Finding Opportunities in Industrial Real Estate – feat. Brent Peterson | Aspen Funds
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Finding Opportunities in Industrial Real Estate – feat. Brent Peterson

Finding good opportunities in real estate can be challenging, especially now. In this episode, co-hosts Bob Fraser and Ben Fraser interview a top Midwest industrial real estate broker, Brent Peterson, about why he believes now is a great time to allocate capital to industrial real estate. Brent highlights several trends supporting a second boom in industrial real estate. Be sure to tune in!

Connect with Brent on Linkedin – https://www.linkedin.com/in/brent-peterson-6944a510/
Learn more about AREA Real Estate Advisors – https://openarea.com/team/

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Finding Opportunities in Industrial Real Estate feat. Brent Peterson

Ben Fraser

Hello, Future Billionaires! Welcome back to the show. We’ve got another fun episode today with our good friends. Is Real estate fun? Real estate is fun. And if, if you’re not in love with real estate yet after this episode, you definitely will be. So we brought on our, our good friend, uh, Brent Peterson. He’s actually a local Kansas City broker, but he’s, uh, kind of a big deal in the industrial, um, real estate market.

He’s a, uh, represents mostly buyers, uh, trying to find investments in industrial. And this is obviously an area that we are very excited about industrial real estate and we’ve talked about it in past episodes and he really dives into what’s driving this. A lot of things we’ve been talking about, but even, you know, one or two steps further where he’s find opportunities,

Bob Fraser

it’s still good.

Is it gonna work? So this guy is, this guy’s really heavyweight

Ben Fraser

in the space and really what’s happening real time with cap rates as the interest rates continue to climb. Um, and what triple net leases are all the things about industrial real estate that you may have heard but may not know yet. So be sure to tune in and.

Hey, if you’re enjoying this show, we appreciate all your feedback and reviews. You can leave on any of the platforms of your choice.

Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Frazier, joined by fellow co-host Bob Frazier. And today we have an in studio guest, which is always a treat.

Brent Peterson, how

Brent Peterson

are you doing? I’m doing great, especially spending time with you guys.

Ben Fraser

So I know this is gonna be be super fun. We’ve been talking about this for at least six months. We was like, You gotta come on the podcast and it finally lined up. Makes sense. And uh, so we’re super

Bob Fraser

excited. So I’m super pumped about this cuz this guy is a heavy weight in commercial real estate.

Um, and so we’re gonna get an overview of commercial real estate for those of you that want to know, learn about that, but also really the market. What is going on in.

Ben Fraser

So before we dive in, you know, Brent, he runs the, uh, team at area real estate advisors. He’s a broker and is involved in all areas of real estate, uh, but most specifically industrial real estate.

And, um, wanted to kind of get a market update of what’s going on, right? We’ve been doing some of these top of mind, uh, episodes talking about interest rates, cap rates, how are they all related, what’s going on? It’s a very unique time

Bob Fraser

in the, and obviously everything’s in flux now, so a lot of questions.

Right? Very much so. So, but before we get into that, give us your background.

Brent Peterson

Um, so I was born here in the Midwest, um, got an accounting degree, um, outta school and worked for one of the big six at the time, uh, on the audit side. Wow. Did not, did not enjoy it one little bit. So , um, I like the people I worked with.

I like the companies, but it, you know, public accounting was not for me. So, um, I had kind of a, but a great background nonetheless. Uh, you know, that has helped me tremendously in evaluating a balance sheet, a p and l and companies as, uh, I look at investments and, uh, manufacturing companies that we might wanna do business with.

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

So it, it, it was a great

Bob Fraser

learning and you can identify with that. We’ve

Brent Peterson

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

So I’m, I’m very fortunate to be doing what I’m doing today.

Bob Fraser

Yeah. We found you to be super well informed as we, we worked with you. Just really understand, you know, what, what drives the market, What, what are, what’s gonna work for us, what strategies to use. So we’ve found you, it’s different than just, you know, you know, you know what I would expect some real estate agents, you know, a different level.

But, um, you know, the thing I love to hear is the 15 years, right? So you’ve seen it’s a good times. and the not so good times . So what did you learn through the great financial crisis? I see a lot of people, you know, have raised their chops in this market only goes up mm-hmm. , you know, kind of mentality. Yep.

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

Brent Peterson

Well, from a personal perspective, I would say that, um, I learned that it’s all about relationships. Um, you know, there’s always people that are making money and finding deals in the market there, especially so in the down times, cuz that’s when really good opportunities can present themselves.

So you need to be strategically aligned and have those relationships that allow you to, uh, take advantage of the market and the situations that are out there. And there’s guys that like to buy during the high times and there’s guys that like to buy during the low times and there’s always deals being done, but it gets back to those relationships.

You wanna be the guy that somebody calls when they say, Hey, Brent, I’ve got this building, or I’ve got this issue. Can you help me? And you know, I’m, I’m the first one to tell you that if I’m the right guy, I’m happy to help. But if I’m not the right guy, I I’m gonna refer you to somebody else that is gonna be, give you first class service in that particular product type.

Bob Fraser

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

Brent Peterson

That’s a good question and I, I, uh, I struggled through economics, macro and micro, both . So Bob, you’re probably more, much more adept at speaking to this, but in my opinion, it it, it’s much different than 2002, uh, 2007 and 2008. You know, we’re not overbuilt in inventory, especially in the single family homes.

Um, in fact, if you look, there’s, we have some of the lowest numbers of listings for single family homes, um, on record. I mean, there’s a lot of markets where there’s just, there’s not product for the people that wanna buy.

