BRG – JPMC – Change Maker Clip 1 – Transcript
Matt:
Well thank you everyone for joining us today. We're very excited to be in the speaker series to dive into the industrial sector. We have two great guests with us today, and it's my honor to introduce Dave Harrison who's president of VanTrust Real Estate. Dave is a friend of J.P. Morgan. He has 30 years of experience in commercial real estate and a very long resume of successful projects. He's helped build up BTRE into the successful leadership position it has today, a very well-respected firm. And although BTRE is very nimble in all major asset classes, they've been very focused on industrial, both build to suit spec for their own account, and also third-party fee developer for others. So, Dave, thanks so much for being here today. Alex.
Alex:
Great, thanks Matt. Today I'm excited to also introduce Jim Galovan, a partner from the global investment management firm PCCP. PCCP has been providing debt and equity capital solutions across the U.S. for over 25 years. And Jim has played an integral role in the growth of their industrial business. From an investment perspective, what do you like about the industrial asset classes, I guess compared to other asset classes you can invest in today?
Jim:
Well, thanks Alex. It's nice to be with you all today. I'm glad to be a part of this. It's fun to talk about industrial because it is such a great asset class right now. And what do we like about it? I mean, liquidity for industrial product is greater than we see in any other asset class. And just as a bit of backdrop: the perspective that I'll bring here from PCCP’s perspective is that we actually participate in all four primary real estate product types. So we invest in office, we invest in industrial, multi, and retail. We do some hotel and family for rent housing also. So we're, it's really five or six major real estate product types that we invest in, and… But really looking probably over the past three to five years, it's been industrial, probably more than anything else right there with multi where we've spent our time and invested our capital. And what we like about it is when I compare it across the asset classes, it is the most liquid.
Alex:
That's great. Dave, how about you?
Dave:
Yeah. To piggyback on what Jim said about the different product types, those are the silos that we historically have developed in. And really, when we looked at the different filters we use on what we develop, it's been consistent for over a decade. And the filters we run projects through or what kind of product type are they, what's the geography, what's the project size. And then lastly, what the gestation period is for the project, from the time we commit to the time it can be stabilized. And industrial fit that last slot real well, because we typically looked before the steel issues and delivery issues today, we used to be able to say, you could start and finish an industrial building within a year. And if it were spec, you'd plan to deliver it, stabilized within another year on the outset. So that gestation period had us as a hedge against interest increases, interest rate increases that haven't materialized. But that industrial component was about 20% of what we did. Today, that 20% is now 70%. And it's really driven, as Jim mentioned, by the demand side.
Matt:
Dave, that’s very interesting because I'd love to be able to double click on what you said about e-commerce trends, accelerating pushing the demands higher on the outside, and also pushing record levels of supply in the country that are matching absorption rates. And so I'd love to get your take on how sustainable is that, especially with the just-in-case inventory compiling onto the demand.
Dave:
Yeah. You know, the old just-in-time model's gone. And I think with COVID, the process or the pipeline for the acceleration of e-commerce has exponentially accelerated. So whether-- we just delivered last week a pretzel manufacturing company facility. E-commerce still has an inordinate amount of market share yet to be realized. It clearly has been accelerated by COVID and everybody’s behind the eight ball from a delivery standpoint, as far as the users are concerned. And what's really being compounded as a challenge to that insatiable demand is material delivery.
Alex:
And Jim, I'd love to get your perspective on that same question.
Jim:
Yeah, I would say the way... our focus has been speculative development of new class A product and industrial, and in particular product that is well suited for e-commerce users. And so you start talking about features like trailer parking and clear height and things that are particularly important to that user base. And what we look at is the fact that really since 2010, well if you look at the industrial stock across the whole United States, only 11% of that was built since 2010. You know, most industrial buildings have been around forever for decades and decades before that point. Even though it feels like we're building a lot right now, when you put that in perspective, it's only 10, 11% of the national industrial stock. Yet in the trailing 12 months, 45% of the industrial demand was e-commerce driven.
And so there's just so much of the demand has a thirst for product that probably 90% of the stock doesn't really serve. They can go into an older building and make it work, but it really doesn't provide the primary bells and whistles that they're looking for. So, given that, it used to be that industrial demand was very much a function of GDP. GDP is up, demand is up, GDP is down, demand is down, and now you really have two demand, right? You have GDP, and then you just have supply chain reconfiguration and e-commerce and all, and that demand driver. I agree with Dave, that feels like it's somewhat uncorrelated necessarily with GDP growth or (inaudible). It'll move somewhat with that, but even in a slow economic time, you're still gonna see companies need to adjust to the changing face of how goods get delivered and processed. So we like that as a dual demand driver in the market. And I don't, I'm not smart enough to predict how long that's going to last, but it does feel like a long-term trend, not a short-term phenomenon that we're experiencing.
