Chad Griffiths  0:00  

But I like the idea of having cashflow get like you said, if you have some rental escalations in the lease, you can get that that top line revenue growth just organically. If if a vacancy does come up, you might be able to do some value out over time. But on that other end of the spectrum, it might be somebody buying a derelict or building that’s vacant, and they’re going to do a full renovation and reposition it, and then try and find a tenant. To me that just comes with a lot of uncertainty. And I would, especially since I’m deploying my own capital into this, I would just rather have the comfort of of that, that cashflow certainty in exchange for not getting as high return as the guys that have higher risk.

Announcer  0:40  

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  0:59  

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, my guest is Chad Griffiths. Chad has been an industrial real estate broker since 2005, and an investor since 2014. And in just a minute, we’re gonna speak with Chad about industrial 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’d like to see how handsome Our guests are, be sure to check out our YouTube channel. And 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, Chad, welcome to CRE PN Radio.

Chad Griffiths  2:09  

Oh, thanks so much for having me on there. And I got to say you’ve got one of the most amazing radio voices I’ve ever heard as your natural for a podcast host.

J Darrin Gross  2:17  

Well, I appreciate that. Hopefully, hopefully the content is rich and people people enjoy come for that. But I appreciate that. Chad, I’m looking forward to our conversation today. Before we get started, if you could take a minute and share with the listeners a little bit about your background.

Chad Griffiths  2:35  

Yeah, so I started in real estate when I was quite young, I actually started in residential real estate, investing in around 2000 to 2003 with a few friends and didn’t really make any money but didn’t lose any money either. But I had the itch to to get into real estate more. So I started by actually joining a Residential Brokerage, did that for about a year in 2004. And just didn’t really see that as being a long term career path for me. So I reached out to a few people that I knew and God started as a commercial real estate brokerage in 2005. That brokerage was heavily focused on industrial real estate. So that’s just naturally where I got put into as well. And I like to say that, at the time, I had no idea what industrial real estate was, I was a complete layman going into it. And I thought it’d be maybe working in office towers or retail strip centers. And it was just by pure luck that I happened to join in a brokerage focused on industrial. And it was such a great turn of events for me, because I’ve been doing that now for 16 17 years. And it’s been an absolutely wonderful experience. So broker for the last 16 17 years. And then I started investing in myself in 2014. And with a series of partners that we have where we pretty much added one property a year. So we’ve got a pretty good portfolio going now, including we just closed on one boat a month ago now for 4.1 million. And that’s a multi tenant industrial building, right in the city that I work in.

J Darrin Gross  4:09  

Sweet. That’s great. I and I love it when people are able to not only work in the space, but also invest. I think there’s I mean, it’s it’s always exciting to see others doing it, but to actually, you know, be in and be able to participate is that much more exciting. I wonder if we could start here for a second. You mentioned when you first started that you did not even understand what industrial was. For our listeners, I wonder if you could just kind of take a second and kind of give some parameters on what what industrial is and what it’s not.

