Archives for November 2023

Empty Mall Convert to Family Arcades with David Goldfarb – CRE PN #435

David Goldfarb 0:00

There’s various components on the reason why we’ve been very, very successful. First, it starts off that the only facilities that we’re looking to move forward in our department stores inside malls. And the reason being over that is, is first and foremost over here is, generally speaking, you go to any mall in the country, and they got 6000 parking spaces, so you never have to worry about parking. That’s number one. Number two malls strategically were put in good locations, overall, where there is they’re very easily accessible to the highways. So this is also an important factor number three over here is you get the cross traffic of any mall, they can enter our facility from the parking lot, or they can enter our facility from the mall itself. So we’ll have we’ll have cross traffic on both on both variations. The fourth element being is we have an internal construction company. So we’re able to build these at a fraction of what these would cost if someone were to enter our industry. And I would say the the fifth element, which makes success very successful, is that we have these eight dimensional facilities that consists of every attraction under run under one roof, that also includes a full food and beverage menu to be able to serve, you know, all American food with about 60 to 80 television sets per location. So it’s like a sports bar atmosphere inside of an attraction venue. And we try to keep these people over there three, four hours at a time. And our next, our next pivotal move, because of the success is we will look to add movie theaters, as component to the venue. And these will be boutique movie theaters that you’ll be able to have, you’ll be able to eat and drink inside the theater. And there’ll be luxury style theaters that are that can range anywhere from six to eight boxes, about 50 people or so per per theater, and they will have the opportunity to really enjoy themselves because there’ll be in a luxury style setting. This will not be traditional movie theaters.

Announcer 2:32

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J Darrin Gross 2:52

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

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Today my guest is David Goldfarb. David is the managing partner at Xtreme Action Park Elev8 Fun, EA Properties and Primetime Amusements. And in just a minute, we’re going to speak with David about the opportunities in indoor adventure parks.

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David Goldfarb 4:33

Darrin, thank you for having me. Um, I’m happy to answer all your questions and give you an idea of kind of the space that we’re in.

J Darrin Gross 4:40

I’m looking forward to it. Before we do get started if you could take just a minute and share with the listeners a little bit about your background.

David Goldfarb 4:48

Sure. My name is David T. Goldfarb. I’m based here in Miami, Florida. I started my company back when I was in college. I went to the University of Central Florida And I started with a company called primetime amusements. We are we are an arcade company where we operate arcade games in large hotels, bowling alleys movie theaters, primarily in the Orlando market as well as the South Florida market. I started that at the age of 19. And I’ve been doing that business ever since. So that was my first entrepreneur and gather

J Darrin Gross 5:26

Awesome. So you’ve been doing like you said all the amusement or not miss some of the the machines, I guess. The arcade equipment are carried, okay.

David Goldfarb 5:36

Arcade equipment, pool tables jukeboxes stuff that you see sports bars, stuff that you’ll see inside movie theaters, bowling alleys, hotels, we have the only arcade inside of McDonald’s on International Drive in Orlando, Florida. We have a 60 a 60 piece arcade room inside of a McDonald’s. That’s one of our most unusual accounts. It’s the most It’s the busiest McDonald’s in the United States, actually.

J Darrin Gross 6:06

Wow. That’s awesome. That’s good. Good for you. Well, sounds like you you’ve grown up in this business, then. You started with the arcade machines and in the business? Are you limited? Or do you primarily operate in the Orlando area or you said you’re in Miami,

David Goldfarb 6:27

where we operate not Orlando was South Florida, we also have a rental division. And we have a sales division. We’ve sold to over 40 countries all over the world. As far as as far as, as far as Australia, all the way to, to even China, where we sold equipment from? And that’s a large part of our division, which is based out of Fort Lauderdale as well. Wow. And chains to like bar mitzvahs and trade shows. That’s another part of our division under primetime.

J Darrin Gross 7:02

Awesome. And are you a distributor for the machines? Or do you you make any of the machines or

David Goldfarb 7:09

so we operate and we distribute, we do a combination of both. We mostly sell secondhand to the to third party markets. We just recently even fact even today, we just sent out a container to Ecuador.

J Darrin Gross 7:24

Wow. That’s awesome. That’s I mean, it’s kind of a part of the business that I don’t know that everybody thinks about, you know, you go to a bar and there’s a pool table and put your quarters and or whatever and play play some pool, but not necessarily thinking about all of the, the, you know, the connection, or how, you know, what are the different chains in the in the business there. That’s, that’s awesome.

David Goldfarb 7:45

That’s how I got started, actually. I started with three pool tables in a small sub shop in the university by the University of Central Florida. And that’s when I started doing that when I was 19 in college, my sophomore year.

J Darrin Gross 8:00

Oh, that’s, that’s so cool. That’s awesome. So clearly, you’ve grown beyond that. Tell us a little bit about what your business is now.

David Goldfarb 8:09

Sure. So that that really put us on a platform. And when I say a platform, it it it enabled us to eventually have our first family entertainment center or indoor Adventure Park here in Fort Lauderdale. It’s 160,000 square feet. And it encompasses go karts and bowling and arcade and trampoline parks and roller skating. And in 2019, we won the number one family entertainment center in the United States. And it was also my first commercial real estate purchase. So we actually bought the building and we operate inside the building. We do a combination of both. It’s also home to our offices have primetime amusements. So we have a 20,000 square foot office warehouse as well. And that’s where we do all our distributing from

J Darrin Gross 9:04

awesome. So the facility and 160,000 square feet that’s not a small retail facility is it all one story like a like a, like a warehouse industrial type,

David Goldfarb 9:18

tilt. So we were we were we were we were very lucky when we purchased the building. It was a it was a former warehouse, but it actually sat on a main road of i 95 which is on the eastern you know the Eastern the Easter Wade go all the way up from Miami all the way up to New York. So we were lucky we bought this piece of property because it had ample parking. And we converted a family entertainment we converted a warehouse to look like a family entertainment center or indoor Adventure Park. And it started off and as as growth. We didn’t we don’t we have a much bigger platform than we started off with. We started off with about 85,000 square feet. And then it eventually grew into 160,000 square feet.

J Darrin Gross 10:07

So did you add on a build, build an add on yourself? Or was there space available? So

David Goldfarb 10:14

so so the building the building, the original building was 350,000 square feet. And what we did was we Kondo the building. So we sold a third of the building to a trucking company called beacons, which is a very large trucking company. They have offices all over the United States. So they bought a third of the building. And then we have a, and then we bought as an individual company for primetime, we bought a section of the building that consisted of 20,000 square feet, which was dedicated. And we also have a gym inside the building as well, where a lot of professional athletes train called Hard Knocks. 365 and you’ll see a lot of pro athletes train over here, including Mike Tyson was training over here as well.

J Darrin Gross 11:02

Wow. That’s awesome. So you you acquire the facility in did you then start adding the the different components as far as the amusement opportunities? I mean, it sounds like it 20,000 square feet, that’s your current your office? Was it originally office space when you acquired it, or?

David Goldfarb 11:23

Yeah, so So what we did was we converted warehouse space into this entertainment space. And when we first started off, we started off with about 85,000 square feet that consisted of an arcade, a ropes course, laser tag, bowling, and go karts. And after year one, we were so happy with the revenue, that we knocked down the wall that was adjacent to our space, and we expanded the arcade, and then we added, added a trampoline park. And then we added a roller skating rink, and we added escape rooms. And then we added a mini golf, indoor mini golf. So we basically have almost every single attraction under one roof. And recently, we just added speakeasy bar, which is a big common thing going around right now, which is like almost like an underground bar inside of the facility. And you would never think that we would have that, you know where we’re located. So, yeah, so we’re, we were very, very happy with the results. And that’s why we continued to expand, going from 85,000 square feet up to 160,000 square feet. And it continues to do extremely well, I would, I would almost call us the Disney or the universal of the South. In the south Florida area. We attract about a million customers a year. So it’s really, it’s really been a real staple to the south Florida community.

J Darrin Gross 12:57

I’m kind of curious. So what is the what’s the secret recipe for the volume of traffic? I mean, that seems like a huge number of people to be, I mean, sounds like your business is extremely successful. But what what do you

David Goldfarb 13:13

The big thing over here is, is we’re really an eight dimensional facility when I say eight dimensional, you know, many, many facilities that are in our space, they’ll have either a go kart track, or they’ll have just a bowling center or they’ll just have a trampoline park. But what we encompasses everything. So this is basically one stop shopping. In other words, you can bring someone that’s five or six years old, all the way up to 80 years old, and they’ll find an activity to do so they the what we tried doing was was making sure that we could fit every single demographic that fit into a family style environment. And and in addition to that, we do a lot of large corporate events. We’ve had a lot of famous people over here at our facility including Shaquille O’Neal has been over here and and Mayweather has been over here. So we’ve had we’ve had Mike Tyson over here. We’ve had Evander Holyfield over here. We got a lot of we had we just recently just had Messi, the soccer player over here. So it’s, it’s really unique. The establishment that we have at extreme and extreme action Park. It was very difficult to duplicate this type of environment somewhere else. And what happened was in 2019, we purchased our first Sears department store in a place called Sanford, Florida, which is north Orlando. And we had said can we take and mimic extreme action Park and put it into a department store, where so many of these have become available, due to, you know, the exodus of the shopping era, going to either Amazon. And then COVID has really, you know, you know, has really escalated that you know that these availabilities of these department stores. So we purchased our first department store in September of 2019 directly from Sears holding, which is a company by Eddie Lampert based here in Miami. And we purchased our second department store, December of 2019, also from Eddie Lampert in Tampa, Florida. And thereafter, after we did these purchases, we started to facilitate the construction process for both locations. And then COVID hit. So our timing was not the greatest. However, we were able to overcome it. And we opened up our first location called elevate fun spelled e le V eight fun in Sanford, Florida, in a shopping mall. And we opened it December 31 of 2021. And we’ve been we’ve been very happy with the results. We just recently opened up our Tampa location, March may 28, of 2023. During this time, we purchased a third box in Jensen Beach, from Simon properties. And that also happens to be a Sears box. And these all consists of about 125,000 square feet, same similar footprint, eight dimensional facilities go karts, bowling, arcade ropes courses, indoor mini golf axe throwing. And we’re now in the process of purchasing our fourth box, which will be in Miami, Florida. And then we will purchase our fifth box later this year in Jacksonville, which will bring us up to five locations.

J Darrin Gross 17:20

That’s, that’s impressive. I mean, they the growth I mean, the recipe you’ve got it sounds like it’s definitely a success. Do you feel like this success is primarily based on having all of the different elements to where you can, you know, hit the age range from, you know, the young to the old and and make it a true family? You know, opportunity is that? That?

David Goldfarb 17:47

Yeah. So there’s there’s there’s there’s various components on the reason why we’ve been very, very successful. First, it starts off that the only facilities that we’re looking to move forward in our department stores inside malls. And the reason being over that is is first and foremost over here is generally speaking, you go to any mall in the country, and they got 6000 parking spaces, so you never have to worry about parking. That’s number one. Number two malls strategically were put in good locations, overall, where there is they’re very easily accessible to the highways. So this is also an important factor number three over here is you get the cross traffic of any mall, they can enter our facility from the parking lot, or they can enter our facility from the mall itself. So we’ll have we’ll have cross traffic on both on both variations. The fourth element being is we have an internal construction company. So we’re able to build these at a fraction of what these would cost if someone were to enter our industry. And I would say the the fifth element, which makes success very successful is that we have these eight dimensional facilities that consist of every attraction under run under one roof. That also includes a full food and beverage menu to be able to serve, you know all American food with about 60 to 80 television sets per location. So it’s like a sports bar atmosphere inside of an attraction venue that we try to keep these people over there three, four hours at a time. And yeah, our next, our next pivotal move, because of the success is we will look to add movie theaters, as a component to the venue. And these will be bowtique movie theaters that you’ll be able to have. You’ll be able to eat and drink inside the theater and there’ll be luxury style theaters that are, that can range anywhere from six to eight boxes, about 50 people or so per per theater. And they will have the opportunity to really enjoy themselves because there’ll be in a luxury style setting. This will not be traditional movie theaters.

J Darrin Gross 20:23

Yeah, I’m impressed. I mean, just the two things you’ve combined that are kind of, I’ve always been kind of like a head scratcher for me is the you know, the malls. I mean, I know the mall I grew up going to buy every pair of shoes and pair of jeans ever, you know, wore growing up, they knocked it down and built a Lowe’s. I was like, how did that happen? You know, and it’s just based on people that the Amazon effect and people stop going to the mall and, and just kind of the change of things. But I would think that the malls would be, you know, or the surrounding businesses would be delighted with the foot traffic you’re bringing is are you finding that to be the case?

David Goldfarb 21:04

Yeah, absolutely. I mean, we’d become basically the 2.0 version of what department stores were. So what what many people don’t realize is, you have the mall itself. And then you have department stores. So for instance, you’ll have a Sears, you’ll have a Macy’s, you’ll have a JC Penney, you’ll have a Dillards you’ll have a Kohl’s. And then you have the nucleus of the mall 70% of the time, the department stores are owned by the department stores, so they own their own real estate. And they own their own acres inside the parking lot. So we’ve we’ve really, we’ve really, you know, from the from the short amount of time that we’ve been involved in this business, we started learning development. And on our first property that we bought in Sanford, Florida, we have just recently worked out a deal to put a hotel inside of our parking lot, as well. And it’s going to be a mayor Marriott branded hotel. And we own the land. Because the department stores that we have purchased, they all come with approximately about eight acres. So we’ve we’re taking advantage of of the of the land that we have. And we’re we’re we’re building it adjacent to our elevate projects. And our first one being will be a Marriott townhomes hotel that will consist of about 150 rooms. And we’re going through a process with the city and a reciprocal easement agreement process, which is not easy, which we’re looking to navigate. And we feel that that the new setting for these mall type of environments, is is now eat workplace, you know, instead of traditional shopping, so you’re gonna see that that malls right now, in the future, especially in major markets, they’ll have hotels, they’ll now have a supermarket, they’ll now have apartments, they’ll have an eight workplace type of environment. And this is starting to become the new norm. And where are things where we think our concept really is going to really pull voters into the next, the next Ashkelon is the fact that we’re already taking 1/10 of the mall, by building 125,000 square foot facilities of entertainment. After entertainment. We happen to be building a hotel on property, what comes next apartments after that comes a supermarket. So we feel like we’re becoming a catalyst in rebuilding these moles, that that really are a dying breed. So look, shopping is going to still exist, because people want to feel in touch shopping. But you’re going to have a lot less retail type of environments, because of the fact that you’re competing with Amazon because of the fact that you’re competing, you’re competing with online shopping. And it’s very difficult, you know, to be able to match pricing. When these online shops, they don’t have to pay rent, they don’t have to pay employees, they don’t have to pay an air conditioning bill. However, retail will not go away altogether. There will still be components because there’s a large part of you know, there’s there’s still the social aspect of of actually getting outside your house and doing something and you’re just going to see these footprints, where you’ll see malls that were a million plus square a million, you know, plus square feet, you’re going to see them shrink down to maybe half that size. And then you’re gonna see things like a Home Depot or Lowe’s connected to these malls, well, they’ll knock down a department store, or they’ll put a hotel or they’ll put apartments. And that’s basically the new dynamic of what is moving forward in the mall environment. And that’s why we’re so excited to really launch our concept. And, in fact, actually, in December of last year, we were on CNBC, with with Kevin O’Leary of Shark Tank, and Bethany Frankel, in a series called Money core two, and we were the premiere episode on on the show, and you can find that on our on our YouTube site at Elevate fund, as well. And it was it was pretty, pretty interesting. We were the, we were the premiere episode of the show on CNBC. That was December of 2022.

J Darrin Gross 25:58

That’s awesome. I think the cool thing I’m hearing and, and just kind of recognizing is like you mentioned, the the Amazon effect has kind of changed the whole shopping experience and COVID kind of accelerated that. But the fact that there’s there’s a use and you’re able to, to, you know, fill the the vacancy created by the, the the exodus of the retail that traditional retail stores, to where those centers, I mean, they were huge centers in, like you said, where they were located in communities and stuff, but but reestablish that core in the activity. And what you’re bringing is an experience related opportunity, as opposed to a, you know, an object that you can buy online or in a retail store, whatever, but you can’t do the on you can’t do the experience online, you’ve you know, that social piece of your brain? Which I think people are still hungry for. I mean, they’re they’re definitely, absolutely, absolutely. So let me ask you, I mean, it sounds like your your plans to kind of go all corners and Florida, is there a plan to go beyond Florida?

David Goldfarb 27:10

Sure. So originally, I was born in New York. And you know, it’s it’s another, it’s another area of development between New York and New Jersey that I understand and, and eventually, we would like to move up the East Coast. The reason why we’re staying in Florida, first and foremost, over here, we wanted to perfect the concept. That’s number one, number two over here, it’s a big state, and it’s the fastest growing state in the whole country, you know, for many reasons. And we feel we could have, at minimum at minimum 12 to 15, up to 18 locations just in the state of Florida. So rather than rather than branch out into different markets, we figured from a management standpoint, it’s much easier to stay in the market that you know, we understand construction law for the state of Florida, because that’s a major component in what we’re doing. And on top of that, right now is there’s just just countless opportunities that we could do this, where we can just get in our car, and drive to a location as opposed to getting in a plane and start and doing this all the way in New Jersey. And we’re not there yet, frankly, I mean, really, to get to that next level, we would need to bring in a really much bigger executive team to get us there. And we’d rather perfect this concept. And I think we’re doing that, you know, we we’ve we definitely have made our mistakes along the way, but we’re correcting them.

J Darrin Gross 28:48

Yeah, I think I mean, I applaud your efforts and kind of the the growth strategy, there’s, you know, work out the kinks local where you can, it’s easier to manage rather than going wide and having less control. I’m curious you know, you mentioned the the the in house construction team and if he can speak to it or not, but is there any kind of a range of of dollars you expect to have to spend on a capital improvement to take a vacant series to convert it into the the property as you operate it?

David Goldfarb 29:28

Sure, sure, sir. So I guess the best way to answer that is is when we first we first started our first store, which was in Sanford, Florida, North north of Orlando in the same regional market, the Central Florida market. We got three bids from general contractors, and the bids ranged anywhere from $70 a square foot to $90 a square foot to give us a vanilla box, meaning when I say a vanilla box, we can then put in kitchen equipment we can then put in the arcade, we can put in the bowling. So in other words, just a conversion, if you take $70, which is the lowest square footage price on this, and you multiply that by 125,000 square feet, you start coming into numbers that these things could range anywhere from 10 million, all the way up to 14 million just in construction. You know, with that being said, this concept doesn’t become so viable. It’s not it, it doesn’t work for what we’re doing. What works is, is we need to be able to purchase these stores num first and foremost that the right number, so we can’t go above, on our purchase, really above $5 million on a department store, have 125,000 square feet, give or take. And then our construction, we’re doing it for a fraction of the cost of what we got these bids on. Because if not, this becomes unaffordable, it just doesn’t make sense, when you add up all the numbers, and then try to operate this. So you know, all in when we’re doing these projects, between the attractions and between the construction and building a full out kitchen, you know, these can cost unlike, let’s say 125,000 square foot footprint, somewhere in the neighborhood of 10 to 11 to $12 million, and you’re ready to open your doors. However, if I did it with just the construction cost, it would have cost me just in construction with third party companies 10 to $14 million. So that aspect really has enabled us to continue to move forward.

