you think through that reasoning and after being able to interface with a number of billionaire individuals and families, which you realize is.

The story that you hear today about diversification and allocation and what they’re doing after they’ve had the liquidity event is very different than the first chapter of the story, which is how they got there. And the realization I have is they make a couple of, they do a couple things that are all pretty similar fact pattern wise.

One of them is they make massive allocations and concentration risk, and they take that on and they ride that risk really hard for a very long time. 

Bob Fraser: Now you’re talking about family offices in particular, or the ultra wealthy? Yeah. Gotcha. 

Brian Adams: Okay. Both either, right? If you’re going to make that type of return, like what Ben was saying, it’s not a 60, so 

Bob Fraser: concentrate into a certain set of asset classes.

Brian Adams: Even though the Wall Street narrative and the financial services narrative you hear is about diversification and allocation and exposure, typically these people are taking one position into either a company or an asset class, and they are very concentrated. That risk and understanding it really, the old adage 

Bob Fraser: is, put, don’t put all your eggs in one basket, put ’em in a lot of baskets, or put all your eggs in one basket and really watch that basket.

Brian Adams: Yeah. And I, they still think, I just don’t think people appreciate like what that concentration is and what that risk profile is for a lot of folks to get to that level. And they usually will take leverage on that concentration as well. And so those were just some takeaways that I got that I just were really.

Kind of changed the way that I think about investing my own portfolio. 

Ben Fraser: I think it’s a really key point. I don’t wanna move too quickly from that, because what you’re saying is from most of the ultra wealth that you’ve been around and have talked with and learn from, it takes a certain level of concentration to create outsize or asymmetrical returns.

But then once you achieve a certain, level of wealth, Then to preserve wealth, you generally diversify, right? So what got you to that point of wealth is not necessarily what keeps you at that wealth and growing it. So there’s, that’s 

Bob Fraser: such a great point. Yeah, no, it’s, that is such a great point.

It also goes to our themes, I cut my teeth in the.com revolution, right? started@little.com with me and my sister-in-law, my attic, and grew it up to 300 employees and raised 44 billion. 44 million in venture capital and, had a, had all, Quarter million dollar, quarter billion dollar valuation and then lost everything.

And I learned from that, that timing matters, right? And Amazon, during the crash, right? Dur during the rise, it didn’t matter how bad your.com was, it went up, right? It didn’t matter, right? On the crash, it didn’t matter how great your.com was and went down. Amazon, you could have bought for. An adjusted basis, 35 cents a share.

If you can buy Amazon or 35 cents a share, guess what you want to do? You wanna concentrate, right? Yeah. And you want to take outsize risk and you wanna leverage and everything else. And it just goes to our theme of understanding timing and trends and mega trends. And it’s okay to concentrate as long as you know what you’re doing.

And as long as you’ve done your homework, and protect your, mitigate your risks through the way you structure your dad and hedging and any other strategies you have. 

Brian Adams: Yeah. Yeah. People, there’s a lot of conversations now we’re recording this in May of 2023. The world’s kind of going sideways, but if you have real conviction and a real long time horizon, and you know what you’re doing, now is the time to invest into venture like deep, right?

Because you can push valuations, you can push term, and you can get allocation. So if you really know what you’re doing, like now is the time to go risk on adventure. Really easy for me to say as opposed to do it. But to your point, Bob, like we’re at that point in the cycle where you’re gonna get some great deals.

There’ll be a washout at the good companies will push through here in the next three to five years. But it’s really scary to do it and actually pull the trigger right. Awesome. 

Ben Fraser: Let’s shift a little bit. So you’re made this transition into private equity. You started working with your wife’s family, helping them find deals and then obviously led you to eventually create accessor capital in your own firm where you actually bringing on more than just family, but friends and family and now, a whole bunch of retail investors.

So talk a little bit about that journey and then some of the themes and thesis that you went about to go start acquiring assets. And obviously you have some contrarian thesis. Around, office, other things. So we’d love to hear some of that. 