Bob Fraser

It’s growing. The inventory’s growing, but still low.

Very,

Brent Peterson

very low. Yeah. Yeah. Well, what’s happened though, you know, I mean, John Smith bought a house three years ago and he might consider selling or moving, but he, he’s locked in at a, a 2.9, 30%, 30 year mortgage.

And if he goes very locked in Yeah. Well, and, and he may be able to fetch a premium for his house, but he’s gonna have to go borrow at a 7% interest rate. So a lot of people are just saying, I am happy where I’m at and I’m gonna stay. It freezes movement. Right. So again, what about the commercial side? I think there’s a lot of good opportunities in commercial.

Um, the commercial markets overall are still very tight. I mean, I know this isn’t really a a, we didn’t come in to talk about office and retail and multifamily, but, um, just very briefly, uh, multifamily on fire still. Um, you know, the housing market, because of the increase in prices, the increase in interest rates, it’s gonna have a continued push on people looking to rent.

It gives, Right. You know, it gives young homeowners freedom. You know, they don’t have to maintain a house. They can move quickly if they want to. Yeah. People need

Bob Fraser

a, We just did a top of mind on this and people need a place to live and if you can’t afford to buy Yeah. What do you do?

Brent Peterson

Yeah, you go ready,

Bob Fraser

go.

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

Brent Peterson

shortage at, at some point in time, you know, we’re gonna have the inventory we need, but I, I don’t know when that happens. I, people have been saying it for the last five years, but we’re, we’re not, we’re not even close, I don’t think yet.

Bob Fraser

So, So you’re seeing the market as the guy who’s in the market on a daily basis. You’re seeing it very tight right now. Still very tight. I’m no, not in every category, right? I mean, office is is soft, isn’t

Brent Peterson

it? Yeah. I mean, my, my 2 cents on office is class A office. I mean, you guys are in a class, a class, a type of building here.

People appreciate this and want this. I mean, what I’m seeing from our office guys and the o the few office deals that I do is they want walkability to amenities. They want something that, First class service within the building, you know, nice fixtures, amenities in the building and, uh, they, they wanna be able to collaborate when they come to the office.

So you need to make the office fun. So class A facilities that have walkability, those are continuing to do well. I think most office guys would tell you that the B and c locations are struggling, uh, more. So that makes sense. Um, retail, I mean if you look at retail vacancy across the country, it fairly historic lows right now.

So, I mean, the difference is, I mean, man, we were talking about this

Bob Fraser

mm-hmm. , and when you say retail, I mean, you know, there’s a lot of different types of retail, right? So

Brent Peterson

Absolutely. I paint with a broad brush when it comes to that, but, You know, when you drive someplace, you’re typically driving to a retail location.

And so if you see a vacancy, you know, that stands out to you. You don’t see vacancies in industrial, you don’t see vacancies in office the same way that you do in the retail sector. So just cuz you’re not

Ben Fraser

driving by in industrial park or something, it’s not usually on your commute to work

Brent Peterson

. That’s exactly right.

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

Industrial’s

Bob Fraser

been. I mean, you’ve seen, this is historic, what we’ve been seeing in the last few years through your tenure, and you’re, you’re an expert in industrial, right? That’s your

Brent Peterson

main area? That is my main area. I do industrial and I do investment assets, and most of those investment assets are industrial in nature.

So, um, yeah, and it’s been nuts. It, it is fantastic. I mean, the overall vacancy rate across the United States is below 5%. There’s some markets that are as low as I, I looked at a market, uh, on the East Coast, South Carolina. The vacancy rate was 0.2%

Bob Fraser

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

Yeah. It’s even, even lower. You know,

Brent Peterson

it, it, it’s unbelievable. I mean, so we are in a, which is 2.9

Bob Fraser

is insane. That means it’s really not vacant. I mean Yeah, functionally, how many, how many of those vacancies are not even available or they’re

Ben Fraser

just obsolescent or whatever.

Brent Peterson

Absolutely. Um, yeah, and the crazy thing behind that is we have record.

New deliveries, new construction.

Bob Fraser

Unbelievable. It’s still being absorbed at this massive rate. It’s, it’s a mega trend. So you, so you’re presiding over this, one of the most incredible markets in history, really.

Brent Peterson

Well, I don’t know if I’m presiding over anything, but I am benefiting from what is happening in the market.

And, and I’ll Oh,

Bob Fraser

your player in it is what I mean. And watching this unfold on your watch,

Brent Peterson

really, it’s historic. Yeah, it is. It’s amazing. And I think it’s, I mean, Covid helped accelerate some of the, uh, the good things that have happened in the industrial market. Um, but it was happening anyway. I mean, we can talk about the e-commerce.

Yeah. And it’s gonna continue to grow. Uh, we, we saw Spike during Covid, It’s come back down just a little bit, but we expect to see continued growth in e-commerce companies that were out there and, um, had tons, uh, of orders, but couldn’t fill ’em because they were waiting for shipments to come from China or other countries that they, they just said, we’re missing out on huge opportunities for sales right here.

So they said, We need to bring a lot of product in, have it ready to go and be ready to ship. We’d rather pay for the inventory carry cost than be left without that product in the future. So, um, I don’t know if you wanna segue into Yeah, well

Ben Fraser

I mean, just wanna take a quick step, step back cuz it’s, it’s so interesting.

I mean, you’ve been, industrial’s been in a bull market for really the past decade because of the e-commerce. You know, e-commerce has been driving a lot of that and, um, you know, as when I was a banker, you know, many years ago, it was like, oh man, at some point there’s gonna be an, our supply. They’re just keep building these facilities and at some point it’s gonna get saturated.

