Author Archives: Nawshad Jamil

Four Current Forces of the Industrial Real Estate Business

The current robustness in industrial real estate markets obscures many forces that can balance and protect your investment and location decisions.   Technology, Monetary Policy, Political Risk, and Space Transparency are important factors that provide support during good times and bad.

New technologies come at an important time because accommodative monetary policies, that disrupted normal return structures since the Financial Crisis, are coming to an end. Building investments require realignment. New to the U.S., Political Risk is now measurable, and wealthy property owners are seeking global diversification to protect and hedge their property investments. Chinese flight from the U.S. and currency battles are two examples. Space Shortages are still the overriding condition, but it’s important to recognize that public listing MLS services only carry a limited selection of offerings while private deals account for many Sharing and Investment/Development deals. Interestingly, markets remain opaque despite the availability of enormous data.

Technology

Artificial Intelligence, Automation and Big Data, are the technologies I am developing with Block Chain being the one most anticipated.  A modest investment in Data and Digital Operations creates more leads, improves execution and compounds investment. Artificial Intelligence is embedded in many off-the-shelf programs like Excel and Salesforce. In the latter, A.I. is specifically directed at creating more Opportunities. Deeper intelligence is found by hard coding with Python, and its derivative, Pandas. For instance, by crunching large sets of parcel data nationwide and matching them to other data sources, investment and availability attributes appear much faster and with better intelligence than using Access or SQL.  Other programs look at layered data, multi-dimensionally, to predict behavior. Practical outcomes include more deals, better communication, and enlarging my network. In the field, we are experimenting with MappSnap, a geotagging tool for customers as an entry way to experience our Digital Platform directly.

Much differently, Building Owners want tech applications that increase building rent. Industrial building tech includes security, access, monitoring, and optimization. It is achieved using sensors, cameras, and automation. Normally an upgrade of electrical distribution and Wi-Fi is a requirement. The economic goal is to use tech to squeeze more rent from inside and outside of the building. The best example to date is the sharing business but instead of companies like WeWork or Liquid Space, every building owner can install new devices and technologies to increase rent.

Sharing runs a continuum from low to high tech and both create more revenue.  Low Tech Sharing is the most common and while it’s not a recent innovation to rent out unneeded space, the ease of finding tenants has increased.  The fundamental way to share is intrinsic, along physical attributes and divisions based on building shape and lot orientation. For instance, long narrow distribution buildings are routinely cut up in sections. Older buildings are divided so each space has yard and loading. Simple surveillance is managed either internally through building Wi-Fi or externally through cell connections. Digital Surveillance replaces expensive demising walls and frees common areas that can be used jointly.

On the higher tech side, Sharing divides buildings to much smaller increments with Wi-Fi, sensors, cameras and robots to monetize every cubic foot. This creates real time data to measure occupancy and surge pricing for seasonality.  This knowledge and its implementation are currently beyond most individual landlords but many large property owners, who can spread costs over large square footage holdings, are the first to deploy digital infrastructure in their buildings. The best example is how Amazon uses similar pricing metrics for warehouses as they do in computer servers to increase rents by multiples of their contract leases. Many 3PLs are making substantial investments in their buildings to monetize ever smaller fractional units, down to pallet spaces, to increase building revenues as in the case of Flexe. The common model is to contract on the square foot, rent out by the cube and profit on the difference.  Both high and low-tech methods will increase building revenues if promoted actively.

Robots are rapidly arriving to make older buildings more efficient. While many long-time owners are selling these older buildings because of obsolescence, others see these properties as prime infill locations that can be improved by technology retrofits.  Robots make older buildings more efficient by covering space more quickly; replacing lethargic, human workers; and automating manual tasks. Robot makers claim that their robots do more for older buildings than they do for new ones.

Monetary Policy

While Tech is opening new avenues for profit, Monetary Policy is always in the background influencing investor expectations.  One unintended consequence of central banking policy over the past several years has resulted in the mispricing of B and C buildings. Cap Rates for lesser quality assets have historically been 300 to 500 basis points behind A. The institutional and non-institutional markets were clearly distinguished by wide return differences. Spreads compressed dramatically over this past 10-year period because of the reduction of interest rates.