Brian Adams: Yeah. When we first got into the business, we raised the really small funds and they were blind pool commingled, vanilla private equity funds because we just thought that’s what we should do, right?

That funds were the way to do this. What ended up happening was we gave our fund investors access to direct sidecar deal by deal exposure on the acquisitions to make, to stretch our dollars. And we realized, really Just 

Bob Fraser: pause there. Yeah, go. Just to explain it. So this is create A fund. So PE investors would put their money in.

It’s a blind pool, which means the investors, there’s no a particular assets and there’s discretion in the manager to go place those funds into assets and then they would purchase then an assets you go. So you put a million dollars into this fund. It’s got 10 million from 10 different investors. There’s no assets, and then you go purchase assets.

When you buy a 10 million apartment complex, you’ll take the fund and you’ll invest that money, but you’ll also allow those investors to go along Parri, PASU, or. Or to buy a sidecar, what’s called a sidecar. So they can not only have their investment in the fund invest in that deal, but they can take another personal investment in addition at the same terms as the, as the fund is.

So it’s a very attractive kind of structure. So just wanted to explain what a sidecar 

Brian Adams: is, right? Yes, ex, you’ve nailed it. Exactly. And we realized that we were in the wrong business because the appetite for the deal by deal direct sidecar investments were much greater than what I was able to do, right?

To track investors on the blind pool side. And that’s not really a criticism against the structure. It was really what I understood later to be in informative of who my investor base was and who I was catering to. There you go. Yeah I changed the product offering to match who my LP base were, which are, individuals and families, private LPs, private taxable investors.

And once I did that and I changed the structure to accommodate and to solve a need in my LP marketplace, that’s when I was able to raise much quicker and sooner. And to go a bit deeper, this would’ve been in the mid 2010, so 2015 era. At that time we were going to a lot of emerging manager conferences and trying to attract institutional limited partners, endowments, pension plans, whatever.

And I went to this conference called Groner in Chicago, which is like the big emerging manager conference. And they said that at the time, 85% of all institutional LP capital raised in commercial real estate had gone to five brand name GP sponsor fund managers. Wow. And I just realized 85%. Yeah. It all had gone to kkr, Carlisle Blackstone, yeah.

Usual suspects. And they just realized, man, like I don’t wanna be in this business. This is a very hard business. And so we spent some time, my partner, I thought, okay. What is the hardest amount of capital to raise and who is the hardest population set to raise from right in our world? And we found that most people, that $5 million raise is really challenging, right?

It’s below private equity. It’s above kind of the country club, weekend warrior, typical syndicates. And most people, even though they say they want to, they don’t really want to work with all ultra net worth individuals and families because it’s a long sales cycle. They’re very high touch clientele and they don’t write huge checks.

Most people wanna move on from that and they go upstream to these institutional folks. So we thought we’ll go exactly where most people don’t want to go, and we’ll focus all our efforts there still offering deal by deal syndication. And that really fundamentally shifted the growth trajectory of the business honestly.

Ben Fraser: So talk about some of the investment themes that you initially got into. So you started this more investment firm with other syndicated money in 2015, was the timeframe. 

Brian Adams: Is that right? I have a legacy platform that I started in 2010 and that has a lot of traditional office exposure, which I think we’re gonna get into.

And that was a hodgepodge, right? That was a series of funds. We were doing joint ventures with some private equity groups. We did some 90 10, 95, 5 allocator type deals as well as syndication. And it was a kind of a mess. It was a bunch of different things. I launched Excelsior Capital to be a a pure play deal by deal syndication platform to learn from all the mistakes I had made.

The first iteration and I launched that in 20 19, 20 20 18 timeframe. So that’s, this kind of got it breakdown. Got it. 

Bob Fraser: So let’s talk about office. You’re not just reading an article this morning in the Wall Street Journal and they’re saying how, hey, we crossed over 50% occupancy in. In office space.