Right. That, that’s, that will definitely happen and it will happen. But it’s, it’s now it’s kind of been like, you know, the booster rock has got out of orbit and now there’s all these other factors. Not, not only is e-commerce gonna continue. To drive more need for it, and maybe at a slower rate because it has taken over more market share.

But as you were gonna talk about here, there’s kind of two other big trends that we’ve addressed in other top of mind episodes of reshoring and manufacturing. So, you know, fir first of all, before we dive into, I’d love to kind of set the stage, um, of what types of properties make up industrial. Cause that’s, again, a broad, uh, you know, description.

So there’s different types, uh, when you’re talking about industrial. Can you just break those down

Brent Peterson

for us real quick? Sure. I mean, I, I typically break it down into three major categories. You’ve got distribution space, which is the, you know, the million square foot or 500,000 square foot Amazon type of facilities, or Walmart or Target, FedEx.

Yeah, whatever. Um, so you, you, you’ll see those wrap it in, wrap it out, and they’re trying to get as much product through there as, as they can. And those are typically located next to intermodal hubs. Whether it be a rail yard, an airport, or a seaport or even a, you know, an inland port along one of the major rivers, uh, that’s where you see a lot of those distribution facilities, especially the mega ones.

Um, besides that, you have manufacturing facilities and those can be a Allstate, uh, shapes and sizes. And I mean, you may have a 30,000 square footer or you may have a 500,000 square foot manufacturing facility, whether they’re building engines or engine parts or implements, or you name it, if it’s assembly or manufacturing.

Those buildings are typically different. They have heavier power. They may not need to have nearly as tall, clear heights in the buildings for, uh, storage of materials. Um, typically you have a lot more lighting in those, uh, buildings. You have a lot more car parks, so there’s a lot of, um, that’s taken into account besides just the semi truck traffic that’s coming in and out and, and there’s other variations in that.

But any place where they’re putting parts together or manufacturing. We consider that a manufacturing facility. And then we have flex space. And flex space is, uh, can be single or multi-tenant. Typically that’s 50% or more office, roughly. And that’s where you’ll have your small, like an H V A C contractor or a, you know, plumbing contractor or you know, a, a car shop.

Bob Fraser

What most people see when they drive by, it’s the flex, right? It’s the little, the spaces that are next to the freeway here or there. And it’s not the big box or industrial

Brent Peterson

that you’re talking about. Absolutely. Absolutely. So those are the three main categories that we get into. And there’s subcategories of all of that.

Sure. But that’s where most guys group it.

Ben Fraser

Yeah. So, so let’s dive into some of the drivers again of. Kind of this next phase of industrial boom. Right? And, and what you’re seeing is we’re, we’re bringing record deliveries of, of new construction, of industrial, uh, that we haven’t seen mm-hmm. for, I mean, if ever, I mean, so the numbers that I’m seeing, and we’re having record absorption, so vacancy continues to remain at historic levels.

Yeah. Something’s going on here. So there’s, there’s something driving that. And, uh, so talk about reassuring as a, as a kind of, uh, primary

Brent Peterson

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

So that’s a huge time lag. Are they just

Bob Fraser

doing circles or what? what’s the problem? Pretty

Ben Fraser

much getting stuck in ports, right? The cans and

Brent Peterson

boats. Well, I mean, we, we’ve all seen boats that have turned sideways through narrow canals, and that’s, that’s, that’s just one point. But the, the difference is that you have huge ships with thousands of containers on them that are showing up to these sea ports and there’s not enough people to take ’em off of those container ships quickly enough, Get ’em onto the trains, cuz that’s what they do.

They lift them directly from the, the boats onto the trains and then get ’em to the, one of the inland, uh, warehouses where they need to be taken apart or, you know, torn down from there. Sure. And then shipped out. So that’s part of it. The other part of it is there’s been. Uh, a lot of pent up demand of, because people in the United States, especially with the stimulus we got through Covid, people have been spending more money.

And so there’s been more demand for goods here recently than we’ve had in the previous few years. So those two couple together have created real supply chain issues. So a company that needs a part to, you know, manufacture their widget, can’t stand to wait, you know, an extra 30 or 40 days to get that part, they need it right now.

So instead of having just in time inventory, like a lot of companies have, you know, practiced in the past. They’ve said we’d rather store up extra inventory, pay a little more caring costs, but be able to deliver the goods. We talked about some

Ben Fraser

car companies. Yeah. I mean, cuz theoretically those curing costs are now gonna be cheaper than the carrying costs of, you know, delays in the votes, the additional shipping costs, and, and then just the unknowns that, you know, something else supply chain goes wrong.

Now you’ve have intangible costs that you couldn’t even count for. So it’s

Bob Fraser

inventory costs are nothing compared to not having the inventory Exactly. Inventory right. To a business. Yeah. Talk about

Ben Fraser

Ford this, that’s a, a great case study of what’s gone on with the specific issue.

Brent Peterson

Yeah, great question. Um, and I’ve seen it firsthand and I’ve also seen it, you know, on a global scale just from what I’ve, I’ve I’ve read and, and heard about.

But, you know, I have a friend that ordered a Ford F two 50 over nine months ago and he still doesn’t have it and it’s not gonna be delivered for another month or so, assuming everything goes well with it. But, you know, and that’s a 2022 model. Typically at this time of year, they’re delivering 2023 models, , the, the product’s not there.