Today the gap between “A” and “B” has shrunk to 50 to 200 basis points and investors are not being properly compensated for risks they are taking for older buildings, in poorer condition, with shorter term and less credit worthy tenants.  By driving down interest rates and flooding the market with liquidity, all spreads became compressed.  Now with monetary policy reversing, spreads will gradually reflect historic norms with a wider gap between property classes. For those who purchased property at low cap rates, they were mostly rewarded with generous rent growth. But with rent increases flattening, buyers will need to underwrite their purchases with a larger margin of safety then they currently do.

My “back of the envelope” method is to give each deviation from prime property a demerit equal to 50 to 100 basis points.  If a property is older, with a poor tenant, in a secondary location, that would add up to a 300 basis point off prime real estate rates. As it stands in today’s market, many investors cut it much closer, so they can gain possession of the asset. Shrewd buyers are no longer counting on an updraft and are returning to cautious underwriting.

Political Risk

Political Risk is a relatively new consideration for U.S. industrial property owners. It can reward on the upside with tax reform, a business-oriented supreme court, or favorable trade policies. On the downside, risks include removal of liquidity, expropriation, foreign influence and legislative uncertainty.  Local risks that affect property owners are laws allowing the homeless to live in front of your building, rent control, and restrictive industrial zoning. Global risk is being staged by economic warfare and is evident by the departure of many savvy Chinese property investors. The Chinese are cashing in their U.S. holdings and returning their profits home.

Among my Chinese customers, disillusionment is clear. Years of very strong investing in Greater Los Angeles is being reversed. Government Sponsored Entities and large Chinese companies were the first to cease their purchases.  Now, members of the Chinese international trading class, buyers of industrial buildings at top prices, are also departing. The clear call is to repatriate their capital back to China quickly and reinvest at home, Southeast Asia and along the Belt and Road.  As poor consolation for their excellent trading acumen, the Chinese will leave wealthier, with their properties and neighborhoods in far better condition than they originally found it.

Realignment of geopolitics affects supply chains. Los Angeles industrial has achieved remarkable success as the primary U.S. gateway to Asia and It has earned many local landlords a fortune. Nothing says boom times last forever and using personal experience, I’ve seen several ups and downs already in my career. Anything that disrupts Asian containers rolling off the docks, will be felt in Los Angeles first. China’s Belt and Road, the controversial infrastructure plan, that is being developed with colonial finance, intends to create another route for Chinese goods through Central Asia and terminating in Europe’s historical trading centers along the Rhine. Los Angeles will always be a superior industrial building market but as global power shifts, other supply routes will become excellent investment targets.

Are Chinese capital movements a harbinger of Political Risk avoidance? Can industrial building diversification run parallel to global financial diversification?  My European colleagues have deep historical reasons to think so and have careers helping foreign investors spread their wealth across national boundaries. For investors who have made California and Los Angeles their primary investment focus, is it time to reconsider homogeneity?

On recent trips to Europe, I have learned that investing in Europe has many similarities to the U.S. in terms of cap rates and its relationship to property class distributions. Newer buildings in prime markets, major capitals and distribution centers, sell at cap rates below 5% and increase incrementally depending on condition, location, and tenancy. Just as in the U.S., product is hard to find and the only way to increase returns is to add value and grow rents. Occupiers need to examine locations differently because the best investment markets are not always where the labor is available. Currently, Americans have a significant financial advantage with favored exchange rates and more aggressive searching techniques.

Space Transparency

While Space Scarcity is the overwhelming market condition, space transparency is also at fault. There’s a crisis in the space listing services and information is compromised by tech wars and unrealistic subscription pricing models. Data is more fragmented than ever and while the promise of the internet is complete transparency, on the street, data is often dispersed in the hands of market participants.

50% of my deals are off-market, transacted through private networks, colleagues, and data I have accumulated.  As an example, large, experienced owners will often “get the word out” months before a vacancy appears and well before a property is formerly listed. When purchasing, these same Professional Owners, aggressive in chasing deals, have a better searching/data operation than most brokerage houses and are financially motivated to solicit directly. In practice, it is equally useful to use old-fashioned means of seeking out the brokers who work the markets instead of relying on listing services.