J Darrin Gross 31:48

And that’s huge to be able to control your cost like that. Mean and not have to carry that much. You know, the additional debt? Or I’m assuming you’re using bank financing, or you haven’t you’re raising capital or how are you?

David Goldfarb 32:04

So so it’s an interesting question. So the first two locations started off with me, and one of my closest friends that we were old roommates, actually 25 plus years ago. And we both started off with, with almost zero monies, so to speak, and we have actually financed the projects ourselves. And we don’t have any debt along the way. We’re doing this with our own money. And up to this point, our first two locations, we’ve done this debt free, our third location, I am doing this on actually on my own, as well as the fourth and the fifth location. As one of my closest friends. He he is right now doing other adventures, so to speak right now. So everybody’s involved with me on these first two projects, and it’s all going to be self financed. And there’s a reason why we’re self financing these projects, we, we knew that private equity will, has already come to us. And we wanted to make sure that let them know that we welcome them, but we don’t need them. And that’s the reason why we went this route.

J Darrin Gross 33:28

That’s that’s a huge feather in your cap not to have to be beholden to the lender or investors or, or anything like that. So congrats on your success and your ability to grow. And I’m assuming also that that gives you a an ability to kind of weather, you know, whatever economic cycles, you know, as opposed to, you know, you hear all the time about people go into business, and they they get a big note from the bank and, and, you know, market changes, plans change, you know, whatever it is, and all of a sudden it’s an it’s no longer and so to not have that dead load on there. I mean, that’s that’s a huge, huge benefit to you and your partner and, and the opportunity for your growth. I think that’s, that’s, that’s great.

David Goldfarb 34:23

I mean, I come from, like an old school environment I came from my father was in the military. And, you know, he has always kind of instilled with the notion, and it’s not necessarily the best practice, but it’s the practice that I grew up on that if you you pay for what you can afford, and if you could buy it, buy it. If not, you know you got all this additional pressure of financing. You know, all these different projects. What happens if there’s another COVID What happens if there’s, you know, a hurricane, what happens if there’s some type of natural disaster, you know, what happens over here is the banks are going to continue to have their handout, and they’re going to somehow force you to pay these dollars. So, you know, you know, rather than be under that additional pressure, you know, the, the plan was to take these first five locations, do it with internal monies. And then thereafter, we could speak to private equity. Thereafter, we could see, you know, what the next steps are, as we move forward. But, you know, we chose this route, and I’m kind of happy we chose this route. Yeah, I’m actually very happy we chose this route, you know, because, you know, we, we, we, you know, first, you know, we’re having a lot of private equity groups speak to us now. And when I tell them, that we’re a debt free company, they all their jaws drop, because, you know, you know, most of these guys, you know, when you go into a perfect example, is watching Shark Tank, you know, you watch Shark Tank. And what happens over here is, you know, the, the sharks, these five sharks that are, you know, listening to all these businesses, you know, they all have the upper hand, because all of these, all of these people that are starting these entrepreneurial type of things, they all need capital. And, you know, without capital, they can’t move forward. So what happens over here is the sharks, they come in, and they take a large part of the company, and then they start controlling the company, and if you don’t perform, they start owning the company. And, you know, that’s exactly what we didn’t want. So that’s why we took the route that we did.

J Darrin Gross 36:39

Yeah, well, I see it all the time, with not all the time. But I mean, clearly, in recent history, it’s played out numerous times, with the rise and fall of interest rates are just the right now we’re kind of going through a phase here, where there’s concern and a lot of the commercial real estate, and specifically a lot of the properties that you’re, you’re looking at, if, if it was or more like in the office space, where, you know, you you bought a building, and a few years back, you had a good interest rate, you had a full building COVID hit all of a sudden, it’s empty, there’s a lease in place that people are still paying on. But once that lease is up, you know, and there’s nobody, there’s they don’t have a need for the property. What’s going to happen? Are you gonna have to give the keys back to the bank? Or is there going to be something else that comes in that, that will fill that. And that’s a huge change of fortune, from, you know, thinking you’ve got the world by the tail, because you’ve got a full building and a low interest rate, and, and then nothing but smooth sailing ahead, and then you hit the storm and, and everything’s upside down. And, you know, it’s a, it’s a major to major situation, and a lot of commercial real estate is facing on what, what to do. And, I mean, I’m just, I’m happy to be talking with you, and finding out that you have found a use for a lot of that space, and are able to take advantage of some of the opportunities and, and also to do a debt free. That’s I mean, that’s, that’s something that I would think you’d be exceptionally proud of that you’re able to do that. Because that’s, that’s pretty rare. So congrats on that.

David Goldfarb 38:21

Yeah, I mean, I think the big, you know, I think I think what needs to be noted over here is that, you know, most people have got blinders on. When I say blinders, they just don’t look outside of a traditional box. And, you know, I think, you know, we have a model that certainly works, and we’re not deviating from the model, we’re buying real estate at a fraction of what it would cost to build. And then we’re repurposing the real estate through our own construction company. And we’re doing it at a fraction of what it would cost any other person that’s going into our space. And because of the fact that I know the attractions, because I’ve been doing this since I’m 19 years old, we are able to be able to do all three components, you know, that that nobody else is doing? So, you know, I you know, if the way to think about us is is is you take Dave and Busters, which is the one it’s these guys are, are are the king in our business. And what they’re doing over here is is they usually have these 50,000 square foot centers, that they’re leasing the building. And then they’re putting in a restaurant and an arcade. And they’ve been duplicating this concept. You know, they’ve they’ve really scaled to this where they have over 100 locations today. So we’re doing something similar to what they’re doing except our locations are about two and a half times the size. We own our own real estate. We own our own construction company, and we have the ability to continue to scale into markets all over the country, because there’s so much real estate that has become available. And, you know, the secret sauce, you know, in this whole equation is really buying, right? Understanding construction and understanding the operational aspects of what is necessary to make to the people come. And that’s why I feel, you know, by, you know, within a very, very short period of time, we will amass to a very, very large company, and there will be a lot of private equity groups that will be knocking on our door, which they already are, well, there’ll be a lot more, you know, as soon as we open up the additional locations, right, now we have two. And the third one is under construction. We’re buying our fourth location in, in nine days from now in Miami. And then we’re buying in Jacksonville. And these are all major markets. And by the way, three of these five properties are all in Simon property malls. And you know, if you’re an assignment property mall, you know, it’s good mole.

J Darrin Gross 41:08

That’s definitely a strategy with the location thing you’ve got figured out? That’s, that’s good. I’m curious. The thought process behind the branding. If I understand, right, you’ve got a different name. For each Is there any kind of thought that you can explain as far as how how you came up with? Are you? Are you keeping them separate? On purpose? Or is there or is there a bigger? Thought? Sure.

David Goldfarb 41:41

Sure. Yeah. So So primetime was the first company they started, and primetime was focused on arcade equipment, focused on rentals focused on sales. And we felt that prime times name worked for that part of the industry. But as a family entertainment center, we didn’t feel like it flowed very well, to our first entertainment center, which was called extreme action Park. And over here at extreme action Park, we did something that’s very unique, that’s almost impossible to duplicate, because of the fact that we converted this warehouse with ample parking into an entertainment center, that it was really almost impossible to duplicate what extreme looks like because you just don’t find warehouses with ample parking. And that are close to the highway, we’re actually on i 95, we have 500,000 cars that pass by our building a day. So so we elected to go with a new name, where we’re focused in mall environments, and we came up with the name, elevate, and spelt with an eight, e le V eight, to make us looked a little bit more edgy, a little bit more cool. And then we named our property company EA properties. So that’s where the name EA properties comes in. So that’s how it kind of formulated, whether it was the right decision the wrong decision. It was the decision we made.

J Darrin Gross 43:13

No, I think, you know, having distinction as to what the in each does is good. Will you continue to badge the new facilities under the Elevate? Will that is that the plan for those?

David Goldfarb 43:29

Yeah, so so so currently, right now, we’ve had the fortune, you know, to be able to buy these properties and, and we we are strictly going into malls department stores, because that’s how we get the square footage that we need. We talked about actually in one of our zoom calls with our ops team that in some areas where extremely high traffic areas for instance, and we can’t buy the property, but we’re able to go into a facility where it’s reasonable rent, and it’s under 15,000 square feet. We will come up with a very scaled small version called elevate social and this will this will consist of like duck pin bowling, and arcade equipment, full bar limited restaurant menu, possibly interactive golf in a 15,000 square foot footprints but where there’s massive traffic

J Darrin Gross 44:38

Well David, this is all very interesting and and I’m I’m excited to talk to somebody who actually found a way to solve the space issue I mean that you know, because it just it’s always been kind of a frustration to me to see these big huge malls just being knocked down. I’m gonna like why I mean, just got to see like just the cost, you know, the cost of build is so expensive. You know, absolutely, I mean, always thought to me, it’d be easier to renovate it and make it useful for something rather than just to start over. But hey, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to determine what to do with risk. And there’s three strategies we typically consider. First, let’s see if there’s a way we can avoid the risk. And when that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And so if you’re like us, my guests, if they can look at their own situation, your clients, the market, interest rates, political, whatever, whatever it is that you identify, and what you consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Sure. And so if you’re willing, I’d like to ask you, David Goldfarb, what is the BIGGEST RISK?

David Goldfarb 46:22

So if I’m going to, if I’m going to make this unrelated to let’s say, insurance or to anything, from an operational standpoint, I think the biggest risk that we’re seeing, or at least I’m seeing in these in picking these locations, is you don’t want to go into a location where the mall operate. Operator is like a Slumdog real estate mall operator. So you want to avoid that at all cost. And even though you have a separate entrance, leading into your building, the fact that you’re going into a mall, where they are basically treating the property as if it was a warehouse, so to speak, not the way the Simon properties do not the way Washington prime group does. Not not the way you know, some of these, you know, other large mall operators run in this type of environment, I would avoid at all costs. So So you know, there are there are certain certain players out there, and I’m not gonna mention names. But there are certain players out there that have been buying distressed moles. And if you happen to buy a piece of property that’s attached to that distress mold, the way they run their operations really is it’s unfortunate, because when you’re attached to what I would call almost a bad neighborhood, if I’m referencing that, no matter how nice your house is, you’re still in a bad neighborhood. So that’s what I would avoid at all cost.

J Darrin Gross 48:09

Yep, you can change the property but you can’t change the neighborhood. No, that’s good. David, where can listeners go if they’d like to learn more connect with you?

David Goldfarb 48:20

Sure. So a couple different things. One is is our our company is Elev8fun.com e le v8 fun.com. And it will show currently right now three locations, two of them that are opened and Jensen Beach which is coming online in the next five to six months. We have our social media, on whether it’s on on Instagram or Facebook or or Tik Tok under Elev8 Fun as well as our YouTube channel.

J Darrin Gross 48:55

Awesome. Well, David Goldfarb, I cannot say thanks enough for taking the time to talk today. I’ve learned a lot. I’ve enjoyed it. And I look forward to doing it again soon.

David Goldfarb 49:07

Absolutely. I look forward to seeing this on in real time.

J Darrin Gross 49:11

All right. For our listeners. If you’d like this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Announcer 49:31

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Neighbor Storage Unit with Joseph Woodbury – CRE PN #434

Joseph Woodbury 0:00

Unlike a traditional storage website where they’re going to find you know, one or two units in their area, and then it kind of take what they’re given, they’ll be able to find many options on our website. From commercial space, they can store near their business they can store near their residence. The top three things that renters care about when looking for a storage unit, our price, security and Location, Location being the most important of those three. The average storage facility is a 30 to 40 minute drive away, according to the Self Storage Almanac, because they’re all zoned industrial, whereas we can find you storage two doors down. That’s why we’re called neighbor.com

Announcer 0:39

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:01

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate and investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Joseph Woodbury. Joseph is the founder and CEO of Neighbor.com marketplace, disrupting the 500 billion self storage industry. And in just a minute, we’re going to speak with Joseph about how neighbor.com is disrupting the Self Storage business.

But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to sell handsome Our guests are Be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that I want to welcome my guest, Joseph Woodbury. Welcome to CRE PN Radio.

Joseph Woodbury 2:42

Thanks for having me.

J Darrin Gross 2:44

Well, I’m looking forward to our conversation. But if we, if you could take just a minute before we get started and share with listeners a little bit about your background.

Joseph Woodbury 2:53

Sure, yeah, we I’m I’m born and raised in Las Vegas, came to Utah for school went to Brigham Young University, spent some time kind of on the the banking and private equity side of things, before landing in consulting work for a consulting firm called Bain and Company worked on in the Senate for the US Senate Majority Leader. And then we started Neighbor. We’ve been working on Neighbor for about six years now. We launched it here in Salt Lake City, Utah. And to jump to the chase, we’ve now got active users in almost every city in all 50 states. So it’s, it’s going quite dramatically across the country. And and here we are today.

J Darrin Gross 3:42

Awesome. Well, I did a little research preparing for this conversation. And for the listeners, I wonder if you could just start by describing what Neighbor.com is.

Joseph Woodbury 3:56

Sure, so we’re a self storage marketplace, which enables individuals that have space to rent that space out to people that are in need of storage. And we started in the residential space. Six years ago, a very similar concept to Airbnb where they allowed people to rent out space for hospitality. We allow people to rent out their garage, their basement, shed their driveway for self storage, and we’ll store your neighbor’s boat on your driveway or your neighbor’s boxes in your garage. Again, that business grew to encompass all 50 states. And then about three, three and a half years ago, we started working with commercial landowners as well. Owners of office space or retail space or even multifamily where we’ll take you know, a large office building that may have suffered vacancies you know, on several floors for the last three or four years and we’ll take those one or two floors that are You know, have been out unable to lease out, we’ll convert them to storage. And we’ll quickly get them to 90 95% occupancy, similar concept in REIT and retail space, you may have a strip mall, where you have lots of suites, some of those suites rent better than others, maybe the suites in the back haven’t had a tenant in them for five years, we’ll take those suites and we’ll rent them out for storage, we do the same thing for parking. Oftentimes, commercial developers are required to build much more parking than they need by city code, we’ll take all of your excess parking, and we’ll rent it out for long term vehicle storage on our platform, we now work with most of the, you know, billion dollar retail REITs in the country, all across the country in and almost every major city. So that’s a strong component of our business as well. Overall, our mission is just to take space that is sitting on used on monetized that no one’s making money off of and repurpose it for this extremely fast growing self storage industry, which has a national occupancy rate right now. 95%, they can’t build space fast enough for this industry. And so we might as well not let space go to waste.

J Darrin Gross 6:11

That’s awesome. The especially the the expansion of your marketplace from the residential to the commercial. I love that. Sure. So let me ask you. So the idea how did it come about? Was this just wake you up in the middle of the night kind of thing? Or how did you come about the idea with Neighbor.com?

Joseph Woodbury 6:38

Sure. So I actually have to give all the credit for the idea to my co founder, who leads our product and design teams now. He six years ago had the need himself, which I think is where most good ideas come from. He and his wife had just gotten married. A week after they got married, they flew down to South America to work for a humanitarian organization down there. And they needed a storage unit to put their items in the States while they were gone. And he looked into getting a storage unit, and kind of had the same experience that I think most people have when they look into getting a storage unit. And that is that all the facilities close by were completely full. They didn’t have any, any vacancies, which is that’s a nationwide problem, over half of all storage facilities are completely full. And so he was going to have to drive a half hour just to the next city just to find a vacant unit. And they were going to charge him several $100 a month, which he you know, at the time, was working for this nonprofit. And as a student, he was like, I don’t pay several $100 a month for almost anything. That’s an incredibly large subscription payment. I paid $10 a month for my Netflix $30 a month for my internet. You know, $300 a month is a lot of money. And so he he looked for a different solution and found a friend that was willing to let him store in his garage. Well, fast forward four months later, they get back from South America, my co founder goes to pick his items up at his friend’s garage. And he just has the thought this was such a better experience, I felt so much more peace of mind. Knowing my items were in a nice clean garage in a neighborhood I trusted than in one of those dirty storage units. Plus, I saved a ton of money. Why doesn’t everyone do this? There’s got to be empty space in every neighborhood in the country. He approached me about the idea. I remember immediately thinking, why has no one done this before? This is such a good idea. Why doesn’t this exist? We started working on it together. And it resonated across the country. Again, we have people renting out space in their homes or their businesses in basically every city in the country at this point.

J Darrin Gross 8:53

Love it the mother of invention, the necessity kind of thing is the answer there. That’s awesome. So when you guys came up with the idea of just kind of curious how long did it take you to go from the idea to testing an app? Or? I mean, is it an app? Is that the primary way people?

Joseph Woodbury 9:17

Yeah, get on board. It’s it’s both a website and an app. You can you can find us@neighbor.com. Or you can go to the App Store and type in, you know, neighbor storage, or really type in anything where you can type in both storage or RV storage for the number one ranked storage app in the App Store. So we’ll come up whatever you type. And to answer your question, it didn’t take long we used what is kind of known as the MVP methodology, minimum viable product where to see if people were interested in this. We set up a very basic landing page that my other co founder there’s there’s three of us, my co founder Colton, he quickly put together a landing page where you could put your email in, if you’re interested in becoming a host or a renter, it did not have the sophistication that our product does today, where you can do almost anything, it just was a way to show interest. And then we would manually connect people with that we would call people up and connect them together the good old fashioned way through the phones. And when that became too much, when we were having too much interest, that it just did not make sense to do it through phones, we built additional functionality into the product. And that’s how it went growing until now, you can do what you can search on a map, you can find exactly the storage space you’re looking for. You can book it, you can pay all through, it’ll manage your reservation for the life of your reservation, it’ll automatically pay out the host, when it’s time to pay them out. It will, you know, you can you can get property protection for your items on the platform, you can do anything you want today.

J Darrin Gross 11:05

And that’s that’s so cool. So the business itself. So you talked about kind of the starting off in the residential space, and then moving to the commercial space. With the residential space, you kind of you were saying how originally you guys were basically connecting people, you know, with the phone, and I imagine that was probably very useful for getting some some live feedback. That a click may not tell you the whole story. But I’m curious, tell me about how, how does it work as far as where where do you guys sit in this relationship between the two parties? Are you a like an initiator or are you an ongoing providing the you know, fee collection and the red distribution, and facilitating all of the all of the interaction for the length of the interaction or how, tell me a little bit about where you start and stop and work?

Joseph Woodbury 12:09

Yeah, it’s the ladder. So we we sit alongside the full transaction. And we we try to provide a seamless, positive experience for both parties from start to finish. So we’re responsible for attracting the renters to our site, they come unlike a traditional storage website, where they’re going to find you know, one or two units in their area, and then it kind of take what they’re given, they’ll be able to find many options on our website. From commercial space, they can store near their business they can store near their residence. The top three things that renters care about when looking for a storage unit are price security, and location, location being the most important of those three, the average storage facility is a 30 to 40 minute drive away, according to the Self Storage Almanac, because they’re all zoned industrial, whereas we can find you storage, two doors down. That’s why we’re called neighbor.com. We can find the storage in your business park, because we’ve often got, you know, one of the offices or retail locations close by renting out storage through us. And so it provides you great location options, because there’s so many options, there’s price competitiveness, you can find very affordable options, you find more premium options, anything you’re looking for, then the renter, once they locate the space that they like, they can book that space directly. We do everything they put in their credit card, we process the payment for them, we’ll even ask them, we offer the the the best property protection of any storage company in the country. And we’re the only storage company that will give you up to $50,000 in protection for your items. And you can select a plan that’s right for you. And then you can check out the hosts will be notified, they’ll be notified of what you’d like to store in their space, they’ll get a chance to approve those items. And then once you’re approved, you move into the space. And it’s quite seamless and easy. We have a whole messaging platform that allows you to message back and forth between your hosts so you don’t have to share your contact information. You can do it safely and securely through our platform. We take care of paying out the host each month and making sure that they’re satisfied. We help the host manage their reservation and know if there’s anything they need to do. And then when it comes time to end the reservation. When the renters time to cancel we take care of that whole process and and move out as well. And then we find the host a new renter for their property.