Chad Griffiths  4:47  

Yeah, great question there and I and that’s a natural place to begin because I think a lot of people are starting to learn more about industrial just with the rise of Amazon and E commerce and All these big distribution centers, I’m sure it’s the same in Portland as it is all over North America, where we see these massive distribution centers going up in higher profile areas. Like in my market, there’s a million square foot Amazon fulfillment center, right outside the airport. So it’s visible for everybody. So now you can miss this a million square foot building right off the highway. So now it’s on a lot more people’s radar, whereas traditionally, these these industrial buildings were tucked away more in industrial parks. And that’s, that’s by urban design, the planners will intentionally try to segregate the industrial parks, from residential and even other commercial parks, just because they can be noisy or they can smell or there could be more vehicle traffic, like semi trucks coming and going. So by design, these industrial buildings have been out of the public view, where now we’re starting to see them pop up all over the place. So I think that that’s a good place to get into it is the first one, which more people are becoming familiar with. And now are those distribution centers. And I would categorize that into, I usually break industrial state down into three main categories, warehousing, manufacturing, and Flex Properties. And those distribution centers will usually fit neatly into that warehousing category. And that’s all the properties where things are basically stored, or they can be repackaged, it could be a shipment of trucks come bringing stuff in, then it’s repackaged, put into different categories and then shipped out to somewhere else, those are typically going to be a warehousing type of property. And the other one, which is just as big and just as prevalent, but outside of that public preview, or the manufacturing properties. And a good example is one actually not far from you, the Boeing Everett factory just outside of Seattle, which is a 4 million square foot building. And it takes a bit of mental effort to actually understand how big a 4 million square foot property is. But all that they do in that property is all the raw materials for the planes come in, the planes are assembled and manufactured and pieces are all put together. And then the finished product, the plane will go out the door on its way to the customer. And that’s that’s a traditional manufacturing property, which is a massive building, but they can be all the way from a 4 million square foot building down to a 2000 square foot industrial Bay. There’s a wide assortment, I think that that’s what a lot of people don’t grasp. Without having some intimate knowledge of it, there’d be no reason that anybody would know this. But there’s a full spectrum of size on this as well. And on the last category is Flex Properties. And I consider that to be more of like a miscellaneous catch all. For industrial properties, they’ll usually be a property that’s zoned industrial, so the municipality will give it an industrial type of zoning, but it might not be conducive for warehousing or manufacturing. So it’s still an industrial zone property, it’s probably either in an industrial area, or it might be on somewhat of a higher profile area. But the key is that it’s still an industrial zoned property, but it can be a wide array of uses. And I’ve seen just to give a few just for context. I’ve seen churches and industrial zone buildings. Car dealers are another great one, because at the front, they’ve got their showroom for all the vehicles but at the back, they’ve got a warehouse for working on all the cars or storage. It’s really just an industrial building that has higher profile exposure to a main road where car detailers dealerships, like to be a bottle depots I’ve seen in industrial buildings. Self Storage is another common one, art galleries, there’s there’s a ton of uses that can provide that the municipality will let that that type of use into the zoning classification that they’ve set for it, you can put a number of different uses into a flex industrial property, but those would be the three main ones. And I would say the bulk of them will be either a warehousing or manufacturing property, but Flex is still a huge category unto itself.

J Darrin Gross  9:07  

And I really appreciate you breaking that down because I think there’s there’s maybe like a fuzzy idea of what it is but to have a more clear picture it certainly helps in and I think kind of what I was picking up on what you were always you breaking it down. So industrials is basically the class and then you have the subclasses which you know the distribution manufacturing or the flex and then is the zoning then does that determine the occupancy possibilities or is industrial like if you came to review you looked at your local zoning and it says industrial is that then what can fit in that that or what can occupy that space? Is that determined by the city then or is that under industrial anything? Anything goes it’s it’s one of those that you’ve been

Chad Griffiths  10:00  

Yeah, every city will have their their own guidelines on how they set their regulations or their bylaws. But going back to the point about this being an urban planning exercise, the cities are want to have the ultimate control over what’s going to go into that building. And it’s just for for the purposes of avoiding having a heavy manufacturing facility right next to a residential neighborhood. Now just cause that cause problems for everybody, there’d be non stop complaints, and it would just, it’d be something that they want to avoid. So every municipality is going to be a bit different on this, but the idea is that they’ll have within the main zoning categories industrial being one of them, though, they’ll typically be a few subcategories of zoning. So in my market, as an example, we’ve got light industrial zoning, medium industrial zoning, and heavy industrial zoning. And we also have a business industrial zoning. But for the purposes of just making this as simple as possible, if we just focus on light, medium, and heavy, every municipality or most municipalities, I should say, are going to have some sort of ranking system like this, and a light industrial property, it could even just be a street office use, there can be an industrial building that is leased just to Office tenants. So the the intensity of what’s happening in there is actually quite low. As you start going up that scale, medium industrial, you might see some more heavier uses, like an auto mechanic or some sort of use that will have more traffic or more noise. And then once you get to heavy industrial, that’s when you can get them to like a heavy manufacturing property where they’re welding or machining, those ones are typically going to be as far away from that residential base as possible. But for for good reason the municipality is going to want to or should, I might even go so far as saying they should control what’s going what’s going into each individual building that they assign a zoning classification for, just to avoid the problems of, of neighbors not liking each other, because one’s residential and one’s a heavy manufacturing, they just try to keep it keep that relationship as clean as they can.