So, One of the big issues that you’ve heard it’s talked about, but the, uh, the computer chips that they have in the vehicles. Yeah. So a, some very basic model cars will have as little as 300 of these little microchips. Some of the, especially some of the electric vehicles, which require a lot of those chips have up to 2000 chips in the vehicles.

So you have a huge demand for that, and we’re not able to keep up with the production for that. Now, the US has got a couple of chip plants that are being constructed, but it’s gonna take a while to build those. Sure. And then streamline the manufacturing. So that’s a big problem. But Ford right now has somewhere between 40 to 50,000 large size trucks sitting in inventory waiting for parts to complete them.

There are, in essence, done well, if you figure that the average cost of those is around $51,000, according to the stat I read, you’ve got over $2 billion of inventory sitting there, completed

Bob Fraser

trucks sitting on a parking lot somewhere waiting for complete chip.

Brent Peterson

People are waiting to buy them, but they can’t deliver ’em.

So, That’s a real problem. So Ford and these other auto manufacturers are just one example of how we need to reassure products. So we have it in our country, it’s able to get to the manufacturer that needs it in a timely manner, and we can actually control our own destiny to some extent. Now we can’t control all the raw goods that go into some of the products that we need, but at least bringing the manufacturing back home is gonna be good.

The other thing that I should point out too, those containers that I was talking about, the 40 foot boxes. Mm-hmm. , you know, two and a half years ago, it cost $1,500 to ship one of those containers from China to the United States during Covid. At the peak it was $20,000 per container. Wow. So it’s dropped back down to about $15,000 per container.

But that, but that widget that costs you a dollar to ship, you know, two and a half years ago now costs you $10. So you magnify that by all kinds of product. It, it becomes cost prohibitive

Bob Fraser

in some sense. Exactly. Maybe it starts to make sense to manufacture here. Yes. And where you get rid of the, the security risk and other kinds of risks.

I think the world’s kind of waking up. Yeah. I’ve been, we’ve been talking about some of the trends out there and there is, there is a de-globalization trend. There’s been a globalization trend that’s been going on for 30 years. Mm-hmm. and it, now it’s, it’s peak. We are, we are, we are post peak globalization and people are realizing, Hey, we don’t want all this globalization because it creates too much risk.

Mm-hmm. . And, uh, there is, there’s a, there’s a, there’s a right balance between globalization and localization, right? So, so that’s what’s happening right now. Basically 30 years of manufacturing that’s not been in the United States is now returning. I actually saw chart recently of manufacturing jobs in the United States, and it’s just this, as you might imagine, this trend down, down, down, down, down.

All of a sudden it’s reversed. Yes. Manufacturing jobs are actually increasing slowly. Yes. And, and

Ben Fraser

planned jobs for manufacturing, uh, from several big companies are

Bob Fraser

huge numbers. Add, add to the fact that, you know, America is actually an energy superpower, and in fact, the only energy superpower in the world.

We’re the number one, uh, uh, producer of oil in the world, and we’re the only industrial power that is also an, an energy superpower. We’re the only one. Yep. So if you have an energy intensive industry, there’s only one place you want to be. Absolutely. And so we’re seeing huge amounts of Wall Street Journal just had an article a couple weeks ago, a week ago on Europe.

You know, Europe’s Europe’s, uh, energy consuming businesses are moving to the United States. Yeah. You know, now the headwinds on that are a strong dollar, which means. , you know, all of a sudden it gets more expensive, gets more expensive to export. So,

Ben Fraser

but you also had an interesting chart that we talked about the other day, um, in looking at wages.

So the globalization trend was, hey, it’s so much cheaper to manufacture overseas where it’s cheaper labor, lower cost of living, et cetera, et cetera. But the largest, um, uh, place, obviously where we’ve done that is China in what the wages, I believe it was a 10

Bob Fraser

x 15, 15, 15 x, 15 x over the last 30 years wages in China’s,

Brent Peterson

which it’s leveling the playing field as well.

Yeah. It’s only gonna get

Bob Fraser

worse as I think by 2050. Uh, there’s, they got a gray tsunami hitting something like, uh, only 55% of the population is working age. Mm-hmm. . So you’ve got half the population that’s retired. Yeah. And guess what? Retired people consume but do not produce. Mm-hmm. , you know, Sorry about that.

Yeah. But, but what that does, it creates wage inflation. Yeah. Mm-hmm. , as you have a shortage of workers and a lot too many consumers and not enough workers, you know, China, China’s got huge problems going forward. They’ve basically neutralized their future. But, but back to real estate, it’s, these are all massive mega trends for industrial in spite of, you know, in spite of the, the, the building that’s been going on, there’s just an insatiable demand.

At some point we will over build and then it’s gonna be, you know, , you know, uh, not good. But for now, we have a huge shortage still because of these giant trends that are just getting

Brent Peterson

started. We, uh, I mean if you look at all the, uh, major brokerage houses out there, they’re all indicating that they expect to see continued growth for the next few years, at least.

You know, most of ’em don’t want that. Industrial. In industrial specifically? Yeah. Yes. Specifically in industrial. So a lot of ’em are very bullish still about the industrial market and. It, it seems to continue to, I mean, we, we can’t build it fast enough, like you said, at some point in time, um, somebody is gonna get caught, but you never know when that end is coming, so.

Right. Yeah.

Ben Fraser

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

Brent Peterson

Yeah. Well, I mean, this is my own personal theory about this, but, you know, we have a, a population in the US that it’s kind of peaked, it seems like. So I think we’re almost at, you know, negative population growth in the us. I think the only thing that may fuel that in the future slightly positive, Yeah.