J Darrin Gross 14:45

So the relationship between neighbor.com and the landlord for lack of I mean, is that what you call it the landlord or the the owners, right? Okay.

Joseph Woodbury 14:58

Well,we call it the host the It allows, okay, the host

J Darrin Gross 15:02

is there a contract between you and the host? Whereas the contract between the host and the the tenant or the, what do you call the? The renter the tenant? You call them the tenant? Yeah. Okay?

Joseph Woodbury 15:18

The renter, yes. Okay? The landlord, the tenant, the host and the renter. Okay, yes. So we have a terms of service that governs our website, it’s a very similar arrangement to if you’ve ever used Airbnb, or Uber, very, very similar late relationship where both parties agree to the terms of service that creates certain obligations between the two. So the renter and the host have obligations towards each other. And then also towards the platform, which is neighbor. But we’re a third party, ultimately, the agreements between you and the host. And we sit there, and we can help adjudicate that, you know, we’re responsible for making it seamless, easy, safe, and just overall relaxing experience, much more so than if you march down to that storage facility that’s on the edge of town, and you have to deal with someone you know, who may or may not know the answers to your questions, a lot of storage facilities, because they fill up so quickly, they don’t have to provide any sort of technology, many don’t even have a way to securely keep your credit card, you’ll give them your credit card, and they’ll write it down on it, index card and go stuff it in, in a filing cabinet. And, and, you know, run it each month. Whereas us we process payments to the same provider that Amazon does. So it’s very safe, secure transactions. And it’s just it’s the online experience that I think we’ve all kind of grown accustomed to words simple and easy.

J Darrin Gross 16:53

Got it? So the price of the storage, is that set by the the host, or is that set by a broad calm, or how’s that ran? Well, how does that

Joseph Woodbury 17:06

that’s set by the host, we provide the host the flexibility to set whatever price they would like. Now, of course, many hosts have no idea what price they should set for their space. Neighbor, fortunately, has the best self storage pricing data in the country. Because we not only are able to see all the publicly available Self Storage prices, and we pull those into our database, from traditional self storage providers. But also because we provide our hosts the flexibility to price at what they like, we get a lot of price variability, some hosts will choose to price quite low, other hosts will choose to price quite high. And we’re able to observe how fast they get rented and who gets rented. And we’re able to take all that data and plug it into a very robust algorithms, where when a new host signs up, we provide them a recommended price, we take into account their location, what features their space has, you know, is it climate controlled? Is it not? You know, what are the does it have security cameras, does it not? All these variety of things? What type of space is it? How convenient is it, and we’ve spit out a price for the host. And we say you’re 90% more likely to be reserved if you use our neighbor recommended price, but feel free to ignore us because ultimately, you’re a business owner, you can price how you’d like to, and we’ll do our best to get you rented. But if you want our best advice, here it is. And then in addition to that, we have a smart pricing feature, where some hosts will choose to go a step further. And they’ll sign up for smart pricing, where we set the price for them. And we can adjust their prices with seasonality and just make sure they’re always at the optimal price and not at optimal occupancy

J Darrin Gross 18:58

on it. So as far as the the fee for neighbor.com. What would one expect as a host?

Joseph Woodbury 19:07

Yeah. So we take the way we structure our fee as the host will set their price. And typically the prices that hosts are setting are are 30, sometimes 50% cheaper than a traditional self storage unit. So the renter is getting in almost every city or they’re getting the cheapest storage that you can find period. So the renter saving a lot of money. Renters on average save one to $2,000 a year by storing through our platform compared to traditional self storage unit. We like to say if you store with neighbor will give you a stimulus check and savings every year for the rest of your life. So it’s quite meaningful from the renter. So the way we structure pricing is we take what the host wants, what the host said they they wanted to earn, and then we’ll add a service fee on top of that, and we’ll charge that to the rent During the renters happy because they’re getting storage, even with our service fee for cheaper than they would a traditional self storage unit. The host is happy because they’re getting what they asked for, and neighbors able to make money on this service fee. Again, it’s very similar to what you’ll see if you go to Airbnb, or you’ll see what the host charges and then you’ll see like an Airbnb fee, we do a very similar arrangement. And then we collect that each month.

J Darrin Gross 20:26

Gotcha, gotcha. And so how do you go about, you know, screening or you know, what kind of measures are in place to ensure that the that you’ve got a credit worthy, somebody is going to do what, what’s expected kind of thing? Or how does that all work?

Joseph Woodbury 20:52

Yeah, we provide this is one of our big values as a platform. And the reason so many people like to do this, on our platform, we actually discovered when we started neighbour, we didn’t invent the concept of space sharing. It turns out that a lot of people had been doing this informally before they let their brother in law store their, their trailer on their property, what we did is come in and formalize it and make it safe so that everyone could do this. So number of protections we provide first, all of our hosts on our platform are ID verified. So so we we send them through a vetting system where they have to go through this pull questionnaire about who they are and what their space is, to make sure that they’ve crossed the bar to list on our space. We actually many platforms, they make this automated through technology, we do a lot of that as well. But in addition to that, we manually review a person and human manually reviews, every single space before it is posted on our platform, which I think is a step above what many marketplaces do. Then when the renter comes on, we require them to submit a full list of everything that they’ll be storing. And that list is passed to the host before the host approves the reservation, the host is able to review that list, approve it. So if the renter wants to store, say, construction tools, and the host doesn’t want construction tools in their space, the host can choose to reject that reservation. according to their preferences. Now, other hosts, they would love to store construction tools. And so they’ll approve that. And so there’s a vetting process that goes takes place there as well. We prohibited number of items on our platform. So that’s in the agreement that you’re agreeing to when you’re signing up on our platform. We don’t allow any sort of perishables like food, etc, on our platform. And then finally, we take additional above and beyond steps to protect both parties one again, renters can rest assured that they can select property protection plans, where they can get up to $50,000 in protection for their items. So if anything were to happen to those neighbors actually foot the bill to recover or replace those items. And then on the host side, they may worry what happens if a renter stops paying you asked about the credit worthiness? Well, neighbor, what we do is we say if the renter stops paying us, we’ll continue to pay out the host. So will will eat the will eat it, and will foot the bill to continue to pay out the host, even though the renter has stopped paying us and will take care of the process to remove those renters items. Because depending on the state you live in, there’s there’s different processes required to remove storage items from space. And we take care of all of that on behalf of our hosts so that they never have to worry about that. So we just again, we try to try to cover all the bases, so that a host can just say, I have space, here’s the price. And our insurer can say I want that space. And that’s all they ever have to think about. Because we take care of all the ancillary situations that honestly happen very rarely, but when they do come up, we take care of them.

J Darrin Gross 24:15

Yeah, I would think that’d be a lot of peace of mind, you know, having, especially if it’s a resident, you’ve got space and all sudden, you know, the rents aren’t showing up or going through the awkward you know, eviction or removal of the person and not perhaps knowing all the rules and how they continually change. How are the eviction rules for stuff as opposed to a residence?

Joseph Woodbury 24:46

Yeah, so many people may be familiar with tenant protection laws that you deal with when you’re renting a rental property out. For storage, they’re not as strict as that In some states, like, it’ll, it’ll take six months to remove a person, you know, a tenant from the Space Storage is a much simpler process that involves some notifications to the renter. And then if they still refuse to pay or come and collect their items, then it involves an auction process. Many people are not aware of that the renter stops paying, you can’t just throw those items away, there’s still the property of the renter, so you have to run them through a formal auction process. That neighbor, we take care of that. So we run we run the auction process, and we can commit to most hosts that, you know, if a renter stops paying, we’ll have those items out within 60 days of that date. So it’s a very quick process. And, you know, speaking of you may have many people that listen to your show that, that are involved in renting out space, not for storage, but for for tenants, a traditional rental property. And, you know, I think that’s a great comparison to our platform. And it shows how much further we go above and beyond, if you’re going to use a traditional rental management software, they’re not going to, I’ve never heard of one that would fit the bill, if your tenant who’s renting a house stops paying for that, you know, neighbor goes above and beyond there to help cover that for our hosts. It really is kind of a next level. Tenant management software.

J Darrin Gross 26:37

Yeah, no, I think that would be a big appeal. You know, knowing that the the mop up of if it comes on done is not up to the host. In just, you know, I’m kind of curious. Security wise, if you do have some sort of a situation and are like in Airbnb, a lot of the properties have like a key code, you know, keyless punch in the code kind of thing get in, is there any change of the entrance locks, etc, that that you find needed or is it kind of depends on the space or?

Joseph Woodbury 27:19

Yeah, so our hosts when they’re signing up their space, they get to select Access. There’s many different options for access to their space. And we give host flexibility and the access options that they select. For some of our residential hosts, they’ll select by appointment only. So they actually won’t even give the renter, you know, a key or access to the space, the renter has to make an appointment to come by visit the space and the host will let them into the space. And that’s how they manage it. And that’s not a problem from for most renters because you don’t store items you need frequent access to you keep those items in your home, you store items that you’re going to access once every six months or so. Many of our our commercial landlords, we’re doing a full build out. And we may put in keyless entry. And so each tenant is actually getting, you know, phone and Bluetooth code where they can scan into the space or, you know, a lock or something like that. That’s, that’s that’s their lock. So access varies from by appointment only to, you know, we have the option to do business hours only or after hours only or, or 24/7 access many people renting out space for vehicle storage will allow 24/7 access where you can come get that vehicle or RV or boat anytime you’d like. So runs the gamut depending on the space type.

J Darrin Gross 28:49

Tell me on how does the commercial space vary or differ from the residential and reason why I’m asking you’d mentioned about the build out or putting in storage? Are you leasing the space and then putting in the the storage equipment? Or is that something that the host is doing and you’re managing through the app and website,

Joseph Woodbury 29:10

that’s something that the host is doing so many times, you know, say it’s an office building, and it’s a 10 storey office building, and they’ve just, they can get tenants on those upper floors, because they’re more attractive, but they’ve just struggled to rent out the first or the second floor for years, they’ll come to us, we’ll put together a whole monetization plan for the first floor. And we’ll show them how much money they’ll earn on that first floor every year. And we’ll give them a few different options, you know, build that options, depending on the earning potential they want to have on the space. And then that landlord they can put up the capex to build that space out. It’s very affordable. This is not like doing some sort of like residential conversion or something. Storage is very, very cheap to put in on a per square foot basis, and then we’ll manage the build out on their behalf. So we’ll actually bring in the contractors, etc, to get the unit’s all built out, the landlord doesn’t have to worry about that at all. And then after a couple of months, when it’s built out, we’ll start renting out the space. So no, we don’t neighbor, we don’t lease space, we don’t buy space, it’s continues to be the landlord space their property, and they continue to be the revenue beneficiary. So all that revenue is coming to that.

J Darrin Gross 30:27

out it curious, I know Airbnb has run into some issues, local issues with perhaps zoning. Or, you know, limitations like in different towns or resort towns or whatever on on length of stay excetera kind of thing. Is there anything potentially that that faces neighbor.com In a similar kind of thing or anything like that, that’s on your rate or concern? Or?

Joseph Woodbury 30:57

Yeah, I think most marketplaces, whether you’re Airbnb or Uber, or you know, DoorDash, most marketplaces, they, you know, cities, they’re just, there’s 19 dozen cities in the country, and they’re all different. And so you run into items. Fortunately, for neighbor, we run into a lot less than those other platforms, particularly because we’re not dealing with people, regulations just go through the roof when you’re dealing with people we like to say, internally here at neighbor, and we often refer to Airbnb as being in the business of storing people. Similarly, Uber is in the business of transporting people. And there’s significant security risks with with activities like that, you know, going and sleeping in someone’s house that you’ve never met before, or getting in a car with a stranger in Chicago, when you land from the airport. Actually, sometimes just think it’s amazing that we, as Americans have become like accustomed to this, I think it’s, I think it speaks to the general friendliness and goodwill that people have, it turns out that people are very good natured. And that if you put the right systems and structure in place, we can do a lot more sharing than we anticipated. But back to neighbor, we’re in the business of storing items. So there’s a lot less risk associated with taking your Christmas decorations, and storing them in two doors down in your neighbor’s attic. One, because we’re hyperlocal, right, we’re not a destination marketplace, you know, you know, you’re never going to talk to your Airbnb host ever again, after you leave, you’re never going to talk to your Uber driver ever again, after you get out of the car. But our neighbor, we’re often joining people that, you know, they’re gonna have a relationship far, far beyond just the storage relationship, they live in the same community, there’s almost a social aspect to it as well. I guess I’m getting away from the question of local regulations, certainly, you know, some cities will have limitations on the amount of vehicles that you can have, you know, may be limited to, you know, two vehicles per person on a property. And so you have to pay attention to those, we advise hosts always make sure to check their local regulations to make sure that the space they’re renting out, you know, is not limited in any way. But in the vast majority of cases, like, there’s no limitations on having someone else’s stuff in your garage, you can have your own stuff in your garage, or you can have someone else’s stuff in your garage, the city or the municipality or the state, they don’t care which it is. So so it’s a much less invasive, you don’t run into long term rental stuff, because again, it’s not a person. It’s much less invasive activity.

J Darrin Gross 33:46

Now, it makes sense, I’m just kind of curious, because I know occasionally you’ll see something or you’ll hear something that especially in the insurance business, I’ve got clients or prospects that have approached or have, you know, the seasonal, or not seasonal rentals, they have just the short term rentals. And boy, when I hear about the money some of them are making, it’s like, oh my God, and then, you know, you hear about the the other side of it as a challenge with some of the neighborhoods and that kind of thing. Okay, that’s, that’s all you need. If you think you’ve got something great all sudden, you know, the rules, rules change and all sudden it goes from gray to nothing. So, some very aware of so, just to in the in the big picture. You know, you mentioned some statistics about the percentage of demand for, you know, the facilities been 95% Full in in, you know, just the Self Storage market. How big do you think the market is or how, I mean, as far as the, the potential for for neighbor.com. And, I mean, it seems to me, like you’ve got a lot of built in kind of just that locality piece that, you know, like building a new facility. You know, doesn’t have Have any

Joseph Woodbury 35:02

Yeah, I mean in storage it a lot of the most successful marketplaces I think, start in very large but somewhat forgotten kind of unsexy industries. You saw this happen with Uber and taxis, right taxis was just kind of this old, archaic industry is with Airbnb, and hotels, you know, they’ve made hotels exciting again, like who was who was talking about, like, you know, the local motel before Airbnb, just this huge archaic industry. And storage very much fits that bill is this old kind of archaic industry that people don’t spend a ton of time talking about. I don’t think most people realize just the sheer size of it. One way that helps me kind of approximate in my head, you can talk billions of dollars all day long. But just in terms of locations, we’ve now built more storage facility locations in the United States than we have McDonald’s, Starbucks, Dunkin Donuts, Burger Kings, Wendy’s Domino’s pizzas, Walmart Home Depot’s and Costco is combined. That’s, that’s how many storage and that’s not counting the units inside of them. Of course, each location has hundreds of units, that’s just counting each location is at one location. So storage is is a huge industry, you could fit every single man, woman and child in the United States, in a storage unit comfortably like they would not be squished together. That’s how much space we build. And yet, and yet, you might think, oh my goodness with with all of that space, it’s got to be sitting empty. But no, it’s the highest occupancy rate of any real estate asset class, much higher occupancy rates than hospitality much higher than office much higher than retail much higher than restaurant. It doesn’t matter what the category is nowhere comes close to 95%, average occupancies nationwide, the industry has really been trying to solve this problem. By building even more space than we’ve already built. The industry spends four and a half to $5 billion a year just on new construction. So we’re constructing $5 billion worth of new facilities every year. And guess what happens every year 100% of them get filled up. And the occupancy rate has actually been climbing. We’ve been increasing the amount year over year that we’re spending on new construction of storage, and yet the occupancy rate keeps going up, even though we keep building more. So that’s the size of the industry. It’s about a half a half a trillion dollar industry. The largest player in the space is a company called Public Storage. There are a 55 or $60 billion publicly traded company is their market cap. And yet, public storage being a $50 billion company, they only have six or 7% market share, meaning only six or 7% of renter’s nationwide store with them. That’s that’s the size of this industry. This is not like it’s very fragmented. So 85% of all market share in storage is controlled by mom and pops, Mom and Pop storage operators 90% of storage companies in the United States have four employees or less. So it’s a very fragmented, huge industry. And there’s not enough space to do we we just need a lot of space. And it’s it’s being exacerbated by this housing crisis that we’re seeing. That used to be that only the coastal cities were in an affordable housing affordability crisis. San Francisco, New York. Now, it doesn’t matter what large city you go to Milwaukee, Austin, Salt Lake, they’re all experiencing housing affordability crises. And as a country as a as a family as an individual. What do you do when you can no longer afford a home large enough for your family and your belongings? You buy a home big enough for your family and you store your belongings in a storage unit that’s much cheaper cost per square foot, then a home is then living spaces. And so storage. It’s got it’s got major tailwinds. We help to be a part of the solution here by crowdsourcing space rebel the unlock a lot. We don’t have to wait for space to be built. We can unlock a lot, a lot more space, millions and millions and millions of square footage can be unlocked through through the power of sharing. The renter is able to save money when they’re not they don’t have to pay those exorbitant prices to pay Before the building of new units, they just pay the host enough to where the host is content with space that they weren’t earning any money on before. And so any money they’re earning is a net benefit for the host. And that way the money doesn’t go to some $50 billion storage Corporation, it goes to their host, most of the money that neighbor processes through its platform does not go to neighbor, it goes to a small business owner, or homeowner or business owner, that is now earning 1000s of dollars a month, that can go to pay part of their mortgage can go to pay for their family vacations can go to pay, or if they’re a large REIT, that has faced in every city, they’re earning millions of dollars of ancillary income, that makes their investments more return at a higher IRR. And so it’s just so much more beneficial than going to some traditional self storage company. And I think that we can come in and at least take, you know, the six or 7% market share that public storage has, if not more. And so it gives you an idea of the size potential where public storage is a 50 $60 billion company. I think that’s the sides potential of neighbor, I think we can get to that and more.

J Darrin Gross 41:14

That’s fascinating, just the opportunity and the potential and just how you guys were situated. That’s great. Hey, Joseph, who if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker, and the assets, I work with my clients to assess risk and determine what to do with the risk. And there are three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we’ll look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, we look to see if we can transfer the risk. That’s what an insurance policy is. It’s a risk transfer vehicle. And the assets I like to ask my guests if they can look at their own situation. Could be or clients, your host your, you know, tenants investors, the political winds or you know, whatever it might be, and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Joseph Woodbury, what is the BIGGEST RISK?