A flaw of Central Listing services is once you post, the data is no longer your own. In an era when many wealthy customers prefer discretion, private transaction marketplaces are growing. Every large brokerage has their own private client distribution network and they use them frequently. Crypto Markets and Dark Pools are not yet commonplace but elements of each, particularly privacy, are effective ways to sell property securely and privately.  The market is more opaque than infrequent participants realize and those that rely exclusively on central listing services will come away with a false impression of inventory limits.  Contrary to the internet’s promise of clarity, the real estate business is heavily composed of personal relationships and pocket listings. Data is no more transparent today than it was when hard copies of the Industrial Multiple was physically distributed weekly and updated in 3-ring binders. Although the public listing marketplace is mature, deals are still found through private networks established organically and methodically. Transparency is based on trust, reputation, relationships and experience while electronic distribution can be restricted by timeliness and secrecy.

Disruption affects the industrial real estate business. Those who spend time understanding markets, expanding their network, and investing in infrastructure will find deals that others miss. There is no uniform way that works for everyone. While conditions appear calm on the surface, instability leads to opportunities for the inquisitive, capitalized, and technically able.

Thanks for Subscribing,

Jim Klein, SIOR
310-451-8121
jimklein@kleincom.com

If you want to be removed from this list, please reply accordingly and you will be deleted.

 

 

15401 S. San Pedro Street, Gardena, CA – 25,000 SF of Industrial for Sale – $6,500,000.

Building A – Front – 16,800 SF
Building B – North – 6,000 SF
Building C – Metal – 5,000 SF
2nd Story Offices – 1,763 SF
Lot Size: 60,000 SF

Completely Refurnished in 2016:
New Concrete Yard and Block Wall
New Power and Power Distribution –
New Fire Sprinkler
New interior dock-hi loading – 3 positions
New upstairs offices and on-site apartment
New Truck Scale
Many advanced automation and surveillance installed
Very Secure Facility
Large Concrete Yard.

For Sale at : $6,500,000.00

Please contact:
Jim Klein, SIOR
Klein Commercial Real Estate, Inc.

310-451-8121
jimklein@kleincom.com

15401 S. San Pedro St., Gardena, CA 90248 (unic. L.A. County) – 25,000 SF – For Sale – Preliminary

Building A – Front – 16,800 SF
Building B – North – 6,000 SF
Building C – Metal – 5,000 SF
New Upstairs Offices – 1763 SF

Completely Refurnished in 2016:
New Concrete Yard and Block Wall
New Power and Power Distribution –
New Fire Sprinkler
New interior dock-hi loading – 3 positions
New upstairs offices and on-site apartment – 3,000 SF
New Truck Scale
Many advanced automation and surveillance installed
Very Secure Facility
Large Concrete Yard.

For Sale at : $6,500,000.00

Please contact:
Jim Klein, SIOR
Klein Commercial Real Estate, Inc.

310-451-8121
jimklein@kleincom.com

European Opportunities for U.S Occupiers and Investors

 

I just returned from the SIOR European Conference in Warsaw, Poland. It’s my third visit to Europe recently and the most persistent trend is the expansion of big warehouse development. It’s leading to opportunities for U.S. occupiers and investors mainly due to the strength of the dollar.

I saw Professor Richard Baldwin, a leading expert on the influence of the Internet and communications technology on trade and production.  Industries arbitrage labor, capital, and technology across national boundaries to find the best profitable balance. New communication technologies for example, tele-presence, will make physical collaboration possible while being thousands of miles apart.  This will open up markets and allow for input substitutions to combat tariffs.

I learned that dealing in Europe is not much different than in the United States.  Cap Rates have the same relative spreads from primary markets to secondary. Below 5% in Paris, Madrid and Germany. Rising in Central Europe until reaching Moscow above 10%. In many of the strongest markets, it’s essential to add value to overcome low returns.

In Europe partly, but particularly in the U.S., we see mispricing in B and C markets. There is not enough consideration being paid to risk from tenant quality, short leases, and building conditions.  Historical spreads between A and B are 200 to 500 basis points. Today that spread has compressed to 50 to 200 basis points.  Space Scarcity, Excess Liquidity and the end of Quantitative Easing are the culprits. Smart buyers are returning to more conservative underwriting to make sure they are being compensated for conventional risks.