And so it’s was signaling return to work and landlords are saying, Hey, this is now we’re normalizing. And the article was saying now it’s stalled at 58% occupancy. And so clearly a lot, clearly work from home is here to stay. And and a lot of employees are demanding. In fact the majority of companies are now offering some work from home kind of capability and Not a lot of office space needed, not as much needed.

And and it’s definitely here to stay. So you’re actually an investor in office and you may have a little bit of a different narrative. So what’s your perspective on 

Brian Adams: office? It’s a challenging asset class, right? I think oftentimes it can be a value trap because even pre covid you would go, what’s a trap?

Sure. You go into this opportunity saying, We’re buying it’s great value. Yeah. We’re buying this asset, right? It’s a class, let’s call it a class A property in Kansas City, your neck of the woods. We’re buying it at an eight cap north of an eight cap, and we’re buying it at a huge discount to replacement costs.

Yep. Okay. So per pound, cheap, nice, juicy, great value, good value going in. The problem is, Once you get in the deal, 10 years from now, it’s still a great value. The way that office is structured with tenant improvement dollars and leasing commissions and operating expenses and modified gross leases.

Once you roll through that tendency, so two to three years in, you start backfilling or extending the current re roll, it becomes very capital intensive and you realize that it draws down from your cash flow. Significantly. Meanwhile, rents in most of these markets, like we’ll take Kansas City Market.

I’m familiar with Class A office, which those are probably nineties vintage buildings. I bet rents have not moved more than a dollar or two per square foot in the last 20, 25 years for Class A office. Wow. And wow you’ve got a problem where, You can’t capture upside. It’s a tenant market. Right?

Because there’s probably too much office products, even back pre covid. Yeah. This 

Ben Fraser: is probably still pre Covid you’re talking about right. Then covid correct is a whole 

Brian Adams: other, so you’ve gotta be very careful about going into those opportunities and not being caught in like what we just value tell out, which is that value trap now.

I think developing office and getting in and out of it. It’s a good business if you can take the risk and there are some value add opportunities, but holding long term, you have to be very careful on the vintage and the cycle risk. And obviously this is a very different story versus what’s happening in gateway markets like New York and San Francisco right now.

That’s a totally different animal and that’s a bloodbath. 

Ben Fraser: I think it’s important to talk about too, because. Just like in real estate. Oh, the real estate market’s being hit really hard. What do you mean by that, right? You’re talking about office, like that’s probably most people are thinking of.

But then you think about office, you have different markets. You have the gateway coastal markets, you have the Midwest, and then within each of those markets you have urban office versus suburban office. And it is it’s so many nuances of the asset class. So can you break it down a little bit of what are the big, categories, would you say.

In office because there’s probably different themes and things we’re seeing as we’re, right now I’m sitting in a class, a office building in, the middle of Kansas City in one of the hotter areas and there’s no real other class A office space available. At least there wasn’t a year or two ago.

And, we actually moved spaces during C O V I D within the same building and we’re like, oh, it’s gonna be great. We’re gonna be able to negotiate, a crazy good lease rate now because demand’s gonna be way lower. And they didn’t budge an inch and we still signed, so it is, there’s very different 

Brian Adams: story here.

Yeah, like most things when you talk to investors and you talk about asset classes and food groups and what’s doing well and what’s not doing well, it really comes back to what is your time horizon and what’s your return profile versus your risk that you’re willing to take. If you have a hundred year time horizon, you’re gonna be okay with office.

Like you’re gonna ride that out. It’s going to appreciate, you’ll figure something out, creative to do with it. It’s not a big deal if you’re trying to hit a big IRR and you’ve got a two to three year window to invest and turn a deal. Office is super challenging unless you take on a huge amount of risk.

And so I don’t think it’s the right question to say what’s good or bad. I always ask the lp what is your timeframe and what’s your return profile versus the risk you want to take on here? And that will dictate where you allocate capital. Because if you look at what the REIT market is saying right now, office in Midtown Manhattan is about 80% down on value from the beginning of the year.