Joseph Woodbury 42:30

Yeah, isn’t an easy answer. For me. Ironically, I think most people’s largest risk is is is in their industry or in their business itself. And, and I certainly think of risks there. But we’ve kind of talked about the storage industry, it’s it’s very robust, it’s not going anywhere. It doesn’t respond to recessions. You know, during the oh eight recession, when most real estate asset classes contracted by 60%, storage grew by 5%. So it’s very, like, counter cyclical and recession proof. And so actually, I identify our biggest risk as a company is, is we’re influenced not just by the storage industry, but because we’re a software technology company, we’re influenced by the venture capital industry. And if you look at other large marketplaces that have gone before us, they’ve raised a lot of capital to get to where they are. Airbnb is a $80 billion company, they just joined the s&p 500. So they are, you know, one of the most important companies in the United States of America. But they raised about $10 billion in capital to get there. You know, Uber raised north of $15 billion, and capital Instacart and DoorDash have both raised I want to say six or seven or $8 billion in capital. So most major marketplaces raised large amounts of capital today, you know, we operate in every city in all 50 states, we’ve raised a measly, you know, $65 million in capital. So I often ask myself the question, you know, will we be able to raise, you know, those those billions of dollars in capital, like marketplaces that have gone before us to reach the potential that they have, they have reached as mainstay brands in the United States. I think that’s, that’s the biggest risk. You know, when I, as the CEO, sit down and think it’s not the storage piece. Renters love us hosts love us host earning money. renters are saving money, they keep growing, they keep transacting, they keep coming to the platform. It’s, it’s, you know, we’re dependent on this venture capital industry. And it goes through different cycles. It’s in a pretty bear cycle right now. And that’ll continue to happen and it’ll keep going through bear and bull cycles. But will that affect us, you know, years down the road? You know, what we go through some bear cycle that forces us to use other means of funding and that sort of thing?

J Darrin Gross 44:57

Yeah, that’s fascinating. The the that risk that you face, I mean, that the capital markets and what they’re going through and kind of the ebb and flow of that certainly affects a lot of things. And

Joseph Woodbury 45:10

The Fed is my BIGGEST RISK.

J Darrin Gross 45:12

Right now. That’s, that’s, that’s been, you know, I think, kind of a theme here as of late with, with interest rates and the attempts of slow inflation and, and all that and, and, you know, hopefully, soft landing and we can continue on and, and pick up the pace again. And, and best of luck to that. Joseph, where can listeners go if they’d like to learn more or connect with you?

Joseph Woodbury 45:39

Yeah, so we, just like our platform, we’ve tried to make it easy to use the platform. But we’ve also tried to make it easy to find the platform. So the company is called Neighbor, and you can go to Neighbor.com. to either sign up as a host, or become a renter. If you’re a large landlord, and you have a lot of property and a lot of cities. Then you can also reach out to us we have several pages if you scroll down our homepage, where you’re able to submit your information. And we can get you in contact with an account representative that will help set you up across your portfolio. You can also email sales@neighbor.com. And then finally, we’re on the App Store. So you can find storage or list your space on our mobile app. Just search neighbor storage. The app is called neighbor. It’s on Google Play. It’s on the App Store. It’s on the Apple App Store. You can find this pretty easily.

J Darrin Gross 46:42

Awesome. Joseph Woodbury, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. I’ve learned a lot. And I look forward to doing it again soon.

Joseph Woodbury 46:53

Likewise, it was great to spend some time with you, Darrin.

J Darrin Gross 46:56

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 47:16

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Dallas Commercial Real Estate Market with Grant Pruitt – CRE PN #432

Grant Pruitt 0:00

2014 2014 is when Toyota announced that they were going to be moving to Dallas Fort Worth from Torrance, California. And at the time, I knew that it was going to be a big deal, but I really didn’t understand how much it was going to impact the market. Because they announced that they are going to go to Plano, Texas and they moved there in 2016. And at that point in time, literally, we were still grazing cows and horses on most of the land that’s out there. And if you drive out there now it is urban as you can get with, you know, 2030 storey buildings and shopping malls and, you know, restaurants and density, multifamily living excetera This is before the Cowboys moved their their practice facility out there and all the office space out there. I mean, literally there was there just wasn’t a whole lot out there. And Toyota built a city.

Announcer 1:04

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:24

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts have building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Grant Pruitt. Grant is the co founder and president and Managing Director of White Box Real Estate LLC. Grand Lodge the firm has a tenant focused real estate advisory investment sales and development firms to specialize in offering a custom tailored approach. And in just a minute we’re going to speak with Grant about the commercial industrial real estate of the market in Dallas, Fort Worth, Texas.

And before we get started, quick reminder, if you like CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. Without alone welcome my guest, Grant Pruitt. Welcome to CRE PN Radio.

Grant Pruitt 3:18

Thank you for having me.

J Darrin Gross 3:21

Well, grant I am delighted you’re here and looking so forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Grant Pruitt 3:32

So I was born to do real estate. I am fortunate from a background standpoint to have grown up in this business. My My parents are both real estate brokers. I started in this business when I was in high school, knocking on doors cold calling warehouses on the east side of San Antonio. And I loved it. I thought it was fun. I certainly didn’t want to do it as a living. I wanted to be a doctor as a kid because it seemed like they played a lot of golf and made more money than anybody else. So I did that when I was in high school when I went to I went to Southern Methodist University, which just got into the ACC excited about that and be a lot better games to watch than when I was there. But I I went to SMU they had a program called the BBA scholarship program and they took 100 kids from an incoming freshman class and they automatically accepted them in the business school. The only way I got into this program was because my resume was stuck to the back of somebody else’s resume. There was absolutely no reason that they ever would have let me into this program. And it was it was a once in a lifetime opportunity I knew and I I took it I was actually pre med when I went to SMU, because I still didn’t want to be in real estate. I thought that real estate would be a good side job for me while I was going to school. So I started looking for opportunities to work in commercial real estate firms just because of that, and couldn’t get anybody to hire me. Simultaneously. They, I through this program, I had the opportunity to take business courses because, you know, they they talk about majoring in business and studying business. And I remember as a kid, what is business? I had absolutely no idea what business wasn’t. And how do you major in something that you don’t know what it is. So suffice it to say, I had a really good time, my freshman year, and I needed to take some easier courses to get my GPA up so that I didn’t lose my scholarship. And I was pretty good at real estate. And I wouldn’t have bad at Spanish either. And so that from a educational background got me into it. And at the same time I kept looking for somebody to hire me, nobody would hire me. So I went back home. And my father said, You know what? He learned how to do warehouses last summer while we do office buildings this this summer. So I started working in helping him with office buildings the next summer and I got lucky, I went back to school, and that fall stream Realty hired me. And I got a job working as an intern doing downtown office leasing. And it was awesome. That was that was the break that I needed. I, I loved it. And I thought it was the just unbelievable, you know, I got to office in a 50 storey office building and growing up in the same Tonio area, you know, the tallest building was a 36 storey hotel. So I just thought it was unbelievable. And as I went through school, I did really well in real estate. And I really enjoyed working as a commercial real estate professional. So when I went to get out of school, I had been seeing all these tenant representative brokers, or real estate professionals, tenant advisors that were coming into town touring these listings that I had, and they seem to be having way more fun than I was, they were making more money than I was, and they seem to enjoy it a lot more than than then then I was enjoying what I was doing. Because, you know, the tough thing about being on the leasing side is you can show a space 100 different times, but nobody leases it because you really don’t have any control over that. And they always teach you, you know, after the listing when they tell you that they didn’t select your building, well, what could we have done different? And the answer typically was well, if you tore the building down, moved it to another location had a completely different design configuration different space and built it somewhere else, then we would have leased it other than that you had no chance of ever leasing this and I had a I had a couple of spaces that had this sub this cutback in them with a column there and so that really inefficient and I knew that and I said you know what? I’m gonna I’m gonna try representing tenants. And I’d like say the rest of his was history, but it wasn’t. So I started when I first got out of SMU I started working on the tenant side at stream Realty and I say oftentimes it was a wonderful experience, you know, stream had just turned 10 years old. I think they’re 25 years old or something like that. Now, you know, they had their headquarters in Dallas they had just opened Houston and and Austin San Antonio now they’re all over the place. They’ve gone from, you know, what was a boutique at the time to being a really a large national force. And I was fortunate in a couple of ways and that a I got the exposure to the founders of stream Mike McBean and Lee Belen. I mean they were there day in and day out every single day, I used to go to lunch with them, they probably don’t even remember going to lunch with me, but it’s very impactful for me at the time. But what I found was real estate companies, when they’re boutiques typically have a bent and they had a leasing bent and I was focused on the tenant rep side. So it really was was a difficult place to do tenant representation. And I had a cousin that was working at Cushman and Wakefield. And he knew that that I was struggling. I mean, I was really struggling and he knew that I was looking for a good mentor in the tenant rep side. And he called me said hey, there’s there’s a guy that works here Cushman. He’s, he his his, the the junior that worked for him, went to go work for some startup that nobody’s ever heard of called Salesforce out in California. Probably a terrible move. And if he’s listening to this, I think it worked out okay for him. He, he’s done very well for us. But it opened the door for me to go work for Mike Wyatt and Bill McClung. And they were fabulous mentors for me. I had a junior broker that was kind of a co partner, if you will, will. And that really launched my real estate career was working with him and for them. And at that point in time, Cushman and Wakefield in the state of Texas didn’t lease buildings. This was before the cousin’s acquisition. This was before the DTZ merger, and it was a tenant rep only firm. And that’s what I did. That’s what I specialized in. I absolutely loved it, you know, the industry started to change, the company started going public. Cushman was acquired by TPG, Texas Pacific Group that also acquired a company called DTZ. They were going to merge them take them public, they ended up doing that. And I really saw a change in the industry, I saw shift from what I used to do, working with tenants, buyers, users of office and warehouse space, to focusing more on facilities management, and what they considered sustainable recurring revenues that Wall Street was demanding. And I got really lucky, because I was I was frustrated, I knew that the business was changing, I knew that the industry was changing. And I had a really good friend and client. And my intent was to call a couple of clients that I was really close with and tell him that I wasn’t sure what I was doing. I was looking for some advice.

He travels a lot. And he happened to be in town and I happen to have done his office lease directly across the street from where our offices were. So I called him up and I said, Hey, I want to see if you know you’re around in the next couple of weeks, I’d come by your office, I was like, Well, I happen to be in town today. And I have an hour that’s available. So you know, call it a godson call it whatever, it was amazing. So I go over to his offices, and I said, Hey, look, this is what’s happening. There’s a change in the industry, I’m not sure really what to do. You know, I could change the jersey, but it’s still be playing the same game and wouldn’t be any different. And he said, Well, you know, have you ever thought of starting your own real estate firm? I said, Well, I thought of that. But you know, I’m a, I’m a good young real estate broker, a good young salesperson, anybody that’s in sales, and I don’t have enough money saved up to be able to launch a real estate business. And he said, I will tell you what I want you to go home, think about what it means to own and operate a business. If that’s something that you want to do, I want you to put together a business plan for me. And I’ll be back in two weeks. If I like it, I’ll back your business. If I don’t, or if this is something that you don’t want to do no harm, no foul, we’ll part ways. And that’s how whitebox got started. I had the lucky golden ticket. And you know, I haven’t looked back though, seven and a half years ago. And here I am today. And as a company, we we focus on tenant buyer user representation of office and warehouse space. We have a group that does investment sales, specifically in the RV and self storage units space. We’re growing that one as well. We have an office, our headquarters here in Dallas, we have an office in Houston, we have an office in Fort Worth, we have an office in DC, and we have a little satellite in Austin, Texas. And we’re continuing to grow. We’re continuing to grow our headcount. We’re continuing to expand the business. And we’ve been fortunate to do about in the last seven years, one and a half billion dollars worth of real estate transactions. I’d like to be able to tell you how many 100 million square feet were the space that is, but I’m not really sure what that is. You know, and I know in one year we did deals in 44 states, six countries, three continents at this point in time. I think you’d be hard pressed to find a state we haven’t done work in. And I know we haven’t done work in Antarctica, but that may be the only continent that we haven’t worked in. And so, you know, we’re we’re full service on the tenant side. You know, I say we’re like a visa anywhere they want to be that’s where we are. That’s where we’ve done work. And, you know, we work with with groups that are are small we work with very large publicly traded corporations and everything in between?

J Darrin Gross 15:06

Wow, that’s an exciting kind of a story there from your start in high school. And you mentioned both of your parents were in real estate, were they both commercial or were was one residential or?

Grant Pruitt 15:20

Yeah, all commercial. So my mother was in Residential Lending, or excuse me, commercial lending, non residential, commercial lending in the 1980s. My father was working for a developer in the 1980s. Neither one of them was doing that by the time the 19, say 9293 94 rolled around. Because if you’re familiar with the real estate cycles, especially in Texas, just about every bank, except for Frost Bank failed in this state, including the bank that my mother worked for, all the developer developers, or most of the developers went out of business, and a lot of people ended up going into the tenant rep space. And so actually, both my parents are tenant rep brokers at this point in time.

J Darrin Gross 16:10

That’s, that’s definitely in the family. And sounds like you’re you said your cousin was also, I have also

Grant Pruitt 16:16

Yeah, have a cousin that does multifamily. My brother is a leasing agent in Houston. I have two uncles that are in commercial real estate. And, you know, I do get people all the time that say, Well, how long are you going to do this? And how long is your family going to do this. And that’s what’s great about the business that I’m in is, it’s kind of like being an attorney, you can dial back the hours, but you’re always off counsel. That’s what what I do is like is that you may not have to do it at the same pace, but you don’t ever have to get out of it. And so what you find is a lot of people like me love what we do. And I’m like, you know, I just I don’t know, if I’ll, if I’ll ever really hang up the cleats? You know, I can’t imagine the idea of not doing what I’m doing. Because it makes me happy.

J Darrin Gross 17:05

Yeah, I I would guess so. I mean, based on, you know, just your, your path there. And it sounds like you’ve had the challenges early on, and how the industry has changed. I think that’s one thing that I think it’s a, you know, more recent for a lot of industries, just the the interruption or the, you know, the the opportunity to change, whether it be the technology or just the financing or or the investors or whoever it is, it seems like there’s been a lot of industries that have gone through change. I was curious, you mentioned the change that happened and and with CBRE or Cushman, you said, you’re with they when you when you started, they were primarily a tenant rep. Firm

Grant Pruitt 17:54

in Texas. And they were much smaller, you know, they’re probably six to eight times the size now that they were then maybe maybe more than that.

J Darrin Gross 18:09

Got it. So is that is that pretty much you mentioned, like Wall Street, kind of the facilities management kind of model to, you know, continue to get those recurring revenue streams is that is that pretty much the model now that most of the big commercial real estate brokers are using this and more that facilities management so they can have those consistent revenues?

Grant Pruitt 18:32

Well, publicly traded or firms with publicly traded debt, which most of them are at this point in time, they derive over 50% of their revenue on that. As a general rule of thumb, most of the big publicly traded real estate companies derive about 85% of their revenues from working with landlords. It didn’t used to be that way. 1520 years ago, but it’s evolved to that. Because it is lame, it is Wall Street driven. And and, you know, I totally get it. Wall Street doesn’t deal with the seasonality that the brokerage business has, you know, the, I’m in Dallas, and in I’m so glad that we’re out of the summer, because in August, it was almost 100 Nate every single day. And you can imagine how many people were here in Dallas, wanting to talk about office or warehouse space, when it’s 100. Nate, they were all in Aspen or somewhere that was much cooler than then this part of the country. And so, you know, what you see is you see an ebb and a flow when you’re I mean, we’re transaction, we’re transactional business, we’re service business. We’re not, we’re not doing monthly retainers, like you would be if you were selling light harvest systems or, you know, facilities management or or just, you know, HVAC management systems, energy management, etc. Even consulting services. So it’s I think it’s hard to be publicly traded. And talk about that ebb and flow based on seasonality. It’s a lot easier to do that when you’re publicly or excuse me when you’re privately held.

J Darrin Gross 20:42

And so, you lightbox you guys started out? More on the tenant rep side? Did I understand that you’ve also kind of migrated into a little bit of the the sales, leasing tax. So

Grant Pruitt 20:57

we’ve always done the investment sales side, for office and for industrial. In fact, the building that I’m sitting in today, we represented the the buyers of this, of this building

the Self Storage in our V parks is an expansion from what we have historically done. So yes and no.

J Darrin Gross 21:27

Yeah. Well, talking about Dallas, in the in the metro area for Dallas. From an outsider standpoint, you know, all I hear about is how Dallas and Texas and Dallas specifically is just kind of a magnet for business. You know, grow grow grow in inbound migration. Is that I mean, is that the case? Are you still seeing that to be the case?

Grant Pruitt 22:01

Yeah, 100%. You know, the best way I’ve heard it described, the, there’s a gamma office that says, The best way to describe our inbound inbound migration is there is a 747 that takes off somewhere in the world, and lands at DFW airport, and all the people get off, but they never leave. And it happens 365 days a year, because that’s basically how many people are coming to the Dallas Fort Worth metropolitan area every single day. So every day you’re adding that and we’ve seen that from a from a headquarters standpoint as well. Goldman Sachs is is building a headquarters that’s supposed to bring 5000 jobs. Frontier Communications, just announced that they’re going to be relocating right around the corner, in Uptown Dallas for 3000 jobs. Wells Fargo’s building a headquarters that’s 3000 jobs. And those are really big ones not to mention, you have groups that are bringing several 100 jobs like Fisher Investments and so forth. It’s not so much those those relocations that drive the business it is, but it’s everything that’s that’s in and around that. And you know, I go back to 2014 2014 is when Toyota announced that they were going to be moving to Dallas Fort Worth from Torrance, California. And at the time, I knew that it was going to be a big deal, but I really didn’t understand how much it was going to impact the market. Because they announced that they are going to go to Plano, Texas and they moved there in 2016. And at that point in time, literally. We were still grazing cows and horses on most of the land that’s out there. And if you drive out there now it is urban as you can get with, you know, 2030 storey buildings and shopping malls and, you know, restaurants and density, multifamily living excetera This is before the Cowboys moved their their practice facility out there and all the office space out there. I mean, literally there was there just wasn’t a whole lot out there. And Toyota built a city. It really is a second downtown in Plano, Plano, Frisco. It is there because Toyota made that statement and brought their headquarters there. About 2000 Oh, probably 2014 15 My brother hadn’t moved to Houston yet and was leasing a couple buildings across the street or across the freeway from where Toyota was Going in, in a walk through this building that he was leasing, and he said, Yeah, 95% lease and I said Really 95% lease and he said, Yeah. And I said, Well, who were, who are these tenants? And he said, they’re all Toyota vendors. He said, they’re all coming. And they’re leasing space with one to three people, because this building had 1500 foot spaces that that’s all they had in this building was 1500 foot spaces, kind of a little bit bigger than executive suites, but smaller than what a traditional office space would be. And he said, they’re all moving here, because they do work with Toyota. And they need to be here close to their headquarters, and then the intent is to grow and take more space once they get presents. And that’s exactly what happened. You know, they came and took those small 12 1500 foot spaces, and now they’re in 10,000 feet or, and 20,000 feet, or 15,000 feet, or what have you, because they’ve grown and expanded with Toyota. And oh, by the way, there’s other vendors that service them, and they moved to the Metroplex to be able to service them. And so it really is this trickle down effect that you see. And that’s what we’re going to continue to see on the office side of DFW back, there was an article that came out yesterday that there’s two metropolitan areas out of the largest 15 metropolitan areas, and there’s only two that are expected to have positive absorption, and that’s Dallas, Fort Worth in Houston. And I think that that’s going to be B, I’ve no doubt that’s going to be the case.