Maybe the, you know, immigration into the US. Um, so at some point in time we’re not gonna, we’re gonna have similar problems and we’re seeing it now, but similar problems that China has, which is there’s just not a workers for the jobs that are out there. So I think that’s gonna push us, My feeling is that that’s gonna push us to an area where we are focused more on quality of construction, quality of goods, stuff that lasts longer.

And that’s gonna cause companies to focus on that. They’ll, they’ll pay a premium for it, but they know that they’re gonna get the best product at the best price by doing that. So, I, I don’t know how that affects the overall manufacturing in our country, but I think that’ll, I, I think that’s gonna bring back a lot of American pride in the products that you buy, because the US can build very, very quality products and has very stringent controls for what we do.

So,

Ben Fraser

so I, I love that your focus is on investment sales and you’re looking at these opportunities and these trends from an investment perspective. So, you know, a lot of. You know, listeners, us included, you know, are more familiar with say, residential housing that’s, you know, family or multi-family housing and kind of the, the drivers of value and the things you look for to evaluate a good property.

But talk about what, what do you want, you know, to see in an industrial property to make it really appealing? What, what are some of the, the drivers of, of value and of appeal in industrial?

Brent Peterson

Sure. Um, that’s a good question actually. Um, first thing is location. Yeah, I mean that’s the, that’s the ABCs of real estate is location, location, location.

So you want it close to a highway if possible. Um, if you’re, you know, close to one of those inter modals, that always typically helps you, uh, you know, from a location standpoint as well. Um, and, and, and then you start looking at the functionality of the building. Um, are the ceiling sign up, We talk about clear height and that’s how, how high it is from the floor underneath the structural steel in the building.

So if I, Why does that matter? If you’re racking goods, you know how high you can rack and it depends on the size of your pallets, how tall they are. Cuz different companies will rack their pallet heights might be different, but allows ’em to put shelving in it. They can determine if they can go four high or five high or six high, depending on whatever that clear height in the building is.

Sometimes power can be a big factor in what a company is looking for and they may need, uh, you know, a four 80 volt with three phase, uh, power that allows ’em to operate heavy, big machinery. Um, number of dock doors and driving doors is really important. You know, markets like, uh, a Kansas City or Denver or Indianapolis, just to name a few here in the, uh, Midwest, doctors are way more important than drive-in doors are on these larger warehouses because we’re seeing a lot of trucks in, and a lot of trucks out.

You go down to Oklahoma City or Dallas or Houston, not Dallas as much, but Houston and, and Oklahoma City. A lot of drive doors there because there’s a lot of oil field service, uh, related companies. They, they do a lot of trucks that’ll drive in and out of facilities and get loaded that way. So drive doors are more important to them.

Um, you know, besides, besides that, uh, and the access, um, you know, typically you’re looking at storage yard or storage space outside. If you have a, uh, a strong amount of ex extra out outside storage, that can make a big difference for particular users. So those are some of the. The basics when it comes to those industrial buildings.

So there’s also like

Ben Fraser

special used type properties like cold storage and, well, what’s the one? I think it’s a cold storage property, but the one that’s like completely black inside and it’s just, it’s super high ceiling height and all that. What, what is that?

Brent Peterson

Cold storage. It’s cold storage. Yeah. So they have some dark warehouses where they only have Yeah, they only have, uh, robots that work in there basically.

Yeah. So pallets are getting picked off by, uh, machines and then they’re delivered to an area where, you know, people can for energy savings. Is that what that’s about? Yeah. I mean, you know, there’s a little bit of heat that’s created by some of the lighting and, you know, machines don’t need, you know, any light to see what they’re picking and shipping.

So yeah, it, they can do it for that. A little bit of freaky , I know. Um, so yeah, there’s some companies that do that and, you know, when you get into cold storage, especially if you’re doing a lot of bulk distribution, they like to go high rather than go spread out because they, they found that it’s a lot cheaper and more efficient to Cool.

Just the square footage and you can go vertically cuz they just simply keep that air rotating up and down. And so they’ll go really high. So there’s places on the east and west coast that they’ll go a hundred feet high with cold storage because that maximizes the amount of product that they can storage.

Is there a big demand for cold storage? Uh, if you listen to all of the, uh, forecasts, there’s a huge demand and a huge need for cold storage. And, and I’ve worked with a number of, uh, cold storage users and they have all told me I need to buy more product. I need to have more inventory. I need to buy it when I can because I can’t count on it showing up when I need it.

So they’re in a similar situation like the Ford Motor Companies of the world. They need the product in order to be able to distribute it. So yeah, huge demand for that.

Bob Fraser

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

that are, that are there. And so the tenants, right? The tenants. So if you have a, a credit quality tenant, that building is actually worth more. Mm-hmm. talk about

Brent Peterson

that. Yeah, great point. I mean, Bob, you, you, you’ve seen it and Ben, you’ve seen it as well. The quality of the credit of the tenant and the length of the lease term is something that most companies will look at before they even look at the building itself, cuz they’re simply buying that credit and it’s almost like a commodity, basically.

Mm-hmm. , you know, if you have a AAA rated credit tenant and you have a 15 or 20 year lease, that property is gonna trade for premium, a premium, a four cap, a five cap, depending on what it is. And you, you know, if you have a shorter term lease, less quality tenants, then you’re buying that building more based upon the quality of the structure itself.

Makes.

Ben Fraser

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

Brent Peterson

Well, they don’t like to talk about that, but Sure. Um, I mean, we’ve seen, um, Amazon and Amazon, like companies trade in the low fours in this market here.