J Darrin Gross  12:07  

Yeah, and I it makes complete sense. I mean, there’s some sort of a buffer between, you know, the different classes, and especially when you get from residential to any kind of manufacturing, I think there’s, you know, makes good sense to have some sort of a barrier. You wouldn’t want little kids playing in, in the areas where the big heavy trucks and, and I can’t imagine it’s enjoyable, if you’ve got around the clock manufacturing, you know, Clank, Clank, bang, bang, boom, boom, you know, orange and a lot kind of stuff. So that all makes sense, but I appreciate you kind of breaking out because it’s like, I think sometimes when, when, you know, you mentioned like a manufacturing like a Boeing plant. I mean, it’s like, holy moly, that’s, that’s huge. And just as far as the the opportunity for an investor to get in, I mean, a 4 million square foot building is probably not likely to be owned by a, you know, individual investor. In that kind of raceway. Next question of the different classes, you mentioned, the the distribution, manufacturing and flex, is there any weight that you would be able to assign that you would think that the percentage of of occupants are owners versus, you know, more and more of an opportunity for an investor? That’s not the occupant to, to, you know, buy and be a landlord?

Chad Griffiths  13:26  

Yeah, instead of you in focusing on the on the categories themselves, I think it’s almost going to be size dependent, because the just the price is going to rise in proportion to the to the size to some extent, the more expensive a property is, and the larger that it is, the more economies of scale are going to be there. So my price per square foot might go down a little bit as you get bigger. But generally speaking, a 200,000 square foot building is going to be a lot more expensive than a 2000 square foot building. So I think size wise is where people would most likely want to focus. Like it’s just it’s going to be unobtainable for the average investor to go and buy a $20 million building. Whereas some of these smaller ones and I speak about the first industrial property that we bought, my partner and I was a 2000 square foot, industrial condominium. So same same type of ownership structure is like a residential condominium or strata where the building is broken down into legal units. That was the same with ours is a building that’s about 30,000 square feet. And this one bay in the building was 2000 square feet. And by the time we had closed on that, and we had to fix a few issues in there, we were into that for about $400,000. And we actually still own that property to this day as the first one we bought in late 2014. And we still own that one and as a $400,000. Condo. It was very small. I think we put down 100 grand or so between the two of us on that, and I got really favorable financing on it. We’ve had one tenants in there for five years and then we’ve put another tenant in there since. And that’s that’s been a really good little industrial condominium for us. So I think it’s you, you could have different categories that you could find a, a warehouse, that’s a 2000 square foot warehouse, where tenants can come and just store smaller tents can come in and store stuff, you can get a manufacturing Bay, you can get a full flex property, we’ve we’ve got everything in our portfolio, we’ve got residential or residential, my apologies, we’ve got warehousing, manufacturing and Flex Properties in our in our portfolio, and they range from that $400,000 to the biggest one we have is about 5 million. But we’ve, we’ve we have partners on that as well. So it’s not just our own capital, and we’ve got bank financing on it as well. So we’ve we’ve scaled our portfolio, but it’s been it’s been over time. And we’ve intentionally sought out the properties that we could afford, as opposed to just focusing on warehousing or manufacturing.

J Darrin Gross  15:59  

No, that makes sense. And especially like you mentioned, just the size of the property kind of predicts the the price and the opportunity for the investor. Let me ask you, so we talked a little bit about individuals and sounds like the the larger properties you’ve bought, I don’t know maybe all the properties you’ve had a partner on in some way, shape or form? I know. You know, there’s there’s multiple ways to do it. Go solo partner J or joint venture or syndication? Do you are you doing any syndication? Are you doing joint ventures? How are you going about acquiring properties?