J Darrin Gross 26:43

Now, that’s, that’s a, quite a, you know, kind of a, a, I’m trying to say some sort of a, the exponent kind of a factor of a, you know, a large manufacturer moving to your your state or to your area. I mean, like I said that. I don’t remember how many jobs was you said that Toyota was bringing, but then all 1000 That was? Okay. So I’m just curious, do you have any sense of the number of jobs created beyond the the Toyota, I mean, all the support industries that work with Toyota and all I mean, that to me is, that’s an amazing,

Grant Pruitt 27:21

my stats are really stale. They’re probably about seven years old at this point in time, which was right about the time that Toyota had moved in. But at that point in time, there’s a there’s you have the Dallas North Tollway that runs north south. And Toyota is on the west side of the Dallas North tollway. They’re on the south side of highway 121. And the Dallas Cowboys and there’s a lot of other corporate users that are on the north side of 121, just on the south side of 121, seven years ago, and it’s you could probably make the case there’s double that now, we went from six to 8000 jobs on the south side to 25,000 new jobs. So that was 4x. And that’s a lot more than just the 4000 people that came with Toyota, I would say that it might even be greater than that on the north side of 121. You may have seen it go to, you know, 3040 50,000 jobs on that side. So I don’t have the exact stat for you. But I can tell you that it’s it’s just astronomical. And that’s my point is, you know, that was 4000 jobs. Wells Fargo’s 3000 jobs, Goldman’s 5000 jobs, frontiers and other 3000 jobs. And, you know, the the list keeps growing and growing and growing. And you know, and that’s just, that’s just on the office side, not to mention the industrial side, which which I expect to continue to grow.

J Darrin Gross 28:54

Really, so the number that you were talking about the the Forex, that’s you’re just talking about Office, not not the

Grant Pruitt 29:01

Office users has nothing to do that’s irrespective of anything industrial in to add to that. You know, the the, we did a, we did a study and looked at how many office jobs we were anticipating, and this is two, three years ago. So the data is more stale now than it ever has been because we’ve had these announcements of new relocations. But we went we took a look at all the new jobs that were anticipated to move to the state or to DFW, specifically over the next seven years. And then based on that job creation, we figure that it’s typically about 300 square feet per person is the metric that Dallas Fort Worth uses, you know, other metropolitan areas could be a little bit you know, denser, but we’re about 300 square feet of person. So if you took how many new jobs were coming to Dallas Fort Worth, multiplied it times 300 square feet per person. And then you absorbed all of the vacancy that’s out there, because it was 900,000 jobs that were coming here. That was 22 point 7 million square feet. That’s no excuse me. Yeah, two point no 270 million square feet is what the number was that we calculated, we would need to be able to accommodate all those jobs. We only have seven, eight 80 million square feet that’s vacant in DFW right now. And like every other metropolitan area in the country, there’s a lot of functionally obsolete product that may have not been functionally obsolete, that is Class B product that no one is going to want to lease, we had some class C product. So let’s just say that we leased all of that, we would still need 200 million square feet, to be able to accommodate everybody that was going to be moving here over seven year span. Now, let’s just say for sake of argument that only half of that gets absorbed because of a hybrid work model. Okay. So instead of 270, you’re looking at 135? Well, you still are short, call it 70 million square feet, and that’s a view absorb all the dogs and cats that you’re not going to absorb because, you know, they’re functionally obsolete, they’re undesirable product, etc, etc. So the fundamentals long term are exceptional in this part of the country.

J Darrin Gross 31:46

Yeah, I mean, that’s, that’s a definitely a demand curve, you’d want to be on if you’re, you know, in real estate, and you’ve got that many jobs and, and people need space. That’s, that’s a great thing. So speaking of the, the kind of the supply demand, is the, I mean, is it just booming with new construction down there, too, are?

Grant Pruitt 32:12

We’ve had the same challenges that everybody else had, you know, 18? Yeah, 18 months ago, 1218 months ago, the hike in interest rates did not help construction financing. And there’s, there’s pros and cons to everything, you know, to everything, there’s an equal and opposite reaction, right. So you hear people say, well, development is is is going to stop and die. And that very may well be the case, we haven’t seen the new starts that we had seen in the past, there has been a real challenge to get the construction financing, to build some of these projects. And these are even projects that are pre leased, even there was one that was pre leased, had a bank as an anchor lease tenant, and they couldn’t get the financing for it. And you know, we’re seeing and hearing more and more stories about that. That’s, that’s a con that we can’t build that product. The the result of that, though, is that when you constrict the construction you when you constrict the supply, and the man’s demand is continuing to go up, even if it stayed level, but it’s continuing to go up, it is going to increase the value and increase the prices and the demand is only going to get more and more competitive. Because we’re not going to have that product. You know, if you look at a a high rise office building, it’s going to be three years to build that. And that’s once you get the plans and the permits, and you’ve broken ground on it. So if we’re not building anything for three years, and you see that stop, it’s it’s going to correct some of the high vacancies that we’ve had in the past. Not to mention, the biggest change that we’ve seen is changes in uses, or reuses of buildings. We’ve seen a lot of vacancy in downtown Dallas, go away because it’s either been transformed from an office building to a hotel. It’s been transformed to apartments or condos or it’s gone to some other type of use. And so that does that continues to impact and constrict the supply. And I think you’re going to see more and more of that in in good areas, I think the challenge, you know, I was talking to a buddy in Chicago. And they’re the opposite of what DFW is as far as conversions and, you know, adaptive reuses. So, for me, I said, you know, downtown has so many buildings that they’re converting the uses to or doing a mixed use. And I said, quite frankly, that may be the only class B product that from an investor standpoint I like, because you have the ability to convert it to a different use. Because I’m in Dallas Fort Worth, we have a lot of product that is on the northern edges of the metropolitan area, that’s 1980s products. So now it’s 40 years old. It’s brown brick. It’s two story atrium product, and it’s got surface parking. And it’s four streets off the interstate. Nobody wants to office in that product. And I don’t know what you do with that product, because you can’t really convert to use. You know, I’ve heard a story about a building like that that was under contract. And they said that they were going to turn that into warehouses. There’s a lot of pushback from the communities that are saying, well, this is an office building, we have homes right here, we don’t want warehouses there. And a lot of the problems on the fringe, you know, that’s where we don’t have industrial product, because there was so much pushback, and you couldn’t get the permit, you couldn’t get the zoning, it doesn’t really make sense to make them multifamily, either. So what do you do with this product? I don’t know the answer that if anybody’s listening out there, please let me know what the answer is. And we’ll go make a lot of money together. I don’t think anybody knows what the answer to that is now. But I say that, you know, I was talking to the buddy of mine in Chicago. And he said, Well, downtown is where we’re not seeing adaptive reuse, where we’re seeing adaptive reuse is in the class B suburban product, because that’s where everybody wants to be. And so you know, every markets different I think the one unifying thing, though, is that there is the workforce has changed. You know, if anybody thinks that we’re going back to the way that we had worked in the past, I think that’s just a mistake, because we opened Pandora’s box. Now you just got to play the hand that you’re dealt, and our class a class double a product and Dallas Fort Worth, like most of the the cities around the country, doing exceptionally well 10% vacancy, potentially less, and most of your class, a class double a product is staying very well least, I attribute that to downsizing. You know, there’s people that were in 30,000 square feet of Class B space, and that same brown brick atrium style surface parking building, and they’re like, you know, half my workforce isn’t coming into the office, the other half comes in three days a week. Instead of leasing 30,000 square feet, let’s just go lease 10,000 square feet in the nicest building in DFW, and it’ll be better for the people that want to come in, it’ll be nicer will enjoy it more, there’ll be more amenities. And we’ll save money, because there’s, we’re going from 30,000 feet to 10,000 square feet. So it’s a win win win all the way around. And we see more and more and more of that. And so you know, that’s why you have the tale of two cities with the the higher end product doing very well. The Class B product, which historically from an ownership standpoint was always considered safe. The reason it was safe was if you were in a class C building and the apart and the economy did well, then you move into a class B, if you’re in a class, a building and the economy did poorly, you moved into a class B, we just don’t see that there’s this huge, huge void huge schism. And I think everybody in the United States is trying to figure out how we accommodate those Class B buildings.

J Darrin Gross 39:19

Yeah, no. And you mentioned that kind of a couple blocks off the interstate two storey brick with atrium. I mean, that was pretty much that was the move back in the 80s. Where, you know, everybody was going to suburban, kind of the office park as opposed to downtown and, you know, funny halloween blows.

Grant Pruitt 39:39

If you think about office buildings, I honestly I didn’t think that you could get more amenitized than we already had been with buildings. You know, because it started very slowly. I will put a conference room in the building we’ll put a tenant lounge in the building we’ll put a fitness center in the building and everybody followed suit and now you have golf simulate. Laterz pickleball courts the, the amended zation of these buildings blows my mind. Well, you can do that with bigger buildings, you can’t do that with a 50,000 square foot Class B Building. And that’s from an investor standpoint, that’s where I see the biggest schism, as well, as far as you know, there’s a, there’s a bid ask spread between the buyers and the sellers. And that, you know, you have a seller who, let’s say they have $100, a foot bases in a 50,000, square foot, two story building, I mean, that’s, that’s about right 25,000 foot floor plate, two of them. So they’re in it for, what’s that $25 million 100 bucks a foot, you’re gonna get 30% site coverage on one of those buildings. So that’s 75,000 square feet. For round numbers, let’s just say that it’s, it’s 100,000 square feet. So we’re gonna, I guess, for 50 million, right, we’re at 100,000 square feet, if you just sold it to the dirt for that, you’re looking at 20 bucks a foot 20 bucks, a foot is not sustainable, at this point in time for industrial development. And some of these guys are in them for 234 100 bucks a foot, you know, I’m just picking 100, you have to your there’s going to have to be a reconciliation, that, you know, the value isn’t there, you’re really buying the land value, buy it for the land value, scrape the site, and then put something on there. But that’s if and only you can get the zoning. So that’s why I think everybody’s scratching their head saying, what is this going to look like? How is this going to shake out? What’s going to happen when these loans come due? Because there’s there’s two things, really three things going against them. Number one, the the tastes have changed. Number two, the interest rates aren’t helping them out. And number three is kind of in line with number one, but the workforce is changed. So I don’t know what you do.

J Darrin Gross 42:21

Yeah, I think that, you know, what you’re saying this, what I’m hearing, you know, everywhere else, and, you know, I drive around Portland, Oregon, you see a lot of the, you know, office buildings, first story, second story are empty. And, you know, if you go in one, it’s like, you can walk along waves before you can see somebody it’s kind of weird,

Grant Pruitt 42:45

but it’s relative, different product type. And it’s different markets, because they’re it’s also some market specific as well.

J Darrin Gross 42:53

Yeah, absolutely. And they’re like, yeah, when I say Portland, there’s a lot a lot of pain in the downtown, but the the otter burbs are doing pretty well. And there’s been that migration, you know, I think it’s like I said, it’s kind of the workforce has changed, where people want to be as change the product. And then also the space demand, you know, the requirements they need for the space, like you said, if they had 30, now they’re moving down to 10, they get a nicer space. People come in a couple times a week, as opposed to five days a week. And it’s it is just kind of a change. And I don’t know that it’s all for the better. It’s just different.

Grant Pruitt 43:31

Different i It’s too early to tell if it’s better or worse.

J Darrin Gross 43:34

Right. Right. Now, there’s, I mean, there’s definitely some convenience factors. I mean, certainly the commute from, you know, the bedroom to the office is a lot shorter and easier than, you know, getting in traffic with everybody else kind of thing, but the community and the sharing of ideas, and just the, you know, being around people. And and I think there’s some work, that it’s hard to measure when you’re in the space together. And I’m just curious how long it takes before people recognize that that’s, there’s more of a benefit there than than not. And, you know, can you see that grow back? And maybe you won’t, maybe we’ll be all this kind of zoom talk and stuff. But I would think that just that, you know, some sort of a well, I don’t know, it’ll be interesting to see, which is, you know, what, what it evolves into, and we’ll be there when we get there, I guess?

Grant Pruitt 44:29

Well, we’re hearing from our clients from I mean, even from our own experience, that the biggest challenge is training for workforce that doesn’t require training. The Virtual Office works exceptionally well. It’s really hard to train virtually, because to a certain extent, stent training is a contact sport, and you really got to be, you know, there’s just so much More to be absorbed, that’s just harder to pick up virtually. And so I think that’s, that’s probably the biggest unknown out there is what does it look like? What does it look for the next generation that’s coming up that that, you know, because what do you learn in school that you apply in, in in your job? Very little. And I say that as somebody who has a degree in real estate, very little, you know, this job, and most jobs, you know, we always laugh and say that we’re a blue collar, white collar job, but I think most jobs are and that it’s on the job training, you learn as you go, you make a lot of mistakes, you just try and make fewer mistakes than the guy next to you. And it’s, it’s hard to do that in a virtual environment. And so I’m very keen to see how that plays out long term, as you continue to have new people enter the workforce.

J Darrin Gross 46:07

Yeah, definitely there will be, you know, I would say probably a decade or two out, we can look back and kind of, you know, tell more of the story. But right now, it is kind of an interesting time, and we will see where it goes. He Grant, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option, we’ll look to see if there’s a way we can minimize the risk. And if we cannot avoid, ignore, minimize the risk. And let’s see if we could transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be your clients, investors, interest rates, development demand, whatever, however you’d like to identify, and what what you consider to be the biggest risk? And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Grant Pruitt, what is the BIGGEST RISK?

Grant Pruitt 47:31

Sure, I’ll give you the micro first and I’ll give you the macro. So from a micro standpoint, with primarily offices in the state of Texas, the biggest risk is the the perceived safety of the cities. As long as the cities in the state of Texas are perceived as relatively safe, we’ll continue to see that inbound migration, the schools have always been an issue. And people always talk about schools. But the minute people don’t feel safe, that’s when you see a flight to other parts of the country where they do perceive that safety. That’s the map the micro, from a macro standpoint, it’s probably going to be the same concern tomorrow, and next year, 10 years from now, 20 years from now, it’s always the lending facilities for me, because I’m in commercial real estate and always quiz people and say, who owns all the real estate in the United States, because the United States is different than some other parts of Europe and so forth. The banks, the banks own the real estate, because they have loans on most of the real estate that’s out there. And when we have hiccups in the lending facilities, that’s where we have real trouble. We saw it in, you know, the 1980s 2008. Anytime that banks fail, anytime we see issues with lending, potentially alternative vehicles that that create more risk? That is a huge concern.

J Darrin Gross 49:17

Yeah, no doubt the lenders and just the effect that, you know, reaching cars on the market is it’s kind of scary when you, you know, everything’s going one direction and all sudden rate changes. And, and, you know, I’m kind of curious, because in just my experience, and be curious to hear from you what you think, you know, it’s that interim between the rate we were add to the rate we’re going to, that’s the challenge, but once we get to a stability or a stable rate, and people can have figured out how to do business, in that rate environment, then things get back on track. Do you see it that way? Or do you feel like it’s, it’s just, uh, works at this rate, it doesn’t work at the other rate.

Grant Pruitt 50:11

I think that I think that we got really used to having essentially extremely low interest rates on historical basis for a long, long period of time. And we’ve forgot that interest rates weren’t always at that level. I mean, even not that long ago. You know, they’re, they’re well above that now. But I think about the first house that I bought, and I was pretty pleased, I got a 5% mortgage rate. And when 5%, you know, when we went from people being, you know, threes to five, people, all of a sudden went, Oh, my gosh, I don’t know how we’d ever be able to buy a home. You got to play the hand that you’re dealt. And, you know, I think poker is probably the best way to look at it. Because, you know, all right, the deal your five cards, you know, you’re not married to those five cards, you can trade them in for different cards. And if you don’t like it, fold that hand and go to the next hand, but you just got to keep playing the hand that you’re dealt. And I think that when, you know, Warren Buffett is he’s got some great one liners, but you know, he always talks about when they Zig you zag. And everybody is, is looking one way, and I know he’s gonna do the opposite. You know, he’s the one that you know, he bought, you know, some of the banks that failed in 2008, and asked why he did that. And they ended up being incredibly lucrative endeavors for him. I’m not a huge believer that, you know, you blame it on the interest rates, you blame it on the instability, there’s always something to blame. I think you just got to play the hand that you’re dealt, and you got to be smart, and you got to, you know, put the pencil to the paper and trust what the numbers give you make your decisions based on data, not based on the noise that people talk about? Because I’ll be the first one to tell you, I get people that tell me oh, well, you know, I read this about real estate, and I read that about real estate, and they’ve been doing that my entire career. And they make what I feel are mean, even this morning, very poor real estate decisions based on what they read in the newspaper. And I don’t I don’t see that because I don’t pay attention to that, you know, that’s a that’s somebody who’s got an opinion. And, you know, I’m looking at the data, I’m looking at it the information that’s available to us and trying to make informed decisions. And that’s, that’s part of my, my, you know, my, my passion in life is to help tenants make decisions based on that data. So, yeah, I would agree with you. But I’d also challenge that at the same time.

J Darrin Gross 53:17

Yeah, I think your summation there, you got to deal with the hands that’s dealt, and also make sure the numbers work. Makes sense. Hey, Grant, where can listeners go if they’d like to learn more or connect with you?

Grant Pruitt 53:31

You can go to White Box Real Estate.com Or you can shoot us an email at contact at white box realestate.com.

J Darrin Gross 53:40

Awesome. Grant Pruitt, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And look forward to doing it again soon.

Grant Pruitt 53:50

Absolutely. Thank you for having me.

J Darrin Gross 53:52

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks, CRE PN Radioo.

Announcer 54:11

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Autonomous Shuttle Vehicles Micro Mile Solution with Dan Grosswald and Joe Moye – CRE PN #431

Joe Moye 0:00

b specializes in the deployment and management of these mobility networks which utilize shared electric autonomous shuttles a seat eight to 10 passengers are designed to do these you know one to two mile type routes and services to connect in the case of the tradition community very end various ends of the property in residential areas into the business districts into the retail districts and things of that nature. So these these live work play type communities is is being developed at tradition kind of represent great use cases for residents, businesses and visitors.

Announcer 0:42

J Darrin Gross 1:08

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com

Today my guests are Joe Moye and Dan Grosswald. Joe is the CEO and leads Beeps efforts in the safe testing of electric autonomous vehicles to serve the needs of public and private communities. And Dan Grosswald is the president of Mattamy Homes, and he oversees homebuilding and Land Acquisition Operations in southeast Florida. And in just a minute, we’re going to speak with Joe Moye and Dan Grosswald about how Mattamy is creating a blueprint of communities of the futures with Beeps autonomous shuttle network woven into their tradition community in Port Lucie, Port St. Lucie, providing equal access to mobility, easy access for shopping, groceries, and more.

And, but first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find this on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Joe Moye and Dan Grosswald. Welcome to CRE PN Radio.

Dan Grosswald 3:27

Thanks for having us.