So if you’ve got conviction and a long time horizon, you should go buy a bunch of Midtown markets. Mid times buy. Yeah. But if you’ve got liquidity needs and you don’t wanna take a lot of risk, then you can’t do that. You can’t allocate to those dues. 

Bob Fraser: Talk about the gateway markets in particular, the bloodbath, just profile it for us.

What’s happening, 

Brian Adams: and again this is and I’m not hedging because I’m a gp. This is just the way I think now, after doing this for 11 years it’s like a tsunami and different asset classes in different markets are on different elevations. The longer interest rates go up, right? The longer rates increase.

And the more values decrease and the longer operating expenses increase, it’s coming after everything. So it doesn’t, the office is just the tip on the beachfront right now is very challenging because, like I referenced about the REIT market, valuations have gone down 30 to 40% on some of those office deals.

Meanwhile, operating expenses. So would it cost to run those buildings from. Insurance tcs, just the construction costs, whatever, they’ve gone up tremendously. Meanwhile, your cost of debt, if you locked in at 4%, if it’s now an eight handle, like those deals are now underwater, and I don’t really think it’s the GP sponsor’s fault if they locked in debt three to five years ago and they’re now refinancing today.

It just happened to be when the debt is rolling. There’s nowhere to go, right? You cannot get a term sheet from a lender. Nobody wants to touch that stuff. You can’t ree equitize it because common equity doesn’t want to go there. And you might be able to go to some groups that are really sharp, that wanna loan to own and charge you a huge amount of debt to get in there, but that’s pernicious to your common equity in your capital stack, right?

So when you see guys like KKR and Brookfield and Blackstone giving the keys back to lenders on these assets, They’re the smartest, capitalized guys on the street, right? It’s it’s just a function of a macroeconomic window that we’re in that these deals just no longer make sense. In today’s environment.

They’re very challenging to handle. I’m 

Bob Fraser: definitely a value investor. I love, value thesis, but I don’t have the gumption for office space. And that’s what of value as it is. When lp, you wanna see some light at the end of the tunnel there, 

Brian Adams: exactly Bob. And when LPs come to me and they say, where are the screaming hot deals?

You go buy a tower. I think a tower deal in downtown Louisville traded for 60 bucks a square foot. God. But again, like what’s the plan? What’s the ultimate play here? Because again, it can be very tempting to say, oh, that’s a great basis to get in on, but you’re married to that basis forever, and in three to five years, it might not look that attractive any longer.

Ben Fraser: It’s just important. I think some of the challenges are what are the long-term prospects, right? You talk about the occupancy at 58%, but. There’s a difference between physical occupancy and economic occupancy. So physical occupancy is probably what they’re reporting, but a lot of these buildings are, economically occupied, meaning they have leases in place to where it’s a lot higher than that.

Maybe 70%, maybe 80%. But the challenge is what’s gonna happen when a lot of these leases, the are matured and they’re now done. And what do the tenants do? Do they sign? Leases again, do they sign for the same rates and do they sign for the same amount of space? Because if this hybrid kind of work from home then continues to go on, which I think is probably hard to argue, it doesn’t, the amount of space that most businesses need is probably reduced quite a bit.

I think there’s still gonna be, there’s these kind of things on the horizon, but it’s hard to know where it lands and where, it plays out. And, this thing that comes to my mind is, this, we just saw this huge failed i p o with WeWork, which was going and trying to redefine office.

And I just saw an article the other day, they’re worth, I think it’s less than 10% of the original valuation. They’re, what do we do like this? The model kind of failed. And so there’s just a lot of things. I think it’s, it’s hard to see where is the light?

So what’s some of your thoughts on, how does this play out? And it, cause you are hearing some, bigger companies that are having a return to work push and trying to get people back to the office. So where does it kind of land? How does that impact the space over time?

Brian Adams: Yeah, it’s hard to catch a falling knife and these type of cliches you hear thrown around by, folks that have been in the business like, like your dad has for a while. When you’re young, you don’t really understand, but now you do. When you see it playing out, it’s, it’s hard and I’ll make a comment that, part of this is the Fed’s doing right?