Logistics and Supply Chain closely resemble the U.S. by building to scale and establishing large ecommerce buildings that supply last mile destinations and production components. Development opportunities are similar where land is controlled long term and development for occupiers creates the value. Many European developers, especially in Central Europe, have large holdings in entitled industrial land but need valuable occupiers to capitalize.

Political Risk, something the Europeans know much better than Americans, is an important aspect. Because of almost universal transparency throughout Europe, political risk has so far been muted but there is still a premium that can be earned by having the right local partners and keeping a low, fixed investment mostly in the land. Corporate credits and a robust occupier market contributes to stability. Because of the strong dollar, purchasing power leads to discounts of 25 to 50 percent.

As in the United States, access to labor is a primary factor in location decisions. There is currently a mismatch between capital and labor. Capital prefers major markets, but industry wants to locate further out where labor availability and wages are lower. This is another opportunity for private capital to earn a calculated premium.

The current World Cup is the correct metaphor for our times. While countries will rival each other on the playing field, it’s the close personal relationships I have with my European SIOR colleagues that will overcome investment and location risks. As many of our clients enter the next phase of global convergence, more frequent communication with my SIOR peers will continue to be the source of many deals.

(Wish I had a better map but shows the influence of regional differences more than national. From the wall at the Polish National Museum in Warsaw, Medieval collection)

SnapSpace in Beta

We started a new site where Users can snap pictures of available space from their phone or PC and upload directly to the site.  It’s meant to work on a market-to-market basis because it also requires extensive “‘on-the-ground” support so Users know about the service. We are testing it in Gardena first. Space providers can offer directly to Space Occupiers. You may need a log-in which you can obtain at http://54.175.202.223/. Currently we are only at a Beta test so forgive the design. The key features combine Geotagging with the Geofield module so space is both posted on the map and in the Listing Section simultaneously. Works on all mobile devices. No third party intermediary is required.

Many Tenants and Property Owners are sitting on unused or underutilized space. We provide an easy outlet to reach Space Users who will pay market rents for any type of industrial space. Either you or I can post the space directly And we will bring you a qualified tenant at market rents. Warehouse, manufacturing, truckyards are our specialty. All sizes and lease terms.

SIOR Industrial Committee – 2nd Virtual Roundtable (via teleconference) – June 7

ANNOUNCEMENT

SIOR Industrial Committee – 2nd Virtual Roundtable (via teleconference)

Thursday June 7, 2018 – 8AM Pacific; 9AM Mountain; 10AM Central; 11AM Eastern (International Members Welcome)

Dear Industrial SIOR,

You are receiving this announcement because you have participated in a SIOR industrial event over the past year. As part of the Committee’s mandate, structured networking among SIORs is a primary goal. To that end, we will be holding our second Virtual Roundtable on the date above. Each table is limited to eight participants so everyone can speak.

The call is targeted at 45 minutes and no more than 60. The time will be divided into three, not necessarily, equal segments:

  • General Market Conditions – Everyone has a turn
  • Are there space shortages in your market? And are there investment/development opportunities?
  • Problem Solving: Share a problem in your business that other SIORS on the table can help you solve?

Concurrently, we are collecting National Industrial Cap Rate data for a forthcoming publication where you will receive credit for your contribution and a complete data set you can use for your own business/publications.

Please respond to the following five (5) questions: (can all be one line for simplicity and we will parse the responses.)

Can you attend the Virtual Roundtable?
(If yes, call information and more instructions to follow)

Metro Area?

Cap Rate for A* Product in your market?

Cap Rate for B** Product in your market?

Will you be a Virtual Table Leader?
(Requires a Conference Call account for you to host)

*A Product is institutional quality, newer development, credit tenants, Build-to-Suit
** B Product is functional, older, shorter term leases, opportunity/value-add

 

 

Gardena Industrial Summer Preview 2018

The Gardena market continues to rage. Could be the best industrial market in the United States. Certainly prices are amongst the highest.  After doubling in five years, year-to-year increases are still rising but more moderately. Space shortages are severe and causing tenants to panic who do not have a long term home. Space Scarcity will keep values high. Land rents are soaring dues to restrictions on trucking in many municipalities. Lots of space is trading in the off-market, quite a bit on our Industry Lands platform

While Gardena has been our business home for 35 years (and no one has better relationships), we have a strong national presence and are more effective than larger companies. We are not locked into one organization like the national brokers but can pick the best SIORS in any market we choose. I’ll be in Warsaw, Poland this summer to Co-Chair our European Program and make more international connections.