Ben Fraser

Wow. Even

Brent Peterson

still. Even still. And, well, the crazy thing is even though we’ve seen a 300, uh, uh, basis point jump in commercial rates, we’re not seeing a big movement in the cap rates for industrial investment product out there.

Bob Fraser

It’s nuts, isn’t it? It’s just huge. The, it just shows how much

Brent Peterson

demand there is.

There is a lot of cash, is what it amounts to. People need to deploy that cash and they can’t sit on it forever. So they’re willing to make, you know, skinnier deals for those quality deals. So for the quality credit tenants. So, Wow. It’s amazing. So now

Bob Fraser

Flex seems like it would be a very different thing. So these are maybe smaller square footage.

You’re chopping it up and you’re probably never gonna get a credit tenant in there. Right. So, Are they, are they as good at deals? Are they, Cause this is, I’m seeing a lot of deals come up that are for sale, but I don’t know if it’s that appealing. Are they, are they good as from an investor’s point of

Brent Peterson

view?

Well, it’s a little more like multi-family. Uh, it requires hands on and a lot of times it requires hands on from the buyer itself. I mean, you can, you can employ a, uh, a property manager if you want, but those are value add a lot of time situations where you can take a, you know, five or 10 or 20, uh, uh, tenant flex building, continue to bump rents as the renewals come up, make improvements to the property.

And you can see better appreciation of that asset in a shorter period than you can from that single tenant. Gotcha. And

Bob Fraser

that lease deal. So from a value perspective, potentially it’s a good deal, but it’s, it is a different, a, it’s, it’s apples and

Brent Peterson

oranges, isn’t it? It is. It requires that hands on. That’s not just a coupon clipper that

Bob Fraser

you’re getting.

It’s interesting cuz one of my good friends, I’m just thinking about who’s been in Flex Industrial small flex. For 30 years. Mm-hmm. saying just how volatile it is. Like when the, when the recession comes, that stuff just goes, EVAs evaporates because these little, you know, little marginal businesses all disappear and you just end up with vacancy.

So he said, you know, just be super conservative on this. And that was his perspective of, you know, small flas. Yeah. What is your, what is your thought? Have you seen any of

Brent Peterson

that? Well, I, I think it depends on where you’re located in the country. Um, you know, the east and west coast when 2007, 2008, a lot more vacancy, a lot more volatility in that market.

Um, you know, the mid Midwest, you know, looking at Kansas City, they’re a good example of what happened here in the Midwest. We had single digit vacancy rates even in 2007, 2008. Absolutely. Now, the rent appreciation in a market like Kansas City is a slow, methodical slope. You know, you’re on a, a gradual incline on the treadmill.

Y you know, California, you may see some huge wild swings, so there’s some real opportunity to make huge money in a short period of time, but we, we’ve kind of been, been slow and steady in the past and I think Kansas City will continue to do that. So investing in a market that’s, uh, more moderate in the rent increases and less volatility, I think is a great place to go.

If you wanna buy flex property. I would

Ben Fraser

imagine too that the Midwest is from a strategic standpoint, operational standpoint, where you can be by several highways or intersections of highways, it creates more access for distribution and uh, there’s some attractive dynamics around those types of. Markets, right?

Brent Peterson

Absolutely. Yeah. For example, I mean, Kansas City is a lot like Indianapolis and um, you know, St. Louis, I mean Kansas City boasts the most interstate miles per capita of any city in the United States. You can get to something like 85 or 90% of the continental United States within a two day drive time of Kansas City.

You have one of the largest airports in a six state region based right here in Kansas City. You have five of the seven class one rail lines that come into Kansas City. We have huge intermodal yards, uh, in the Kansas City market, which is similar to some of the other Midwest cities. So we get more tonnage of freight by rail through Kansas City than any other market in the United States.

Chicago gets more cars, but we have more freight that comes through Kansas City. There’s a lot of reasons to want to be in the Midwest, cuz you can get product here fast and you can get product distributed throughout the country very easily. Right. And there

Bob Fraser

isn’t a huge land program cuz there’s, there’s, you know, this city has spread horizontally unlike some of the coastal cities that they’re only, they can only go vertical and just.

Creates density and cost. So we haven’t seen

Brent Peterson

the great point. It’s very affordable. Right? Absolutely.

Bob Fraser

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

Brent Peterson

opportunity, I think.

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

Bob Fraser

well, and we’ve seen lease rates rent go up significantly.

So anybody that’s got a old existing lease, , there’s real opportunity there. They’re gonna, they’re gonna get some increases.

Brent Peterson

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

Bob Fraser

Yeah. So it seems like a really good strategy, you know? Um, you gotta be able to hold the property until the leases are up, you know, You know, But seems like, so we’re, we’re, uh, we’re kinda getting juiced over something, these kind of things.

Ben Fraser

Absolutely. What other opportunities are you seeing? I mean, it’s obviously a hot market.

It’s, you know, projected to be a hot market for many years, and there’s some big macro trends that are driving that, you know, what are the opportunities as an investor? How do you, you know, where, where are the areas that, that you’re seeing investors most interested in? Um, in placing capital into industrial?

Bob Fraser

You bring your own

Brent Peterson

money. Yeah. Well, I, I mean, Bought and sold some, uh, commercial and an industrial, uh, assets. And it’s been good to me and I’ll continue to do that. I think candidly, we we’re kind of in a unique window here where we’re seeing very little product hit the market because people haven’t realized that, hey, these interest rates have really affected the cap rates.