When you put rates at zero, when you give developers free money, they’re going to develop. And they’re going to give people and users and tenants massive incentives to move to new buildings, which means that legacy product gets left behind. And unless you have some type of tax incentive plan and a, and something to do with that legacy product, it’s going to become obsolete really quickly.

And that’s just like a commentary about the policy that we’ve been experiencing in Nashville, which is one of the best commercial real estate markets in the world. We have a class a building downtown. Great building. Had a great rent roll. It’s now considered a, a legacy class A building cuz we have new product.

It’s gonna be under 50% occupied at the end of the year. And it’s owned by one of the biggest office res in America. Like these people know what they’re doing, but we have brand new class A office that just stole that tendency and continues to do at some point they’ll be price discovery, and there is a point at which some large well capitalized groups with a long time horizon will come in and find value in these assets.

It’s going to take some time to shake out. I personally think that a lot of groups are gonna give the keys back to the lenders. If they operated during oh eight and they see the writing on the wall, they’re not gonna incur those fees and legal costs. Of fighting with the servicers and a lot of master servicers and bondholders are gonna start being the owners of a bunch of office buildings and eventually, rents will come to a point where it makes sense for users to come in and they’ll be able to ride that cycle.

But it’s gonna be a rough five plus years I think. 

Ben Fraser: Shift a little bit to medical office cuz that’s another subset of this space that you are in. But maybe it’s a little bit of a different story than traditional office space. 

Brian Adams: Yeah it is and it’s really, nothing that you all aren’t familiar with demographically or the US population is getting older really quickly and get getting sicker very quickly.

And so it’s riding the. The tailwinds of those demographic shifts of this aging baby boomer population that is going continue to need services. And we see just from my healthcare folks, these larger campuses and providers are trying everything they can. To get outpatient services off of main campuses and distributed to different locations to service those populations directly, as opposed to folks coming in to a centralized location.

There are some different dynamics in medical office, just given the nature of the buildouts and the fixtures and the requirements there. They tend to be very sticky tenants as opposed to office, which is really commoditized and people can move to different locations and doesn’t really mean much. If you’re a dentist or a LASIK eye center, like an asset we own in Kansas City on College Boulevard, and those buildouts are very expensive for the tennis to bring somewhere else.

And landlords can’t really afford to incentivize them to go to a new location. So we like the dynamics there. They are. They are much more core plus as opposed to value add. And cap rates haven’t really moved from a return profile, right? Correct. Yeah. Yeah. Correct. So we, that’s probably 25% of the portfolio.

And we also think they’re very resilient, right? If people are gonna cut something from their lives, it’s, if they still have discretionary capital or income, they are going to continue to pay for their healthcare expenses as opposed to maybe going out to dinner or, shopping or something like that.

What are the negatives? There is la there’s not as much upside there, right? Because people know that these tenants are going to be steady, Eddie. They’ve got the baked in lease rate increases. There’s not a huge ability to create a ton of new value in those assets, right? Because those tenants don’t tend to leave.

And it can be hard to attract a new user. So if you’re looking to hit big irs, Unless you’re doing a big aggregation roll up, play medical is a very challenging place to do that. But if you’re looking for a consistent yield and good and long-term appreciation, it can be a good place to put capital.

But you’re not gonna hit these big home runs like you can in in industrial or the value add office right now. 

Ben Fraser: Yeah. What kind of cap rates are they the medical office trading at relative to say 

Brian Adams: traditional office? Yeah, hugely dependent on the credit of the tenant, right? So if you’re looking at something that’s non-credit, so what I would say is like a regional, local user, like a LASIK group that’s a partnership or a dentist that’s a sole proprietorship, you’re probably gonna be somewhere in the six cap range.

If you’ve got a medical like a university system who’s the sole tenant in that building and has a 15 year lease. Cap rates are gonna be in the fours probably. They’re still very odd at this. Yeah. 