Besides our 35-year industrial brokerage career in Gardena, we have two new initiatives. We are applying tech to get more space on the market. Sharing, A.I., analytics, and automation are new ways to make more space available by improving older, infill industrial buildings. We are looking for investors and investments to purchase more property. More information can be found at IndustryLands.com.

Industrial Building Portfolios – In Heavy Demand

Industrial Building Portfolios, $50MM and greater, are where the action is today. Institutional investors need scale and the only place to find it, as far as industrial, is in the portfolios of National Operating Companies and Private Partnerships. Institutional Investors stand between the real estate and fixed obligations to satisfy pension, insurance, and retirement plans. It’s major financial plumbing and as the obligations grow so does the need for product. Roll ups, a familiar consolidation vehicle in corporate America, is now the preferred way for large real estate investors to buy. Unknown to many, national industrial building ownership is consolidating and almost all local developers/investors sell into these relatively few pools as a final exit.

In order to obtain more income, institutional investors have different strategies. Purchasing brand new developments is a popular way to buy yield. New to the field, are sub-institutional quality buildings, also called “B” and “C”. On its own, a single “B” or “C” asset, may not garner much institutional interest, but as part of a larger portfolio, the property trades at a very low margin. There is strong financial support for proven cash flow in infill markets, even if the buildings are older. Average vacancies across portfolios and the cost to operate these buildings are low.

In Los Angeles, and a few other markets around the U.S., small investment partnerships and family owned businesses have seen the value of their real estate explode. The portfolio effect is one reason, but the real estate itself, often located in rough industrial, is the beneficiary of urban economics and distribution networks. Formerly junky industrial buildings are fetching institutional quality prices.

Outside of major markets, the logic is much the same although prices tend to be a lot lower. Infill industrial, freight hubs and key logistic locations are the valuable pieces that make up a larger portfolio. Many private operators have spent a generation or two expanding these building networks to where the whole is worth more than the pieces. No matter how the investment partnerships and operating companies were formed, the buildings are analyzed for their cash flow potential.

Why now? Not only do portfolio values increase through aggregation, but there are also positive pricing effects due to consolidation. Portfolio theory demonstrates that there are rewards with larger scale. Lower costs of administration and management benefit beneficiaries directly. Scale, across a broad set of assets, reduces cost and expenses.

Big Data, particularly national parcel data, has an important effect on Portfolio Management.  Big Data and Analytics increase the ability to seek, analyze, and close on big industrial building holdings in very short time frames. This creates a layer of liquidity that is new for industrial building assets of this type. Because of Big Data sets and large values, the game has taken on new dynamics. For one thing, Occupiers have unprecedented advantage to leverage occupancy with ownership that yields tangible benefits. For portfolio owners, it’s the speed to monetize large asset pools that is a significant new innovation.

On the Buyer side, the top tier of industrial buyers is limited to a small handful of REITs, Insurance Companies, and  Private Funds who can write a check for $50MM or greater.  Below the top tier, there is a spectrum made up of different buyers and deals. Opportunistic, credit lease, multi-tenant, or tenant-occupied each have applications to larger pools and it is often the developer’s place to help the investment fit. In capable hands, a rough-hewed older industrial building can be turned into a well performing part of an institutional portfolio as long as it is bought correctly on the Spectrum.

Geography is another way large investors make price adjustments on the fly.  Certain major markets establish an index based on market size. Los Angeles, New York and Dallas are primary benchmarks. Other markets are adjusted accordingly into a national matrix. While these indexes are based on real numbers, thin trading in smaller markets leads to mispricing. As data improves and more experienced local analysis makes its way to decision makers, the business of large portfolios is more transparent. Knowledge of U.S. markets, access to product and personal relationships with leading investors make large industrial assets more liquid and valuable than ever before.