So I think there’s gonna be some real buying opportunities. I don’t know if that’s three months down the road, a year, two years, but, but there’s gonna be some real opportunities. Okay. Yeah. Um, so if you, That’s exactly what

Bob Fraser

we’ve been saying, that it’s, this is a counter trend move. If there’s softness in the market, big, big massive megatrend going up to the right, and if the market moves against it, well that is, you know, this is, is a gift,

Brent Peterson

right?

Absolutely. That’s when people can make real money in a, uh, in industrial or any type of, in investment real estate. So,

Bob Fraser

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

Brent Peterson

Is going up. Yeah. And, and just the uncertainty in the market is gonna cost some deals to happen as well, because you’re, you’re right.

If, if, uh, an owner has. Large assets that has a lease that’s ending, and they’re scared to live with that uncertainty. Right. They may take the cash in May coming.

Bob Fraser

Yeah, absolutely. Let me get out while the getting’s, Good . Yeah. Right.

Brent Peterson

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

Yeah.

Bob Fraser

So in a, you know, one of our, one of our passions with this podcast is to train our investors to not be fearful, because that is the time you make the most money. Absolutely. Right. When everyone else is vacating the market. Yes. But there’s nothing wrong with the market in the long term. Absolutely.

That’s you, I’m sure you saw this in 2008. Right. There’s people that just, they stepped up because they weren’t emotion, they weren’t in, invested in someone else’s emotions. Mm-hmm. . Right. And they stepped up and made a killing.

Brent Peterson

Yes, Absolutely. Um, again, it’s, it’s when you make the most money is when those opportunities present themselves.

Um, I. I, if you can simply take the perspective that I’m gonna buy this asset and I’m gonna own it forever, you will not lose on that 99% of the time. And so you, you have to be with able to withstand some of those downturns. But if you buy an asset with good principles in mind, you are gonna do very well in this market.

And there’s so many reasons to buy real estate. I don’t know if I get, get a chance to about why before you do

Bob Fraser

that. Do Okay. Do you have a story for 2008 for us? Give us, give us a couple of examples of like, some deals that were made. Oh, man. Um, yeah. We didn’t prep

Brent Peterson

you for that question, . No. Well, and that’s, that’s like ancient history there.

I I mean, I worked for a, a company at the time that liked to buy, um, big industrial buildings in small markets. And that, uh, would, were very patient. They’d come in and pay cash for the property. Wow. And they would sit on it. And, and the, you know, the. The idea was if they had to sit on it for a year, two years, five years, they would do that until they had the right tenant that they could put in place there.

And they had some huge successes by doing that because they, they did exactly what you talked about, Bob. They, they had people that either had a vacant property or one that was coming vacant and they said, We’ll, buy it. Those guys were thankful to get rid of the property. My guys came in and proved the, uh, asset and sat there and waited for the right user.

And they had a, they had a couple of home runs with that by bringing the right user to that market. And, and they were unique because they started looking at smaller markets. They didn’t have to go to a Chicago or Kansas City. They could look at those, you know, third and fourth tier markets and say, We can find a way to make this work.

So, Right. I saw that happen with several deals back, uh, during that time frame. So

Bob Fraser

it’s the way you make the big box. It’s like JP Morgan said, he said the way. When the blood is in the streets, that’s, that’s when you make the money, you know? Absolutely. I was looking in 2008 as seeing Miami beachfront condos for $35,000.

You know, no one wanted this stuff. Yeah. And I’m thinking, oh my gosh, they’re not making more beachfront. Yep. You know, and sure enough, you would’ve, you’d done a 10 x I was part of the, part of the.com crash. Mm-hmm. , and I remember being offered data center, brand new built data center, their completed data center, 20 cents of cost.

Wow. No one wanted it. There’s too much overbuilding, too much data, too much internet. No one’s gonna, Internet internets over, Internet’s dead. Or you know, at least the high growth. And yeah, it’s. And I would’ve made, it would’ve been a 10 x. Yes. You know, you just have to, you just have to take the long view.

Brent Peterson

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

Bob Fraser

opportunity.

Yeah. And the key to withstanding that is just, you know, making sure there’s margin, Being super careful with your debt. Yes. Your debt service. Cause that’s when you get creamed is when you can’t, you can’t service your debt. Absolutely. Right. You gotta make sure you can service the debt. And beyond that, just hold it.

Yeah. You know, and I remember even my daughter, this is a funny story, I’ll tell, tell a story. My daughter, you know, she bought a condo, a three bedroom condo, and it was outta foreclosure and she paid $65,000 for this condo and she was terrified she was gonna lose money on it.

Brent Peterson

and doubled it or tripled it, or she tripled her money

Bob Fraser

in like two years.

Yeah. And, and I said, but honey, and you need, we didn’t know if the market was gonna keep going down, going down. Zillow could say that’s worth a thousand dollars tomorrow. Who knows? Right. But I said, Honey, you can rent it for $1,500 a month. Right. So if you’re, if you put down $6,000 or $12,000 and you buy this and you’re earning, you know, $12,000 a year, do you think that’s a good deal?

She’s like, Yeah, that’s a good deal.

Brent Peterson

, Well, you did the right thing. You had a plan. Yeah. You just had a plan when you went into it. If this works, we do this. If this doesn’t work, that’s, then we do this. That’s, that’s the whole key behind it. You need

Bob Fraser

to be able to flip the switch to the plan A is short term, plan B is long term flip and be able to flip a switch.

Mm-hmm. to have a long term flip to your long term business plan if you need to. Yeah. I heard a good

Ben Fraser

quote the other day. You probably have heard this, but it says, uh, don’t wait to buy real estate. Buy real estate and wait. That’s exactly right. Yeah. Right. So it’s , I mean, patient capital and long term capital is, is gonna win.