Joe Moye 3:29

Yeah, appreciate the opportunity.

J Darrin Gross 3:31

Well, I am really excited to talk to you. I’m looking forward to our conversation. But before we get started, if each of you could take just a minute and share with us a little bit about your background. Well,

Dan Grosswald 3:46

I’m Dan Grosswald, as you said President of the Southeast Florida Division for Mattammy Homes. And I’ve been in the home building business mostly in Florida for the past 30 years, worked for various large homebuilding companies, developing communities and homes throughout the state of Florida and the Southeast.

Joe Moye 4:11

And Darrin, Joe Moye, CEO of Beep and I guess I’m a serial technology entrepreneur, if I had to describe myself in one sentence, I’ve been involved in both the investment side the operate side of startup technology companies for the better part of the last two decades. We started beat five years ago, really on the thesis of being able to get out in front of the wave of these autonomous shared electric platforms that change the way we move people and provide an alternative means of transportation in public and private communities and most specifically, in these first mile last mile use cases where, you know, we have to provide incremental arterial routes to connect people to goods and services in areas like that. addition community at Madami homes.

J Darrin Gross 5:04

Got it? Well, I said, I’m excited to talk to you guys and doing a little bit of research and just kind of thinking through some of the challenges that you guys face and solve and work through. It’s, I’m looking forward to our conversation. And I guess the the the first thing I was thinking first start with the vehicle, but actually, I’m thinking more about the community. So I’ll start with you, Dan. With the community, can you tell us a little bit about the, the size and scope of the communities that you’re developing? And kind of little bit of the back or I guess, kind of the, you know, just a little description of what what makes up the community that you develop?

Dan Grosswald 5:48

Well, we have, you know, communities all across North America, were founded out of Toronto, Canada, but we have a US operation that runs from Dallas, Phoenix, Tucson, and to the Carolinas and all through Florida. In South Florida, we have multiple communities. Tradition is really our flagship community. It’s a 20 year old community that fell into bankruptcy in the downturn. And Mattamy bought it in 2018. And that was about 25% of it was developed as a very complex deal because of the debt structures that were in place with CDD bonds and other obligations that it’s actually three dri eyes. Three major plan developments that are are one, and as I said, was partially built. And there’s about 8200 acres combined. There are ultimately almost 18,000 homes there. There’s 22 million square feet of industrial and office space. There’s apartments along with the residential and there’s a lot going on there. There’s two, two, turnpike i 95. interchanges, they’re a massive network of roads and trails.

J Darrin Gross 7:08

Got it? And you said it was 25% developed before you guys took over?

Dan Grosswald 7:12

Yes. The previous developer, you know, fell bankrupt. And so we when we got there, we had still a very large community, but some of it had already been their shopping center, was there a power center, and a couple 1000 homes were in place there

J Darrin Gross 7:30

Got it. And you said eight-two hundred acres is that right?

Dan Grosswald 7:35

Eight-two hundred acres, there’s 800 acres of open space and parks, and a lot of homes and commercial development there.

J Darrin Gross 7:42

Got it. And I’m just curious, since Beep deals with the autonomous vehicles, how many miles of roads do you have in 8200 acres? And traditionally,

Dan Grosswald 7:56

You know, I don’t know how many miles I know that we built 15 miles just last year and expanding their community from one end to the other. And as far as the autonomous shuttle is concerned, we’re building a 20 mile long network of trail system that largely travels on

J Darrin Gross 8:17

And is it independent of the roadway then is it its own little path or?

Dan Grosswald 8:22

That’s that’s the ultimate goal for the most part. The way we’ve done it way Madam has done it in tradition is that we’re creating a separate trail network with a pathway specially designated just for the autonomous shuttle.

J Darrin Gross 8:38

Got it. And Joe, if you could describe a little bit about Beep and then the vehicle that you guys are deploying in the Tradition development.

Joe Moye 8:49

Yeah, so as I mentioned at the onset here be specializes in the deployment and management of these mobility networks which utilize shared electric autonomous shuttles a seat eight to 10 passengers are designed to do these you know, one to two mile type routes and services to connect in the case of the Tradition community very end various ends of the property in residential areas into the business districts into the retail districts and things of that nature. So these these live work play type communities is is being developed at tradition kind of represent great use cases for residents, businesses and visitors. The the vehicle itself today operates at about 12 to 13 miles an hour. You know covers a range of about you know two to three miles in distance. You know, as far as kind of the furthest routes that we we serve. The batteries which are provided as these vehicles are electric can operate in about a five to six hour service before being recharged. And the whole concept is to take these platforms and as Dan described to build a mobility network that gives people an alternative to their personal transportation and, more importantly, provides access and mobility options for people that don’t have personal transportation or have difficulties getting out of the home.

J Darrin Gross 10:28

Got it? In the use of the the the autonomous vehicles, is there a regular route that they travel like a regular city bus? Or is it more of like an app and somebody says I need to get from point A to point B and the vehicle shows up to take them there?

Joe Moye 10:46

Yeah, so it’s a great question. The answer is all of the above. So one of the things that’s unique about these technologies, and I know we’re going to talk a little bit about, you know, the importance of risk and safety, as it relates to the deployment of these vehicles, is having a, you know, geo fenced area or a fixed route type service is a key component of where the technology is today, we have kind of virtual rails that the vehicle travels on, but it doesn’t mean it needs to be just a trolley car loop. We can connect routes and redeploy assets into different directions, and provide as you point out the flexibility of on demand services. So being able to hail a ride at a particular stop, you know, to get where you want to go. It’s not come to my driveway and take me anywhere I want to go. But Mattamy has designed a very convenient network of, of shuttle stops where it’s very convenient for, you know, the residents and visitors in the area to access the services.

J Darrin Gross 11:48

Got it. And Dan, I’m just curious, from from Mattamy’s point of view, what what were some of the thoughts and bringing in the autonomous vehicles to service the community.

Dan Grosswald 12:04

When we acquired the property, which is located in the city of Port St. Lucie in South Florida, you know, there’s 70,000, homesites approved for development in that area. And it’s one of the fastest growing areas in the country, very, very popular for people relocating from the northeast and other parts of Florida, it’s a really affordable place to live. But in positioning our community, we want to differentiate it from all the rest of the 70,000 Lots, we wanted to make a special place, you know, Mattamy has a commitment to community and making it a great place to live and making a positive impact there. And also sustainability is one of our core values. So putting all these things together, the differentiation, the sense of community and sustainability, it was really just a perfect fit to make Tradition, a really special place. And that’s what attracted us to Beep.

J Darrin Gross 13:05

So in, because one of the other things is it has a development as opposed to like a quote city where you’d have the I’m assuming a city bus? I don’t know if that’s something that the city has available or not. But is there any error? I guess, first of all, I guess the question is, does the city have its own city bus system or any kind of a public transit,

Dan Grosswald 13:31

There’s public transit, you know, it’s not very robust, and for the western part of the city, and it covers like a wider area, you know, we’re trying to provide a smaller network that connects each one of our communities within the master plan community, to the downtown and to each other and to a network of parks we have there. So we’re able to more specifically provide transportation, and the ease of transportation in and out without using your car within the community. So it’s more of kind of a micro last mile transportation system than a broad overarching bus system that goes across the whole city.

Joe Moye 14:13

Yeah, I’ve I could add in, I think one of the most important aspects of what we’re doing together is, you know, the biggest gap that we have in our country and transportation is this micro transit arena that we’re talking about, you can take a bus into downtown, you pick the city, and yeah, if you happens to be, you know, New York or the other large metropolitan areas, you may be able to use a subway or another means of getting around. But in most cities and in most communities, you know, in the case of of Dan’s community, I think it’s 17 square miles or 18 square miles. Think about taking a bus to get near the community and then how do you get to your job on the other side of that community. So up A component of this is providing these arterial services, as I call them, in Dan’s case to connect residents and make, you know, the whole area, much more eco friendly and convenient from a mobility perspective. But it’s also how do people, you know, that may come from outside the community, leverage that network as well to access the various goods and services, including, you know, a major health center that is there on their property, the Cleveland Clinic, so a lot of lot of importance, I think, in looking at the realities that large bus services are not terribly convenient many of these scenarios and frankly, don’t navigate some of these roadways very safely and very effectively.

J Darrin Gross 15:50

Yeah, no, I appreciate you. You shouldn’t line on that. Because I just, I was trying to think, Okay, how does this compare and contrast to what one might think of as a traditional, you know, transit system? And just kind of that Micro Focus? I appreciate that. So on as far as the adoption, acceptance kind of use within the community. Dan, can you speak to how the community has been, how they’ve responded to the use or the, the vehicles in the community?

Dan Grosswald 16:29

Well, I go a little bit beyond that. First, you know, we introduced the idea to the City Council, and the police department, the fire department, you know, a lot of the governmental agencies there, and they embraced it wholeheartedly. The city of Port St. Lucie is pretty progressive in terms of trying to develop a better transportation system. So we started with them. And they were very accepting of it. And as you know, we’ve slowly deployed the network. And in the first phases, we circled the commercial areas, there’s a very large commercial area in the center for shopping and dining, and, you know, personal services. So we use it in there first, and it was immediately adopted, we’ve done a lot of programs to introduce it and explain it to the residents. And it’s present in all our community events. And now we’re deploying it into individual communities as they open up. And the usage has been very strong and consistent. You know, the only thing that really affects it is sometimes weather or holidays or things like that, but especially during the weekends and the evening, early evenings and things like that people love to use it to go downtown or to go shopping or go to the dentist. So it’s been really pretty easy. Of course, you know, there’s always a few naysayers here and there, but I’m sure that happened when the horse and buggy was introduced in the car. And, but that’s something you face, but by and large, it’s very widely accepted and embraced by the community.

J Darrin Gross 18:07

That’s great. I’m curious how how, if somebody is writing, is there a fee they pay to get on? Or is it? How’s the the fee structure?

Dan Grosswald 18:19

Well, that’s a good, that’s a very good question. So the Tradition as a series of CDDs, community development districts, so the CDD, and this will also lead into some of your risk questions, but the CDD owns and operates the vehicles or leases on but they own and operate the system. So people pay CDD Fees through their tax bill. And we fund that the whole system through the CDD. So they get to really write it for free. And that would be open to anybody within the county, by law. That’s great.

J Darrin Gross 19:02

And, and maybe this is more for Joe, on the vehicle itself of understand there’s no there’s no driver on the vehicles that correct?

Joe Moye 19:13

That’s correct. We do have attendents on board the vehicles today because they’re this particular platform is overseen by the US Department of Transportation, they have a program to deploy these types of initiatives, like we’re doing it at tradition. And so they do require an attendant on board who can take over in the case of the need to manually intervene for any reason, is there to educate and inform people on the use of the technology. So I think it’s safe to say that if if a driverless vehicle pulled up in your driveway, you know, you’d probably want to learn a little bit about it before you jumped on it and and took it anywhere. And so it is an education process and adoption process and A big piece of kind of what the future holds is to shift those attendance to virtual attendance so that they will be remote instead of on the vehicle, and providing, you know, the ability to communicate with passengers. If there’s, you know, God forbid a medical incident or some type of safety incident, you want to make sure somebody can immediately, you know, engage dispatch, help, Dan mentioned the importance of the first responders and how you they were integrated into this process to train them on the vehicles and how they will operate in the community. So, so yeah, they are operating in driverless state, if you will, but there is an attendant on board today as part of the transition to kind of more of the human in the loop model.

J Darrin Gross 20:53

And how long have has the the technology that you guys are using? Is it a particular brand of vehicle? I mean, Beep, you don’t manufacture the US? Is that correct? Or is that

Dan Grosswald 21:05

That’s correct. We don’t we don’t manufacture the vehicles themselves. We’ve got multiple suppliers. This particular vehicle is from France. The brand has called NaVi they were actually recently acquired by a firm called Kosong. In France, as well, large industrial equipment manufacturer, but so we import those vehicles. And then like I said, we operate them under these US DOT guid guidelines.

J Darrin Gross 21:35

And how long has the technology? I mean, the the autonomous vehicles, how long have they been around?

Joe Moye 21:39

These vehicles have been around for about seven years. We’ve been operating in, in Tradition, about three years now a little bit over two plus years. And we’ve been operating in other locations for for four years since we founded the company. But the vehicles themselves were operating in Europe a few years before we brought them to the US market.

J Darrin Gross 22:07

And given the the nature of the vehicle, I think you mentioned they travel about 12 miles an hour tend to call is kind of the rate of speed. Is that right? That’s correct. I’m just curious, is there a number of incidents? Or can you I mean, I’m just trying to think of what would be the incident where human would have to get involved, I could see the the interaction with the riders or the passengers not understanding maybe what, you know, what is it? Or what are we doing here kind of thing. But but as far as the operation is, is had been flawless? or have there been any issues?

Joe Moye 22:44

It operates, it operates very effectively in autonomous mode. So the technology itself is, you know, has been advanced and matured over the years, I will say that, you know, some things that are coming in the next generation vehicles, like obstacle avoidance is a good example. You know, where do we have challenges today, you know, we’ve got prescribed shuttle stops, and sometimes you’ll pull up and there’ll be a FedEx truck, and your shuttle stop? Well, the vehicle itself doesn’t maneuver around that and find another location to stop. That’s a simple, but, you know, not an uncommon example of where, you know, you need to take over brief manual control of the vehicle. And those are, although they sound very simple, those are the types of things that are being solved for as it relates to how would you do that, you know, without an attendant on board in the future, and that is simply initiate a command remotely that, hey, it’s safe to maneuver around that vehicle, or, you know, provide what type whatever type of approval it needs to make, take a particular action. So, probably the most common scenario we see is where, you know, something takes up its space. I can see that.

J Darrin Gross 24:06

As far as the the expected updates, or the the future updates that you’re expecting, are those software in nature, or is there is it a reconfiguration of the hardware,

Joe Moye 24:19

it’s both so there’s, you know, the next generation vehicles, which will be released in 2025. So, a couple of short years from now, you know, there’ll be much more industrial grade as far as kind of an automotive type platform although in the shuttle form factor that will be able to operate at higher speeds will you know, have advanced technology in the vehicle itself and the drive by wire and brake by wire type components, which are really important to make that you know, the starting and stopping the vehicle much more human like, you know, and and then secondly on the software front And the external technology, you know, it’s, you’ve really got two competing forces in autonomy. Right now you have vision technologies, which are all camera based, much like your adaptive cruise control on a vehicle you may have today. And then you have sensor based technologies that a lidar in particular, which which emits an image and creates a three dimensional view of everything around it today, these vehicles are purely sensor based in the next generation, they’re going to be a combined sensor and camera base, which will dramatically advance its ability to operate in these higher speed more complex scenarios. And that’s been a big kind of piece of what’s been advancing over the last several years with with a couple of our key partners.

J Darrin Gross 25:51

In Dan, as far as the the investment in the vehicles, is there a I guess this could have been for either one of you guys, but I just think with Danby in the community, the the one that bought the the vehicles, is there, what’s the expectancy? Life expectancy? Or do you? Do you have like a replacement? sense of how how long before you have to replace the vehicles? Is there a thought process on that, or?

Dan Grosswald 26:22

Well, we have, I think, a life expectancy of seven to 10 years, but the technology evolves faster than that. So what we’re more interested in is having, keeping up with a trend and improving the service and the quality of the service and the cost of the service. And that’s one of the great things about working with beep is that, you know, when our agreement, they they agreed to help us provide the latest technology, regardless of the lifecycle of the vehicle.

Joe Moye 26:50

And that’s, that’s a really important point. Because if, if you look at like the, you know, FTA guidelines for useful life of public vehicles, you know, a shuttle form factor or a van form factor is typically a five to seven year useful life. And, to Dan’s point, I mean, every, every three years, we envision a refresh of the the sensor stack, and the camera stack, potentially, software upgrades, no different than any other application today, you’re going to get those updates pushed, often and regularly. So that will continually stay up stay updated. But the big thing is going to be you know, do we want to get into an expanded operating domain and need to upgrade the center stack to, you know, what we all know will be cheaper and better technology three years from now, it’s kind of Moore’s law, in effect.

J Darrin Gross 27:49

Yeah. So what have been some of the biggest challenges in deploying the the technology and, and going into vehicles in the community?

Dan Grosswald 28:02

Well, for us, really, the biggest challenge is not the technology, but building the infrastructure, because it’s different. And the sometimes the city has trouble understanding the meaning of the infrastructure that we’re building, you know, they’re trying to apply principles and rules that for roads or pathways that don’t necessarily apply to the vehicle. So the approval process has been very difficult at times, and honestly, difficult, time consuming, and a lot of explaining and understanding, teaching and understanding with the cities. So really, the slowest or most difficult part is getting the infrastructure bill, you know, allow the vehicle to travel off road, within tradition.

Joe Moye 28:50

And I would just add, you know, it’s, you know, as these vehicles evolve, and continue to, you know, be more broadly utilized in scenarios, like we’re talking about here. And there’s a, there’s a big regulatory and legislative set of actions that need to happen. I mean, our, you know, the standards in our country, the Federal Motor Vehicle Safety Standards, in particular, weren’t written for autonomous vehicles, they were written for driven vehicles. And so for decade old regulation is governing, you know, these new technologies. And there’s, we spend a lot of time both educating and lobbying in Washington around this regulatory reform, and we’re seeing some progress for certain. But you know, our country has always been the leaders in these new transformative technologies. And this is one where, you know, we’re falling behind other parts of the world as far as attracting those partners here to US soil because we’ve been a little slow on the regular The toy front.

Dan Grosswald 30:01

Yeah, we really are early adopters of the technology. I think we’re the only users of autonomous shuttles in South Florida at the moment, although there are several others within the state. But it just shows you that it’s not really widely recognized or known or understood from a approval process in the in the local area of approvals.

J Darrin Gross 30:25

Yeah, I’m kind of curious, I would think that this is becoming more well known and recognize you guys are probably receiving a lot of attention from other communities looking to adopt the, the technology or the use of it is that are you finding that to be the case? Right?

Dan Grosswald 30:41

Yes, we, you know, we get a lot of interest from other developers wanting to see it. And we also get a lot of interest from Uli Urban Land Institute and universities, we’ve had multiple visits from different university University of Miami FAU, where they, you know, have these people learning, discipline or planning or architecture, or those types of things, and they want to come visit and see it. So we’ve had a tremendous amount of people come and visit, see it an operation, I’m trying to learn and understand how this works. No.

J Darrin Gross 31:19

And as far as the the routes, I get kind of a gate around the community kind of thing, where I’m assuming the vehicle wouldn’t necessarily transfer beyond that or go beyond that. Is there a, is it all just programmed in there on the on the the the route that it travels? Or is there? I mean, we talked about I guess there’s both the schedule, and then the the opportunity to like, call the vehicle to pick you up at a certain point. But how are you? How is it been used in the community? Is it just basically there’s a red shuttle and and travels around the community? Or is it? Are there specific routes that are travels? Or how many? How many vehicles do you have currently, in your fleet, I guess would be maybe a starting point.