We advise, we sell, or we bring in our own deal. Please let us know if we can help with your Industrial Building Portfolio.

Thanks for Subscribing,

Jim Klein, SIOR

310-451-8121

jimklein@kleincom.com

PS: Participation Available in Industrial Syndication – Infill Los Angeles

(If you want to be removed from this mailing, please respond and we will immediately delete you from our database)

Race for Space – The New Dynamism

Dynamic pricing is becoming a greater influence on space leasing and building sales. By dynamism, I mean fluctuating rents separate from conventional underwriting.  A “spot market” is emerging to satisfy demand for smaller, flexible, and elastic spaces. Many examples include Truck Yards, Warehouse Sharing, Creative, Cannabis, and other categories of sub-space where “street rents” are disconnected from contract rents.  WeWork and Amazon are two primary examples that contract with the Landlord at one rent, and lease out space bits at higher rents. Public Warehouses, Self-Storage, Swap Meets, Studios and Truck Yards operate along the same model by collecting additional rent by offering “alternative occupancies” with varying degrees of added services. The revolution is any building can be pieced out especially with easily acquired technology that can create “smart” buildings for automation, surveillance, and access.

Dynamic pricing is buttressed by space scarcities and rent surges. The L.A. Harbor is a perfect case where proximity, drayage costs, and labor unrest, results in dynamic fluctuations partially geared to seasonality but more to sheer demand. Unused yard areas that can be repurposed for truck parking are going for $.35 per foot and warehouse sections are approaching $1.00.  Long standing tenants and family owners are the primary beneficiaries by subbing out their unneeded space.

We sold this 25,000 square foot building two years ago to a Chinese investor and he created the closest example I have seen locally to a “smart” building. In order to sustain autonomous production, he installed 100% IP surveillance cameras, automatic doors and levelers, new power, fire sprinkler and Wi-Fi throughout. Because it is a 24-hour operation with robots, the owner built a small apartment upstairs so the entire operation can be centrally monitored and controlled around the clock. The building itself becomes a major input to the production process. In addition, once the electronic infrastructure is in place, sharing is simple.

Runaway Pricing:

Dynamism is just as clear in the scramble for investable assets. Many small partnerships or family businesses find themselves sitting on incredible wealth from secondary industrial properties they have acquired through a long, productive business career. Particularly in Southern California, the combination of high rents, low cap rates, upside potential, and high dollar values have attracted the largest investment funds to the region. Not because these are terrific buildings, but “B” and “C” buildings generate strong cash flows, in great markets, and can sustain reliable income. Investors receive a slight premium with steady performance and dynamic increases with hands on operations.

One opportunity for Owner/Users is the high price of Los Angeles real estate, soon approaching $200 per foot. It enables them move to Inland Empire, Las Vegas, or Phoenix, all quickly becoming a part of Greater Southern California. Many local companies can improve their operation at greater savings and still have a hefty profit left over. While I hate to see business decamp from Los Angeles, no one has a better national network of experience to accomplish a seamless, “pick up and move” strategy than I do.

Dynamic Trading Network

As speed ramps up, it will be important to have the platform keep up with dynamic space trading.  More and more it will be discrete electronic networks that will replace word-of-mouth and informal communication. Public Listing Services will always have a place, but the “electronic whisper network” is a practical solution to transact deals rapidly and still keep offerings confidential when necessary. Torrent networks, Slack, and RocketChat are a few of communication tools we are exploring. In addition, we want to replace the lumbering process of “papering” a deal by using faster agreements. For now, AIRCRE forms combined with a paralegal service based in India is allowing us more time for deals but is not the ultimate solution

Building a strong Digital Operation is the only way to maintain parity with dynamism. In our work stations, we combine field video, parcel information, and Salesforce leads to search for space deals that would otherwise not be “on the market”. In essence, we are creating space through Search and Spot Pricing.  Because of the velocity, we can often deal the space faster than listing it. While still crude on our end, Digital Operations is a remarkable return on investment. For the first time, customers are investing alongside of us to create richer communication and data platform to see those deals.

Please let us know what we can do to help.

Jim Klein, SIOR
310-451-8121
jimklein@kleincom.com