Ben Fraser: Interesting. Wow. And then shift a little bit to industrial. So that’s probably an area that we’re obviously very aligned in from a thesis standpoint.

And but you got, have a unique strategy. So we’ve done a lot of kind of class, a new development, kinda more big box industrial, which we. Also going after older vintages, more class B value add type projects. And so talk a little bit about what. But that’s like kind the flex industrial space.

Yeah. So 

Bob Fraser: we’ve talked quite a bit about large industrial, right? Big box industrial, which we like because it’s capturing this reshoring trend. And the big box industrial can be both distribution centers or manufacturing, heavy manufacturing or even light manufacturing. And typically it’s 300,000 plus square feet, and up and that kind of thing.

And our thesis, the distribution boom. Has driven so much of the the absorption and the extremely low vacancy rates and the by the, in the future, it’s not gonna be distribution that drives us gonna be ma the reshoring trend. So over a trillion dollars spent in reshoring last year.

And it’s not gonna slow down for at least the next couple decades. So we’re, we really think that’s a very powerful trend. So we focus a lot on the class, a big box industrial which we really like. But what you’re talking about is flex industrial. So paint a contrast for our listeners and what you love about this asset class.

Brian Adams: Yeah, and for what it’s worth, I completely agree with you about the reshoring and the rebirth of manufacturing the US just given the geopolitical Scene that we’re seeing play out and the volatility there it no longer makes sense for us to have that distributed manufacturing network. And so I’m a believer in, in terms of Flex Industrial, the way I put it is it’s like the mullet of commercial real estate.

It’s like business in the front. So you’ve got office retail, like your traditional usage. And then you’ve got the party in the back which is distribution warehouse. Could be un HVAC space where you just use it for storage. The typical user that we see would be like a landscaping services firm or a chimney repair shop.

Something where they, what square footages 

Bob Fraser: are we talking about? That’s 

Brian Adams: A sweet spot. Yeah, so we do multi-tenant. So on the asset size you’re looking at 50 to 150,000 square feet. Quite a bit smaller. Yeah, quite a bit smaller. Single story typically. So the product that you see around airports, typically it’s not the sexiest stuff in the world.

It can be usually class B. Eighties, nineties vintage when alive it was stood up. Yeah. And are these 

Bob Fraser: typically 36 foot clear height, like the big box, or can be shorter? 

Brian Adams: Not always. Yeah. There can be huge variability there. Sometimes we see the standard clear height. And we see everything in between.

Or sometimes they don’t even have like full warehouse rollups in the back. It can just depend. 

Bob Fraser: And these are probably more steel buildings as opposed to concrete tilt up the class, a big box we’re done. 

Brian Adams: Correct. Yeah. From an insurance standpoint you can’t do wood frame really any longer.

It’s just, it’s. It doesn’t work. But yeah, this is typically kind of steel frame structure. Correct. Gotcha. Okay, so how are 

Ben Fraser: you driving value? What’s the story here, how do you make these properties? 

Bob Fraser: These are value add, you’re not favoring development.

How are you doing buying value add deals? Yeah. 

Brian Adams: Correct. So these are existing properties, again, multi-tenants. So typically we’re seeing anywhere from. Five to 10 users per deal. Anywhere from two to 10,000 square foot per tenant. The reason we like it is a function of what I referenced before, lessons learned from doing traditional office where, elevators are a killer.

You’re talking about 150 to $250,000 per elevator cab in replacement costs. Nobody wants to put money towards elevators to maintain them or to fix them. So you always inherit problems. Modified gross leases where you can’t control the operating expenses and you can’t push through those expenses at tenants like you can in a triple net deal.

Where we see is market on the industrial flex side and then just a common area, this cam load that you end up having to handle and distribute out. Typically, these don’t have any common areas, so what you’re really focused on. Is roof foundation and parking lot are your big kind of CapEx expenses because HVAC insurance, et cetera, gets pushed through to the users and they typically have their own metered on the HVAC side, which helps a lot and no elevators obviously cuz it’s single story product.