Joe Moye 32:06

Yes, so So Mattamy has six vehicles operating three routes today, they’ve got two additional routes that they’ll be expanding to, in fact, launching one later this fall, you made a comment. And that is probably important to point out because what’s unique about what Madami has done at tradition is they actually exit the community and go to a retail area, across the road from the community. So it’s not just about getting to our town center and, and getting to the amenities within tradition itself, they actually connect to a property they don’t own, which, you know, is an important, I think piece of what we talked about the form of extending these mobility options. But, but they’ve got six shuttles operating across three routes today. They are, you know, typically running certain hours of operation, with the ability to, you know, utilize through an app and on demand. So it’s not just, if you miss the shuttle at 315, you have to wait, you know, for 30 minutes until it gets back, you can pay on the shuttle to know that you’re there waiting. So those types of, of technologies and more convenience and demand planning type things that you want to do, you know, it’s there’s certain hours of the day where, you know, one route is highly highly utilized, people want to get into the town center for dinner. So looking at those demand profiles and adjusting the routes and the timetables, based on when the the ridership wants to utilize the service is an important piece of kind of the continuous improvement.

Dan Grosswald 33:55

Another thing that we like to do so we have a very robust entertainment and cultural activities in the town center. And tradition has a really beautiful downtown center, kind of like old fashioned southern square with a big grassy area in it. And we have events here almost every weekend. So another thing we like to do with the shuttles is we call it like a caravan where if we know we’re having a special event, we can line up the shuttles and bring them from into certain areas to service the event. Because parking is always at a premium at the highest peak times. And the shuttle allows people to avoid having to fight for parking. The other thing it does is you know if you want to go downtown and have a few drinks, you don’t have to worry about you know, drunk driving or anything like that you just get on the shuttle and delivered you to your communities door. So there’s a lot of good ways that the shuttle can be used and deployed that service special events did not just like that bus route type of situation.

J Darrin Gross 34:56

Hey Joe, I am I assumed that It, Dan and Mattamy they purchased the vehicles from Beep. But I’m curious is that? Is that the case? Or do you guys continue to own and lease and operate them on behalf of Mattamy? Or house?

Joe Moye 35:14

So we do I mean, both scenarios across, you know, our customers in the case of Mattamy, they did it directly acquire the vehicles. And I think, as Dan described, and he can chat a little bit more about reasons why they did that, and why that was important. But then we provide the full service of operating, maintaining, managing, charging, doing everything you need to conduct the service itself.

J Darrin Gross 35:43

Got it? The answer any anything. As far as the the the owning and operating the vehicles.

Dan Grosswald 35:53

Now, we just did a cost benefit analysis that whatever is better to lease or buy type of thing. And it just made more sense to us to buy. And with, you know, with the way that beep operates, they’re always willing to help us, you know, we’d have to worry about obsolescence because of the structure of our contract. And you know, the way they like to go about doing business. So there’s that minimizes the downside of actually buying a vehicle that, you know, is going to become obsolete in a few years.

J Darrin Gross 36:25

Joe and Dan had mentioned some of the different organizations and communities that had come to look at the vehicles and operation. I’m kind of curious, from your perspective, what what are some of the areas that you’re seeing growth in this type of use of the autonomous vehicles?

Joe Moye 36:45

Yeah, so we’re seeing growth in a number of use cases, you know, certainly these Master Plan communities is a great example of, you know, the various types of services that Dan has described. And Mattamy has been a real leader in in industry on advancing, we have other similar communities, one up in the Orlando area, one in the, in the Atlanta, Georgia area. The other you know, primary use cases have been in public transit, where, you know, in downtown urban areas like, you know, Jacksonville, Florida, as an example, like Peoria, Arizona, Contra Costa California, where we’re providing these types of services to really augment public transit to where, you know, in the example of St. Petersburg, you had a ferry coming across the bay, and then it was an hour, a mile and a half to get into the downtown corridor, providing those types of services to link, in that case, a ferry service to the downtown area. The third I would say is campuses, you think of campuses, as academic as business as medical campuses, all of them have parking challenges in it, and the opportunities to maybe supply a service that makes it more convenient to get around these communities versus pulling cars in and out. You know, all of those are our primary use cases for what we’re doing today.

J Darrin Gross 38:24

I just, I love this whole topic. And I would think that it’s exciting for for both of you. I mean, I would think that there’s just a certain amount of excitement when, you know, as opposed to the same old, same old kind of cutting edge, kind of leaning into the the new and and I think there’s a lot of happy people that as they see it, there’s, I mean, you’ve mentioned there’s a few dissenters, but I would guess that by and large, there’s a lot of happy people that interact with you and, and the product there. So that’s cool.

Dan Grosswald 38:57

Yeah. Well, you know, when you buy a home in a large community, the community has an identity. And there’s a certain amount of pride and, you know, esteem that comes with living there. And having cutting edge technology, like the autonomous shuttle from beep, really lends to that feeling that the person gets by living in tradition. Yeah.

J Darrin Gross 39:20

Just occurred to me when you were talking about different opportunities, Joe, or with different communities, campuses and stuff. Is there any kind of weather limitations you you mentioned? I thought like there were certain limitations.

Joe Moye 39:36

There are there are some limitations. I mean, it can operate in light, light rain today. I mean, the some sometimes you know, Florida is graced with storms that come through sideways for about 45 minutes every afternoon. And frankly, cars shouldn’t be on the on the road either. So there are some limitations because today his technology is just purely LIDAR based. These next generation platforms, that’s a big thing to be solved for is, yeah, the fused vision sensor and radar technologies. In fact, you know, the higher fidelity radar becoming more and more a key component to how these vehicles will navigate in the future and, and deal with things like inclement weather not we don’t have snow in Florida, but but certainly there’s, there’s locations all across the country where these vehicles want to be deployed. So we’ve got to solve for that. You know, and then it goes as far as even things as simple as a spinning sensor that has almost a wiper on it that keeps them clean, much like you would a windshield. So So there’s all types of technology that being advanced to ensure they can operate and you know, what, how did we use to say it about the, the the post, men and women you know, operating rain, sleet, snow, or hail or something like that.

J Darrin Gross 41:06

I think they’ve forgotten that up the mailman I have anymore but anyway, I appreciate you guys, uh, you know, just what we’re talking about here. And just I just would think that it’s exciting every day to go to work and and have some sort of a, you know, the point to introduce or have people comment on or be excited about that. I think that’s, that’s pretty neat.

Joe Moye 41:34

It is, yeah. Dan reminds me every day. It’s never a dull moment together.

J Darrin Gross 41:38

Yeah, that’s cool. Hey, if we could guys, I’d like to shift gears here for a minute. As I mentioned before, by day, I’m an insurance broker. And as such, I like to ask my guest question about risk. And the question is, what’s the biggest risk. And as an insurance broker, there’s a couple of strategies we always try to employ. And the first is we look to see if there’s a way we can avoid the risk, when that’s not an option, and we’ll see if there’s a way we can minimize the risk. And if we cannot avoid or minimize the risk, and we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. And like I said, you know, I’d like to ask my guests, if they can take a look at their situation, and identify what you consider to be the biggest risk could be, you know, the the laws, the technology, the community that, you know, whatever, whatever it is, that you see might be the biggest risk. And again, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Joe Moye and Dan Grosswald, what is the BIGGEST RISK?

Joe Moye 42:54

Yeah, I’d be happy to start with that. I think, you know, the the autonomous technology mobility area has done, it’s probably done itself a little bit of a disservice of all the lofty expectations of these George Jetson scenarios of vehicles zipping all around our roadways in autonomous mode. And, and I don’t think it’s because anybody was derelict in their visions, I think it was just the reality that this is a walk before you run technology. You know, one of the things that we’ve hit on here that’s so important, is starting with planned route, controlled speed environments, where you’re able to mitigate a lot of the complex interactions, one would typically have one, you know, much more sophisticated or much larger routes for the traveling of a vehicle. You know, it is the technology is getting better and better every day, as you and I talked about before the call even applications, beyond moving people, you know, if you’re moving boxes, or luggage or anything else, same type of technology that’s being advanced to perceive an environment and be able to navigate a course. And so, you know, I think, I think it’s important as an industry, that we, you know, evolve this together in these more controlled environments and not set false expectations of these vehicles will be able to go anywhere, anytime, any speed tomorrow. And I think from a risk perspective, you know, that dramatically reduces, you know, the chance that, you know, something would happen, but, but I’d also say, you know, at the end of the day, and you probably know these statistics better than I but you know, 43,000 people perished on us roadways. Last year alone, you know, incredible tragedy, the property damage associated with that, you know, the quality of life damage associated with that 94% of that caused by human error distraction impairment, these vehicles respond in a scenario three times faster than a human can identifying something and actuating a break, and they’re never distracted, right, they’re not staring at an iPhone, they’re not going into the town center for a couple of drinks and getting behind the wheel. And that’s, you know, that can’t be lost in this, this is about, you know, saving lives and reducing risk as it relates to one of the biggest threats, you know, in our country today. So, So anyhow, that would be my my soapbox speech on that topic.

Dan Grosswald 45:54

We’d look at it from three perspectives. You know, first, the biggest, the biggest risk, really, from our perspective is human failure, the vehicle itself and the technology itself is, is very good. And as Joe pointed out, is better than a human being in terms of its safety factor. Really, what happens is either for packing a human acting from the outside of the system, you know, crashing into it, or taking advantage of the vehicle is a risk, not the vehicle or the system, or when it’s not an autonomous mode, it’s actually riskier than when it is in autonomous mode, sometimes the vehicle has to be manually moved. So the risk factor increases slightly, they’re over when it’s in autonomous mode. But the other the other two things. So we decided purposefully to create the dedicated path for the reasons that Joe mentioned earlier. So that helps us minimize the risk that it’s not interacting on an open road or parking lot system as much as otherwise would be if we didn’t have the trails. So and we did that for a reason. And finally, we’ve decided to have the CDD operated, so from a developer point of view, having to do CDD own and operate the vehicles gives us, you know, some sovereign immunity from what we would otherwise be exposed to as a corporation. So that’s kind of how we viewed the risk and how we’ve tried to mitigate or transferred as you mentioned earlier,

J Darrin Gross 47:29

I love the thought put into all that as far as the I mean, your answers and also the way you guys are actually operating. That’s cool. So to wrap up here, Joe Moye, Dan, Grosswald, where can listeners go if they’d like to learn more connect with you?

Dan Grosswald 47:47

So Mattamy Homes.com is available to you. If you drill down in that website, you’ll find tradition, or you can come visit us and Port St. Lucie in tradition on Tradition Parkway, and I 95.

Joe Moye 48:03

And Beep can be found at Ride Beep.com and similar Twitter and LinkedIn connections, so Google that you’ll find us.

J Darrin Gross 48:16

Awesome. Well, Joe Moye and Dan Grosswald, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon. All right.

Dan Grosswald 48:28

Thanks for having us.

Joe Moye 48:30

Appreciate it.

J Darrin Gross 48:32

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know more you grow. That’s all we’ve got this week. Till next time. Thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

Speaker 2 48:51

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Commercial Real Estate Energy Tax Credits with Owen Barrett – CRE PN #430

Owen Barrett 0:00

I decided to get involved via syndications as an LP, and the first deal that I invested in happened to be a master meter deal in Texas where the owner spent, I think, $200,000 a year in electricity. So I asked the, you know, the group a GPS, what are you guys doing to eliminate reduce that? And they said nothing, which I thought was fascinating. So that led me on this, you know, just a learning curve of what is the multifamily world? How do people buy buildings? What are they doing from an energy perspective? And at the end of that sort of learning cycle, I realized that multifamily owners are sort of the least innovative when it comes to energy management. And so there’s this huge opportunity to not only become owner of buildings but also really lead an industry in energy management, which is just getting more and more important.

Announcer 0:53

J Darrin Gross 1:12

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investors protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Owen Barrett. Owen founded Rayven to decarbonize existing buildings at scale. Rayven has the world’s first net zero real estate investment platform, every property they buy is converted to true net zero, no offsets involved by partnering with 1000s of authentic retail impact investors. Owen, Rayven, Owen and Rayven, and every single investor will decarbonize the world, one apartment building at a time. And in just a minute, we’re going to speak with Owen Barrett about impact investing, you can invest and help lower the carbon footprint of commercial real estate.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube had Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest Owen Barrett. Welcome to CRE PN Radio.

Owen Barrett 3:17

Yeah, thanks for having me.

J Darrin Gross 3:20

I’m looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background. Yeah,

Owen Barrett 3:29

I started off in finance and kind of got a knack for financial analysis. I enjoyed the analysis piece I didn’t enjoy the finance piece. So I went to grad school for environmental science that launched me into a career as an energy manager for Fortune 100 company. So it was my job to save the company money by saving them energy, got a lot of exposure to really every different technology clean technology that makes economic sense. And then I turned that into my first business to took that experience started a company called Loomio did the same thing for public school districts around California ended up working with about 40 school districts and sold that company. And that’s when I started getting involved in real estate investing. At the time, I did not know that sort of my background in energy management was going to meet this interest in real estate investing. But I decided to get involved via syndications as an LP. And the first deal that I invested in happened to be a master meter deal in Texas where the owner spent, I think, $200,000 a year in electricity. So I asked the you know, the group a GPS, what are you guys doing to eliminate or reduce that? And they said nothing, which I thought was fascinating. So that led me on this, you know, just a learning curve of what is the multifamily world how do people buy buildings, what are they doing from an energy perspective and at the end of that sort of learning cycle, I realized that multifamily owners are sort of the least innovative when it comes to energy management. And so there’s this huge opportunity to not only become owner of buildings, but also really lead an industry in energy management, which is just getting more and more important.

J Darrin Gross 5:20

That’s fascinating. The just the notion that that expense 200,000 was just like, no big deal.

Owen Barrett 5:31

Yeah, they actually said we don’t, we’re not going to do anything we just grow at 3% a year. Right now. Not the right perspective.

J Darrin Gross 5:39

Well, and I wonder how unique that is? I would, it sounds like you looked around and found that that’s kind of more common. You know, it’s, I know, the people I’ve talked with, it seems like more of just the bottom line, noi, is that number you’re trying to get to and, and get the rents up and maybe cut a few expenses. But it seems like and I hope we get into it here with our conversation. It’s just what’s all involved in some of the work you’re doing. But let me let me ask you this way. So Raven, you founded that, or you are an investment firm? Is that correct?

Owen Barrett 6:18

Yeah, it’s a Regulation A offering, which is a an exemption via the SEC, that allows us to market to accredited and non accredited investors. So it’s a little bit different than how most syndications are put together. Those are usually reg D.

J Darrin Gross 6:34

Okay, and what I guess I’m kind of curious, what is it that distinguishes the A from the D.

Owen Barrett 6:41

So reg D, there’s, there’s a 506 C, in which you can mark it to accredited investors. And then there’s a 506 b, where you can accept investment from non accredited investors, but you cannot market it. So there’s sort of this conundrum of, well, we want to mark it. And we want to go after non accredited investors, because we feel like there’s a whole community of people out there that are pissed off about the lack of action against climate change. But they may not necessarily be accredited, it’s hard to be an accredited investor. And so Regulation A is sort of this unique combination of both of them where we’re allowed to market. I mean, not any way we want, but you we have to do things within how the SEC tells us but there’s a lot of freedom with how we can market and we can take investment from accredited and non accredited investors. So it really opens up the the universe to everybody.

J Darrin Gross 7:34

Got it. And just to be clear, is that Reg A is up from the the jobs act, is that?

Owen Barrett 7:39

It is. Yeah. Okay. So it’s called a nickname as a mini IPO.

J Darrin Gross 7:43

Okay, I sometimes I lose track of the different variety of options available. But I was thinking that that did come about as the jobs I got it. So alright, so the the ask the class you guys focus on? Is it primarily multifamily?

Owen Barrett 8:01

That’s all for the time being, it’s all multifamily.

J Darrin Gross 8:04

Okay. And is there a particular size of asset you guys look to buy,

Owen Barrett 8:10

just for economies of scale from like a property management perspective, it’s usually 100 units or higher. Occasionally, we’ll like we have a deal under contract that’s 252 unit properties that are close to each other. So we kind of view it as a, you know, 104 unit deal. But that’s, that tends to be sort of our our baseline.

J Darrin Gross 8:32

Got it? And is there a particular territory you invest in

Owen Barrett 8:37

There. I mean, there’s not we so it’s funny. We go after cash flowing assets, and we tend to find the highest cash flow in the Midwest, sort of North Dakota through Texas. That tends to be where electricity is cheapest. And there’s sort of the worst solar regulations. You know, the best solar regulations are tend to be on the coast and liberal areas, but we don’t invest there. So it’s a little bit of a conundrum between where our solar model works the best versus where we have the best luck finding cash flowing assets. But at the end of the day, for us, it’s a real estate deal first, and then it’s a decarbonisation opportunity second, so the fundamentals of the real estate are the most important thing, and then it has to be a good opportunity to decarbonize the sort of how we evaluate our opportunities. Got it.

J Darrin Gross 9:29

You mentioned when we’re talking about or just kind of your your experience with the does an LP The separate water metering and that do you do things in addition to the solar or is it primarily solar is at your, at your, your primary, you know, act as far as I guess, energy neutral or or, you know, improving the energy efficiency of the properties.

Owen Barrett 10:01

Yeah, now we do a lot more than that. It’s it’s challenging to give sort of a blanket statement for what we do across every property because a lot of properties are different. Sometimes we’ll replace windows, you know, go from single pane to double pane. Sometimes we’ll upgrade lights from incandescent or compact fluorescent LED. There’s a lot of efficiency work that goes into our properties, upgrading H vac, potentially electrifying domestic hot water systems. But across the board, we install solar. So we do efficiency first to reduce the load on our building. And then we install solar. And we also really focus on solar, because most people are familiar with solar. Like if I tell someone I’m selling VFDs, they’re not going to have a clue what I’m talking about unless they come from the energy industry. If I tell someone I buy apartments and install solar on it, that usually clicks for most people, because they’re familiar with that technology.

J Darrin Gross 10:56

Yeah, that makes sense. So on the properties that you’re you’re investing in and you’re buying, or is there any particular like a mix or a style is it is it in a multi storey building, single storey are an age that works best?

Owen Barrett 11:18

Yeah, so this is pretty exciting with our business model. Because this has changed recently. We always go after garden style properties. So one or two stories, because we need the maximum amount of roof space, it’s a lot cheaper to install solar on the roof than it is in a parking lot. In certain markets, you can get additional value from covered parking with markets where it’s really hot Phoenix DFW, occasionally you can charge tenants for covered parking. And in those instances, it’s actually better to install like covered parking solar. But most times, it’s more cost effective to install it on the roof. So that’s why we look for garden style. When we started, we were looking for Master meter deals. So think like a 200 unit apartment building and one electric meter. Because that made it a lot easier for us to install solar was a single interconnection point, it was one set of plans to permit. But with Master meter deals comes a lot of deferred maintenance, because most of those properties were built in the late 60s, early 70s. So about probably three years ago, we started to try and figure out how can we take the same sort of value, similar value add model, and apply it to submitter deals, so you know, 100 units, and 100 electric meters. And at the time, we couldn’t do it, there was just we could do the installation. But there was no way to manage the billing. So if you have 100 units, each with their own electric meter, you’re actually installing 100 small solar systems, one system into each unit. That means every month you have to figure out how to Bill, your 100 tenants for the amount of electricity that they used from the solar that we installed and paid for. And up until recently, that was a manual process. So every month, you had to go into what’s called the inverter system and look at how much energy was produced, you had to turn that into $1 amount. You had to bill your tenant, it’s really burdensome process, and it doesn’t scale. So we actually just built a software product that now automates Silla billing for us. So now we can implement our model on sub metered properties, which is super exciting, because we really want to get away from those older properties, a lot of deferred maintenance.