You know, especially if you’re investing with a long term trend and inflation. You’ve got those inflation behind you is

Bob Fraser

the one sure thing right now. Absolutely. It’s the one Sure thing. Absolutely. We are going to see inflation. We don’t know how much, but we are for sure gonna see it. Yep. And inflation is real estate’s best friend.

Yeah. So,

Ben Fraser

and industrial’s so attractive because we haven’t did this a lot, but. The lease structures, especially right now because it’s so competitive, you get triple net leases. Yes. Right. And so as a, a triple

Bob Fraser

net lease Yeah. Give us the breakdown. Why are they

Brent Peterson

so cool? Well, a triple net lease, well is, is what I referenced earlier, a coupon clipper.

That means that that tenant pays you rent for that building and you simply collect the rent. They pay the taxes, they pay the insurance, they do the maintenance on the building. , they do the janitorial on the building. You have zero responsibilities there. Well, and and, and typically we call that an absolute net lease, but a triple net.

Sometimes that requires a landlord to still maintain the roof and structure, but so many of these industrial buildings have brand new roofs. Yeah. The exterior structure is a concrete building. There’s very little or nothing to do there. So I, I

Bob Fraser

love it. I mean, it’s, it’s really the ultimate, you know, you just de-risk.

Yes. So many levels when you’re putting the risk on the tenant.

Brent Peterson

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

So, um,

Ben Fraser

okay, well I’m, I’m sold. I wanna go buy some real estate. You okay? Let’s do it.

Bob Fraser

. Let’s go do it. Let’s go. Loosen our pocketbook, man.

Brent Peterson

Now you, you told me I was gonna get to tell people why. Yes, of course. Of course. Why you should buy real estate. And there’s so many factors. I mean, I wrote some of them down, but real estate gives you reasons to make money, pay less taxes, and then grow that asset as well.

So for example, appreciation. If you buy an asset, we appreciate you well, and I appreciate you , and so does that real estate, if you take care of it, if you simply do the things to keep it up, maintain the landscaping, maintain that roof, maintain the structure, the envelope of the building is the biggest key.

But if you maintain that real estate because of the inflation that you talked about, That building’s gonna appreciate value over time. So something that’s, it’s a for

Bob Fraser

sure thing. You don’t know what it’s gonna do this year or next year, but you, you can be assured over 10 years it will appreciate. Yeah.

Brent Peterson

Yeah. If you were in the market, in, in the stock market, you’ve lost 20 or 30% of your net worth that’s in there this year. If you had own a piece of real estate, you likely have not lost anything and maybe even gained value in that real estate this year. So anyway, appreciation is a big plus for it. The depreciation side of things, the IRS lets you depreciate that asset over either a 27 or 39 year useful life.

They also have what’s called bonus depreciation. So you can do a cost segregation on the building, break out different assets of that real estate, and then take accelerated appreciation on that. Uh, in a shorter period of time, the tax cuts and jobs act. It is winding down though, but through 2022, you can take bonus depreciation on, like I said, certain parts of a piece of real estate and pay a lot less in property tax and a lot, or a lot less on your, uh, income tax for that year.

Big reason to do it. Other reason, Let

Bob Fraser

me just explain that for a sec. Cause, So we’ve done this and it’s very cool. Cost segregation. It’s what absolutely the says you’re supposed to do. It’s not a, it’s not this thing that you can kind of get by with it. And what it is, it’s like, it’s saying that, okay, your building depreciates over 27 and a half years, but maybe your bathroom fixtures you depreciate over five years.

And I’m just making this up. But you get the idea or your light fixtures and your, your electrical system all depreciates faster. And so what that means is it generates tax deductions right out of the gate. So you pay a firm and they go in and do this study for you and tell me what your fence is and your gardens and your absolutely, it all depreciates this much and this much, this depreciates that much.

And they build a depreciation table for you that you literally just put on your tax return and boom, you get pretty big write offs pretty quick. And as to your point, that’s all going away or part of it, it’s going away in 2023. Right? So this is a really good time

Brent Peterson

to. Stick the four can, and you still have opportunities in 23 and 24.

I mean, it, it, it reduces by 20% unless they make some modification to the laws. Right. Uh, each year. But yeah, it’s a great time to take advantage of that, um, cash flow. Hopefully that tenant that’s in the building in re uh, that, that you have leased out is paying you more than your debt service and the cost.

Own that. So you get positive cash flow out of it. The other thing is you can do that cost segregation, Bob. You can write that building down to, you know, the bare minimum, whatever the land value is, and then you can sell that asset and do a 10 31 exchange and buy something that costs more money and do that same process on a larger asset.

Bob Fraser

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

Brent Peterson

it’s amazing. Yeah. You, you’re, you’re in essence playing with the government’s money. They’re allowing you to defer your taxes.

But you know, until your ultimate demise, if you want, until that asset passes to the next generation and you know, so you’re growing tax free income in real estate by transferring from one asset to the next. It’s a wonderful way to grow net worth. Let’s get into

Bob Fraser

real estate

Ben Fraser

.Okay. You really sold me now.

Bob Fraser

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

Brent Peterson

Absolutely. It’s always a good time to be in it, so just gotta, don’t wait to buy real estate. If you wait, you’re gonna end up waiting too long, so.

Ben Fraser

Awesome. Well, Brent, this is awesome. Super, super fun to have you in and kind of sharing all your, your nuggets of wisdom here and, uh, thanks so much listeners for tuning in.

Please join us again for next episode of Invest Like a Billionaire. Thanks so much.

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