So really a function of being informed by one of some of the things that we found problematic in traditional office brought us here. And then what we see fact pattern wise often is these are very much, so we’re talking 10 million purchase price type properties here. So smaller deals very often owned and operated by in an individual who may or may not be a real estate professional, they’re probably leasing and or managing the built-in themselves.

And so what we find is they are just trying to keep the building full. They’re not pushing rent. They’re not pushing credit, they’re not pushing term. They’d rather just do a one year extension and keep the user in at the same lease rate they were before, as opposed to go risk on, take the vacancy, go dark for 12 months and get market right.

And so oftentimes we’re seeing a $5 a square foot on a triple net basis between what current in place rents are versus market. And so we go in, wow we just bring 

Ben Fraser: like for a per percentage standpoint. That’s. Pretty high, right? Cuz these are, it’s probably what, 30 to 50% above, right?

So in contrast to office, which hasn’t really had, rents grow over the past 20, 25 years because of this surge of industrial absorption and reducing vacancy, it’s pushed release rates up a lot. And so the terms as they come due, you’re seeing this pretty big gap in the market relative to 

Brian Adams: the rent roll.

A hundred percent’s Exactly right. And what you also see is the benefit of, as traditional office has become out of favor you this is a much more in inexpensive option for people to come in and we see some traditional office users just choose, this option as opposed to going to a suburban office building as well.

Because they do have more flexibility in how they use it. The layout, parking load is typically not a problem. And because they’re not the prettiest things in the world, they’re not building a lot of new ones, right? Cuz people don’t want these, it’s like self storage. It can be very hard to build a flex industrial property in an existing neighborhood cuz people are the nimby, they don’t really want that to be there.

And so you can push rent pretty aggressively. And again, when we look at risk versus reward, if we’re just underwriting to bring it to market. Nothing more, right? We’re not trying to overreach or be superstars or be incredible asset managers or really savvy real estate people. Just bring it to what we find market to be, and if we can still hit upper teens IRRs, then yeah, I think that deal makes a lot of sense to us on a risk adjusted basis.

Yeah, that makes a lot of sense. 

Ben Fraser: And what we’ve seen on the development side, your point on supply, The flex is a difficult animal to build, right? Because one, maybe you have some just pushback from neighborhoods, but two, it’s quite a bit more expensive than the big box. And if you’re a developer, you’re trying to maximize your, spread your value, difference between your cost of to build and what you can sell on a per basis.

Flex is an interesting animal because it’s got likely limited development supplies. There’s not much being brought to the market. So it’s got some other positive trends as well, 

Brian Adams: Ben. The, but I will say the pain in the neck factor’s pretty high for the first 12 to 36 months, right?

Because you’re converting leases from modified gross to triple net, which no tenant likes and that’s horrible. You’re probably kicking some users out, right? That are bar in arrears or, are problematic for whatever reason. And so you do need an asset management team that can take on that brain damage and do that work.

But if you do it 24, 36 months and you execute on it, it can be really good. So 

Ben Fraser: because you’re likely having to pay up for the in place, cash flow, right? Because there’s this potential value to capture between the in place rents versus the market rents. And if they’re a sophisticated seller, they, they know at least to a certain degree that, Hey, I know there’s some more value.

I’m not purchasing rents. So you may have some limited cash flow going in because the current rent role is, paying up for that. But then if you have to kick tenants out, if you have only five tenants in ability versus a multi-family, or you have, a lot more, one of those vacancies probably reduces cash flow further.

So you have, I would guess, limited cash flow. From an investor’s standpoint for the first few years as you re, re, re-tenant the property, work through all those conversions from gross to triple net and but the backend can be pretty, pretty nice. 

Brian Adams: Yeah, the savvier owners and St.

Sellers will do like one lease where they get market and they’ll show that it’s doable and they’ll show that Delta and they’ll say, Hey you can capture this, but there’s a lot of meat on the bone, right? Which, I think is a good play, but to your point, year one or two can be very limited cash flow.