J Darrin Gross 13:32

And I hear you. So I’m curious the gift the challenge with the multiple meters in that your software, are you still hooking directly to the individual systems? Or have you been able to now have one one solar system that then you’re able to then I guess, mathematically apply the the credits back to the different residents, electrical bill.

Owen Barrett 14:05

So in a few states, there’s something called virtual net metering. California is one of them. Some of the states, the New England states have virtual net metering. And that allows you to do exactly what you just said you the utility lets you install one large solar system and sort of virtually allocate the benefits to all of your tenants. That would be nice if that existed across the country, but it doesn’t. And it probably never will. We actually see sort of net what’s called net metering going the opposite direction. So it’s going from more solar friendly to least solar friendly or less solar friendly. So with us focused on the Midwest, where there probably will never be virtual net metering. We still install one solar system per meter because that’s the only way you can do it. It’s a little bit more complicated from an installation perspective. There’s a lot of what’s called the interconnections. So every time Have you installed solar systems sort of into the utility infrastructure? That’s the, that’s an interconnection that requires a permit. So now we’re permitting 100 systems, you know, but they’re all exactly the same. They’re all three panels, three inverters, one interconnection point. So we just like replicate the permit set. And that’s not a huge deal. It’s more the billing, that’s been challenging. But that’s now been solved with the software.

J Darrin Gross 15:22

Interesting. Now, I’m sure the permitting fee is to give that away, I’m sure they are happy to see. Exactly. So, so let me ask you so that the properties that you’re buying, you mentioned you you’ve worked on some of the older properties. Now you’re looking for newer properties? Is there an age range that you find that is most agreeable?

Owen Barrett 15:49

No, it really works on everything, I think, internally, we’ve sort of set up a benchmark of after 1990. That just tends, you know, it’s a little bit arbitrary, but we just want newer properties we don’t want we’re okay with with value add, where you’re, you know, renovating the interiors, and raising rents, but we don’t want any huge, like plumbing issues or big H fac expenditures. So we just tend to set our, our sort of minimum year at 9090. And look for deals after that.

J Darrin Gross 16:21

Yeah. Been older property is a lot of character and stuff, but Oh, my God, the capital improvement can eat you alive.

Owen Barrett 16:31

I mean, it just takes one to really, you know, ruin a year’s of return to something that is extremely hard to predict or impossible to predict.

J Darrin Gross 16:42

I get it. So the projections that you guys provide for your potential investors and, and that de do some sort of a comparison as to the property with and without the, the energy saving upgrades that you guys do? Or is that just part of the presentation. So we

Owen Barrett 17:05

used to do that when we were seeking capital from institutional investors. You know, we would say here’s, here’s the deal, as is, here’s the deal with sort of what we would call an optimal amount of energy upgrades. So up to a certain point, energy upgrades, improve the returns, they help your IRR. But once you go past that inflection point, and start going to net zero, which is sort of where all buildings need to get to, if we’re going to really have a chance against climate change, you start to chip away at your IRR. So you know, regular deal may have a 15% IRR, you do some energy efficiency and some solar, you may get it to 1717 and a half percent, but then you go net zero, and you may bring it down to like 12 to 13%. So we used to show that comparison. And what we found across the board is that every investor, whether they touted themselves as an impact investor or not, just wanted to maximize IRR, that’s all they wanted to do. And so after talking to these institutional investors for three years, and hearing the same thing coming out of all of their mouths, which was just a lack of authenticity, we pivoted and said we don’t want to work with family offices, private equity institutional investors anymore. We want to go after retail investors, because we think there’s a huge amount of people that will be okay and excited about a 10% annual return, knowing that they’re supporting net zero real estate. So now we don’t show any comparison, we just say if you invest in this deal, you will earn a 10% annual return. And you’ll be you know, you’ll be encouraging and allowing net zero real estate, which is where the whole industry needs to move to and net zero real estate without offsets. Everybody’s focused on offsets right now, and it’s not the right attitude.

J Darrin Gross 19:05

The offset thing to talk a little bit about that what it is, I guess,

Owen Barrett 19:11

So a carbon offset is the equivalent of one metric tonne of co2. So the idea when they started, it was a great idea. But like a lot of things people have figured out how to take advantage of a good idea. The idea behind offsets is, for a lot of properties, you can only reduce your load so much on site via on site energy efficiency and onset renewables. Think of like an industrial plant a manufacturing plant. There’s just not enough surface area to install on site solar to eliminate your load, like 100% over the air to get net zero. So the group that invented the carbon offset was thinking okay, if buildings implement energy efficiency to the best extent that they can, and then they implement renewable energy to the best extent that they can. And they still haven’t hit net zero, then they can use offsets, to eliminate the rest what they can’t eliminate, because they just don’t have the surface area. And that’s a great approach. The problem is sort of twofold. Now, companies are just using carbon offsets. So they’re, they’re foregoing energy efficiency and renewable energy. And they’re just saying, it’s a lot easier and cheaper for us to go Net Zero via offsets. And then the second part is, the offset industry as a whole is immature and kind of lacks credibility. So there’s been a lot of big offset programs that have gotten busted for, you know, putting forward sort of phony offsets, they’re saying that they’re doing some forced the forced dri project overseas turned out they weren’t. So there’s been a lot of that. So now, when you see companies sort of pegging themselves as net zero, carbon neutral, whatever the buzzword is, on carbon offsets. If you dig into it a little bit more, more often than not, they’re just kind of false promises.

J Darrin Gross 21:14

Hear the talk the talk, but don’t walk the walk.

Owen Barrett 21:19

Exactly. But consumers are getting, you know, they’re getting more educated is going to take time, but there’s companies now Nestle’s a good one that just walked back there Net Zero commitment. Because consumers are starting to demand more, they’re, they’re starting to demand actual action, not just buying the cheapest offsets you can find.

J Darrin Gross 21:40

Right? Right. Now, it is frustrating, I think when you do look under the hood, and look for the actual results, a lot of times the given and a lot of the laws that get passed, I mean, they’ll have the title will be, you know, helping, you know, single mothers and in, you know, children, and you find out that it’s the details, it’s making the, you know, corporate, you know, some sort of corporate welfare as opposed to the, you know, what the title says,

Owen Barrett 22:13

Well look at like the inflation Reduction Act, I mean, I’m a huge advocate of of that, but it’s not going to do anything to inflation, or it’s not going to do it fast enough. So it was just inflation was a buzzword at the time still is. So they passed a huge piece of legislation with that as part of the title,

J Darrin Gross 22:30

Marketing, baby. That’s yeah, exactly. That’s one thing I know is that in America, we know how to market. So all right, so let’s talk a little bit about the, the system’s on 100. Unit. property, you mentioned that the systems, you know, they vary depending on what you’re what you’re doing. But I’m assuming based on everything you’ve talked about, between separate metering the permits and all that kind of stuff? What kind of a cost would you budget? For a, you know, 100 unit? You know, Midwest, garden style apartment solar system, what would you expect your your cost to run?

Owen Barrett 23:16

So if you’re trying to go net zero on 100 unit property, it’s probably about 125,000. And then I, you know, I would expect that you’re probably going to save on 100 unit. You know, it’s hard to say exactly, but somewhere in the neighborhood of like 50 to $100,000 to noi

J Darrin Gross 23:39

So you get your multiple on your cap that, that I know what your cap rate is? Do what kind of a How many years do you expect it to take to be a complete payback based on on your projections?

Owen Barrett 23:55

So generally, it really depends on you know, where they’re what the cost of electricity is, in California, like I said, we don’t invest in California, but the paybacks, like if you take tax credits into account, so tax credits are really interesting. Normally, we didn’t take tax credits into account, pre inflation Reduction Act, because as a real estate investor, you have a ton of depreciation, you’re most likely doing a cost segregation, study and save a lot of depreciation. So a tax credit, on top of all that depreciation is kind of worthless, doesn’t really hold the same level of importance without the depreciation. But now, because of the inflation Reduction Act, the tax credits are transferable, so we can actually sell our tax credit for cash. So now we do factor the tax credits into our economics because even if we don’t need them, we can sell them and right now that market is pretty new. It hasn’t really emerged. We’re seeing Seeing the discount rate of like 20%. So if you have a million dollar tax credit, you may be able to sell it for $100,000. But over the next year, we’re gonna see that market mature a ton. And it’s probably going to be like a 5% discount rate. So you’ll sell a million dollar tax credit for $950,000. So in California, the paybacks about probably four years. In Texas, sometimes it’s 10. But we don’t really evaluate it that way we look at what’s the cost of the project, what’s the tax credit, that’ll give us a net cost. In certain utilities like Texas, where encore provides a lot of the electricity, there’s an additional rebate on top, so that’ll drive your net cost down even more. And then we take the NOI that that project will generate and apply a cap rate to it. And if the value created exceeds the cost, then we deem it a good idea. Even if it equals the cost and it’s a wash, I still think it’s a good idea. Because as a, you know, as a building owner, as a community owner, I feel like it’s everyone’s responsibility to do some level of good, that good doesn’t have to be environmental, it can be social, but a lot of sponsors out there kind of you know, they’re talking about how they’re improving the community, and they’re adding amenities at the end of the day. They’re just justifying rent bumps, which most tenants don’t want. So I feel like it’s it’s our responsibility as an industry to have some level of positive impact in these acquisitions.

J Darrin Gross 26:31

Yeah, no, I would guess that most tenants would be in agreement with you.

Owen Barrett 26:37

You don’t care if you resurface the pool and bump their rent 250 bucks, they’d rather you not bumped around.

J Darrin Gross 26:43

Right. Right. Right. And I think there’s also a level of, you know, things are supposed to work. You know, why are you charging me for making them work? Yeah. I get it. You mentioned some of the tax credits. Are you? Are you able to finance these just on capital you’re raising? Or is this figured in to come some sort of a capital improvement? Budget? Or are you getting any grants? Or is there any, any other kind of options for, for financing the, the energy savings?

Owen Barrett 27:24

Yeah, we’ve found that the best way to finance it, at least for us is just to put it in the, you know, the initial capital stack as a part of the capex. And so depending on what kind of debt we’re using on our acquisition, some of that cost to solar is coming from equity, and some of its coming from debt. There, I wish there were better commercial financing options available for specifically for multifamily, but it’s just kind of a gap in the industry. Most lenders want to see you know, three years of of a p&l to make sure that you’re kind of financially sound, and they won’t let you show p&l from a previous owner, which doesn’t really make any sense, right, like the operations of multifamily, you’re buying them on the assumption that you’re going to improve noi. But so if I buy a property today, I have to wait three years to show three years of p&l is under my ownership before most commercial lenders will even, like entertain a conversation with you. So there’s just there’s some issues in the in the lending space around commercial solar, specifically for multifamily. And so because of that, we just put it in our capital stack from day one, and then we don’t have to deal with any of these lender issues.

J Darrin Gross 28:45

Problem solved. It’s good. What about the the actual ownership of the system? I know I’ve talked with other firms that their their single mother and their investment strategy was to own the the solar system and put it on buildings and that and and, you know, then have a title to them or something like that is is this? Are you just in his his part of the building and when you sell the building, the the next owner will get the benefit of the system?

Owen Barrett 29:20

Yeah, most times so sometimes. So we bill our tenants back for electricity generated by solar that’s that’s the only justification that we have to install solar on solar in the first place, we have to be able to monetize energy created. And in some states that requires that the the equipment itself is owned by a different entity than the entity that owns the building, but it’s all the same, you know, managing members, so like, there’s no control issues. The problem with those third party ownership structures like the one that you mentioned, where they get rid of the upfront cost, which is great, but then there There’s, then there’s this issue of what happens to the what happens when someone wants to sell the property. Because if that next buyer doesn’t agree to all of the language in the contract of the entity that owns the solar, it holds up the sale. And that’s why you see a lot of specifically real estate, residential real estate agents don’t like trying to list houses with solar that’s owned by third party because it always holds up the sale. So we’ve strategically made a model where whether it’s the same entity owning the solar that owns the building, or a different entity that owns the solar, but really, it’s just like a subsidiary that owns the building. It doesn’t hold up the sale in any instance. So we’ve done that kind of methodically. And I think that’s a big part of the reason why solar really hasn’t penetrated the multifamily market, because multifamily owners don’t think it’s worth getting into a third party ownership contract, if there’s any chance that it’s going to hold up the sale and they need to exit.

J Darrin Gross 31:10

Yeah, no, you’re not looking for ways to gum up the works when trying to exit. Yeah, that’s a little extra explanation to your investors. What about the power that you’re generating? And I don’t know what 100 unit apartment building average power usage is. But can you compare like a pre solar versus a post solar, as far as the, I guess, the the energy used from the grid for a, you know, the, the, I guess the complex? Yeah.

Owen Barrett 31:55

So there’s, there’s kind of two scenarios, there’s a scenario where a utility has what’s called what’s called net metering. And then there’s a scenario where there is no net metering. And so net metering is the ability to export electrons back onto the grid, and you get compensated for those electrons. And the way that you get compensated usually is a credit starts to build up on your bill. So in the northern hemisphere, most solar systems over produce in the summer, so you start to build up this credit on your bill in the summer. And then in the winter, the opposite is true. So then in the winter months, you kind of chip away at that credit. And if the system was designed correctly, over a year, your bill should be about zero. So that’s kind of how you net out your bill. In a non net metering scenario, you don’t get compensated for any electrons exported to the grid. So you can either design a system so that it does not export or exports very little. What we do is we still say there’s net benefit to the grid for exporting electrons, even if we’re not compensated. And so we still go net zero, and just export some of the electrons to the grid, we’re just not compensated for it. Because our perspective is, we can’t let utilities like control whether or not we’re going to make a net zero building utilities are inherently against solar, because it takes away their revenue. So of course, they’re going to try and do things to prohibit solar installations. So if we just play to the utilities rules, it doesn’t really get society anywhere. So we’ve figured out a way to, you know, raise money, pay our investors a return that they like, and do Net Zero Real Net Zero buildings, anywhere in the country. We don’t need net metering rules. To do it, the economics are better, but we don’t need them.

J Darrin Gross 34:00

That’s funny. You mentioned that I’ve got a couple of property set in Florida that I remember learning that it was like illegal in the Sunshine State to put solar on your roof. And I was like, wait, wait, wait, wait, we’re solar, his sun driven, you’re the Sunshine State? And I think it wasn’t until they came up with a way to make sure that they were, you know, remain compensated or or were in control of it. I mean, I think that’s the case. I didn’t follow it that closely, because I don’t have any.

Owen Barrett 34:33

Yeah, I mean, it’s, it’s some of it’s a bit of a joke. And a lot of states you can’t build a an off grid house like that. The technology exists now with solar and storage. You still need to bring utilities to your property even if you don’t want them. And that to me is just an outdated model. I mean, utilities. The utilities could be on the other side of this making money from solar from Evie chargers, like they could figure out this As transition is happening, how are we going to get ahead of it? And how are we going to make money from it? Instead, they’re just doing what, you know, a lot of big old dumb corporations do, which is they try and stop it or slow it as long as they can, but like, you can’t, no one will stop this transition, it’s happening. And it’s gonna happen faster and faster, as we, you know, get closer to this net zero economy. So, I think I think a lot of utilities are going to lose in that perspective.

J Darrin Gross 35:26

Yeah, well, I’m pro, you know, kind of bucking the system a little bit, and, and especially if there’s something good comes out of it. And, and sometimes it takes a little while to make the powers that, you know, I think that I think this is true in a lot of things is that anybody that’s in power is going to do anything they can to protect themselves. I mean, I’ve seen it just in silly ways. And then different things where, you know, an agency or a person or an industry is just, you know, this the way we do it, you know, and it’s like, well, that’s kind of silly, but no, this is the way we do it. And, you know, if that’s if you’ve got a stake in that, and that’s your livelihood, and, and you’ve got enough people that are affected by it, he can really slow the rate of change. But, you know, here’s the system, we have

Owen Barrett 36:23

a real short term perspective, though, right? I mean, like the the ignorance of thinking that you can slow progress is just mind boggling. Sometimes. I mean, there’s a gazillion examples of corporations that have had that mentality, Polaroid comes to mind. And look what happened to them. I think utilities are gonna see similar fate unless they start understanding that this is an opportunity for them. And right, and maybe they’ll start encouraging some of this progress.

J Darrin Gross 36:56

Well, it’d be nice to, you know, especially with all of the things that we’re facing, I like said, I’m an insurance broker. And, and there’s clearly, there’s clearly a consequence, for the way that we’ve, you know, you know, the way we’ve been behaving or way we’ve been acting stuff, and, and anything I think we can do to, you know, turn the corner or lessen the impact, I think is a good idea. So, but he let me ask you, so on what’s going on? Oh, on these systems, do you? Is there a straight line depreciation mentioned? Or cost segue? Do you guys what, how long do these systems? How long do they last? And how long do you schedule for depreciation.

Owen Barrett 37:52

So we usually you could do bonus depreciation 100%, year one on solar, so we do that. But they generally last 25 to 30 years. I mean, there’s a lot of instances where they’re still performing past 30 years. But usually the there’s just like a couple of key components to solar systems. One is the racking on the roof. The other is the inverter that, you know, takes I was mixing us up DC energy and converts it to AC or AC to DC. And then the third is the module itself, the the panel. And so the panels are usually warrantied, like a production warranty for 25 to 30 years, inverters are usually 10 to 20 years racking, you don’t really have to worry about so we’d appreciate everything here, one. And we expect these systems to last at least 25 years.

J Darrin Gross 38:42

Yeah. Hey, Owen, if we could, I’d like to shift gears for a second. Now by day by day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there are three strategies we typically consider, we first look to see if we can avoid the risk. And that’s not an option when we look to see if there’s a way you can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way we could transfer the risk. And that’s when an insurance policy is risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. Could be your clients, investors, the utilities, you know, public policy. You know, however you would like to identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Owen Barrett, What is the BIGGEST RISK?

Owen Barrett 39:53

Yeah, I think it’s easy. It’s climate change. I think it’s climate change. For a number of reasons. From a utility perspective, I mean, look at the heatwave that we have going on now, in the Southwest US, how are utilities going to keep up with all that demand? Assuming that this is like the new normal. From an from an insurance perspective, we’re seeing major insurers pull out of entire states, because the climate risks are too high state farm just pulled out of California due to wildfires, and Florida due to Hurricane risks. So there’s so many adverse effects of climate change that are going to just perpetuate through all different pieces of the economy. Agriculture is a huge one too. I mean, thinking about your food supply and how that’s gonna get affected. There’s just there’s so many risks of climate change, that it is just mind boggling to me that it’s not everybody’s number one priority to do everything in their power, whether as an individual or corporation and institutional investor to solve this as fast as possible, because I think we’re moving entirely too slow.

J Darrin Gross 41:12

I get it. Good stuff. Hey, Owen, where can listeners go if they’d like to learn more connect with you?

Owen Barrett 41:19

So for me personally, I’m on LinkedIn. Owen Barrett. That’s really the only kind of social channel that I use personally. And then for the company, Rayven, it’s R A Y V E N in our handles, our join Rayven on everything, every major social platform.

J Darrin Gross 41:39

Got it. Owen, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.

Owen Barrett 41:50

Yeah, thanks for having me. It’s fun. All right.

J Darrin Gross 41:53

For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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