Matt:
And Dave, is that what you're seeing at BTRE?
Dave:
You know, it is, probably the unique situation we have right now is what starts out as a spec real quickly turns into a built to suit, even in some cases before it's out of the ground. And to Jim's point about the timing and the need on the part of the users, the last four buildings we've delivered, three of them have converted really from spec to a built to suit halfway through construction or at the beginning of construction. We just had a 660,000 square foot building be sold to an owner user on manufacturing. And before we were done with the building, they had already taken 130,000 square feet of slab out to do under-slab plumbing. So it's… the line between spec and built to suits blurring because of the delivery schedule and material procurement.
Alex:
Drilling down a little further on that. So as a developer or an investor looking to… looking for pockets to invest in, you think about life science and it tends to cluster… even office and creative office where it would cluster around other large companies, Amazons, Googles, what not. Do you see the same thing with industrial as you're looking to make an investment and hoping that maybe what was spec might convert into a build to suit? How do you think about geography and location as it relates to your investments in industrial? And maybe Dave, if you want to start with that.
Dave:
Sure. I think from an underwriting standpoint, you have to assume it's an empty building and that it is speculative. And you gotta, as Jim mentioned, all the requirements of the built to suits today, you gotta create an attractive of a mousetrap as possible, so that the site plans that we're doing today on a spec building mirror what we're learning from the build to suit requirements. And forget the-- or in addition to the labor studies and and traffic and logistics, these individual site plans on a speculative basis have substantially more expansion capabilities, more trailer storage, more circulation, more employee parking than a normal spec would’ve had even five years ago.
Alex:
Jim, are there emerging areas to sort of follow on from what Dave just mentioned and those dynamics, are there catalysts in certain parts of the U.S. that that might drive to more success in industrial looking forward?
Jim:
I think so. And I think it's an interesting question because you mentioned, maybe life science on the one end or office clusters, and there's a few of those, not a lot, right? There's four or five really strong kind of core clusters of life science throughout the U.S. On the other end of the extreme, you could say there's apartments everywhere because it's shelter and everyone needs shelter. Every little town, every small town across the country needs some form of living. And so industrial, I think, is moving actually more toward where it's quite dispersed, right? Because the industrial product is needing to go to the population centers and not just be concentrated in Chicago, LA County, and Northern New Jersey. It used to be maybe you were, you'd have one big thing in the Midwest, and then you have an outpost on either coast. And really, with just in time, just in case, next day delivery, it just doesn't allow for that model to work anymore, which is pushing industrial buildings out. So we're a national investor and we look across the entire U.S., and we're in a lot smaller markets today than maybe we thought we would have been in a decade ago.
Alex:
How do you, I guess, how do you think about the speculative deals that you're doing, of where kind of a musical chairs, is there any concern that the music could stop for industrial, and then you have some empty buildings for awhile?
Dave:
Every night I think about that. You know, there's a lot of folks in our product type right now. And with compression of cap rates, it solves all kinds of misses that somebody might have. I do worry that at some point, I'm going to wake up and somebody's not going to have an industrial site anymore; they're going to have farm ground again or an empty building. I just hope it's not us. So I think… we love good competition. I think this product type is attracting a lot of participants that, when there's movement in the other direction might not fare as well. We've got more ground now than we ever have, which bothers me as well. But the objective that we have is velocity of taking raw ground to being pad ready. And again, when we look at that gestation period, we don't want to look at ground in a 5, 7, 10-year time period, even in parks. We want to look at it at 1, 3, and 5-year periods.
Alex:
Jim, any thoughts on the same topic?
Jim:
You know, I think there's a big trend to go big, go big, go big right now with boxes cause there's been demand for large spaces. But when you're doing that in locations, that really historically haven't seen those size tenants, you might get an Amazon deal on another one, but I don't think you're five deep in a lot of these locations where we're seeing big, big bulk product. And so I think matching your-- the size of building with the size of tenant that's common in that market. It seems really obvious, but we've seen some mismatches there where I think there could be missteps if there's a slowdown.
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