But honestly, in today’s environment where I’m pitching against people, putting money into a TBI and getting 5%, the yield story doesn’t really play that anyways, so we’re looking for shorter duration, deeper value add i r driven opportunities, and so it plays well in today’s environment because cashflow isn’t as meaningful as it was a couple years ago.

Bob Fraser: Talk about demand drivers. So in the big box industrial, we mentioned distribution, the e-commerce trend, it’s continuing and albeit a slower pace. And then the reshoring trend driving a massive D demand, and we’re seeing vacancy rates reflecting that. We’re seeing. Basically class a big box industrial.

Class A is vacant rates are effectively zero. And, but what’s driving demand? It wouldn’t, I don’t think it’s reassuring. It feels like it might be more correlated to retail. And it’s servicing retail clients and and retail sales more so Tell what is it correlated to? What are the key demand drivers here?

Brian Adams: Yeah. I think you’ve nailed it. Seems so cliche to throw out there, but this last mile distribution facilities and centers, I think what has happened is because e-commerce and what Amazon has done, it’s pushed through the entire ecosystem. Meanwhile, they just haven’t built a lot of new flex product, and so you’re just seeing more demand, less availability.

We just did a deal in Charleston, South Carolina. Where the submarket vacancy rate was 1% for our product type, right? So you’re, they’re not building, they’re not building a new product. The demand continues to, as people just want stuff delivered to them, a la carte or service services provide to them.

As the economy grows, there’s nowhere for these users to go. Meanwhile, location is really important, right? Because it’s all about speed to the customer, speed to the end user. And so if you need to be in a certain part of town, There’s no other availability. That’s where you’re seeing that rent push through, that NOI growth occur within the property level.

Bob Fraser: That makes sense. And surprising to a lot of people. We track retail sales and you’ve seen for the last really 12, 15 years steady uptrend in, in retail sales and services. And, but then since Covid. It’s taken a hockey stick up. And this is contrary to what most people would think, but retail is on fire.

And to me that would if that’s, if you’re talking about services like, landscaping and, it’s basically gonna, it’s gonna track retail, right? It’s gonna track the retail kind of spending And maybe it’s wholesale, but it’s once, wholesale buyers or wholesale sell to retail.

So it’s going to be right there. We 

Ben Fraser: probably have a lot of service-based clients too, right? The H V A C companies and others that are servicing again, is gonna cyber. 

Brian Adams: Yeah, sure. Yeah. We don’t, we’re not gonna put on our foil hats for this episode, I don’t think. But we, the government’s giving us all this money.

We become a consumer oriented economy. And this is the, this is one of the results is, we have to have companies and services to, to meet that demand. So here we are. No, 

Bob Fraser: I like the thesis. I think it holds water. I like it and I love the value add play.

Yeah. And the fact that, you know that it’s not being built anymore if it’s not being built. We’re seeing a ton of that. We’re talking about that in the retail strip centers. None of this stuff has been built in the last 15, 20 years. And so replacement cost is just, Way higher. And and demand continues to grow right through, through recessions.

You had a little dip, but then it just keeps growing, with the economy. Yeah, I, I love the thesis. Yeah. 

Ben Fraser: Brian, I think we also came up with the name for your next fund. I know you don’t do Funds Syndications, but I think Mullet Capital or Mullet Fund I think that’s gonna go far.

Brian Adams: In the back, everyone on the team grow mullets. We can do a whole branding thing about it. Yeah, it’ll be great. I’ll pick that some, my marketing folks. I think they’ll love it. Yeah, absolutely. I love it. 

Ben Fraser: Awesome. Brian, thanks so much for coming on. It’s always fun to just chat with you, hear your thoughts, and obviously inform and appreciate your perspective.

So thanks for sharing with our audience 

here. 

Brian Adams: Yeah, thank you all for having me on. Really appreciate the opportunity. All right. Thanks.