Chad Griffiths  16:41  

Yeah, we’re doing it all through corporate ownership, corporate partnerships right now. So we’re not into the syndication stage where we’re sponsoring a deal. And that’s, that’s been by design, where we’ve, we’ve just wanted to first build out a track record for ourselves. So that at some point down the road, if we ever do decide to sponsor a deal, then then we could be confident as the GPS and try to attract LPs and give them comfort that we we have a good track record. And we’ve just been fortunate, we’ve been in a position where our partners have come in as equity partners, and we’ve, we’ve gone in as equity partners as well. So it’s just been a good arrangement with some very close friends of ours. But at some point that we would like to do that just to scale the scale of the ownership portfolio beyond what we have right now, it probably is on the radar. But it’s been a very, very close group of friends and colleagues that we have invested alongside us right now. And it’s, it’s we’ll just set up a new corporation that will hold the real estate, and then our individual holding companies will own the proportionate share within that, which has just been a good structure for us without having to get securities lawyers and, and everything that entails a syndication involved in it. So that’s, we’re just trying to keep it as simple as possible for the time being.

J Darrin Gross  17:59  

Yeah, I love simple keep. So let me ask you on on the different properties net. You know, a lot of times when people buy a property, they have some sort of a strategy, maybe to to improve the economy’s, you know, value add kind of a strategy, or at least that’s a real common one with like multifamily and in office or retail. Is there any kind of a strategy like that when you go and acquire an industrial property? Or are you basically just looking at here the numbers, we’ve had scheduled rent increases? In let’s see if we can’t fill the vacancies?

Chad Griffiths  18:42  

Yeah, great point. And I put that on a spectrum right on just the the amount of risk tolerance that an investor has in relation to the upside that they envision. So I’m, I’m a pretty on the one end of the spectrum, I’m pretty conservative investor myself. So I like buying properties that already have some some element of stabilized cash flow. So I don’t have to take on the risk of waiting to find another tenant and, and the risk that accompanies that. So I’ve been a pretty conservative investor, most of the stuff that we’ve bought, has, has had tenants in it, or we bid really high degree of comfort that we could backfill some of the individual spaces. But I like the idea of having cash flow, get like you said, if you have some rental escalations in the lease, you can get that that top line revenue growth just organically. If if a vacancy does come up, you might be able to do some value out over time. But on that other end of the spectrum, it might be somebody buying a derelict old building that’s vacant and they’re going to do a full renovation and reposition it, and then try and find a tenant. To me that just comes with a lot of uncertainty. And I would say especially since I’m deploying my own capital into this, I would just rather have the comfort of of that that cashflow certainty in exchange for not getting as high return as the guys that have higher risk?

J Darrin Gross  20:02  

Yeah, definitely the risk reward. And, you know, from what I understand the demand for industrial is is, like limitless. Are you finding that to be the case in your market that there’s just so much demand?

Chad Griffiths  20:18  

It is crazy. In the 16 years that I’ve been in this business, I’ve, I’ve never seen anything like this. And that even includes 2013 2014, which was a pretty hot hot market. There’s just an insatiable appetite for E commerce around the world, everybody shopping on ecommerce, this last 18 months that we’ve been through have really accelerated that trend that was already gaining popularity pre 2020. So we we’ve just seen so much demand for warehouse property, not even just in the coastal markets. And we like along the whole coast where you are like, if you started looking at some of those markets there, the vacancy rate is sub 1%. And when you get into a sub 1% vacancy market, there’s essentially no vacancy, that’s just almost becomes like a rounding error to say it’s zero. But there might be a little bit out there if you’re really lucky. And we’re even seeing that start to creep into more inland markets as well, where Dallas right now is a good example, Dallas is probably leading North America in the amount of development that they have underway, because they’re at historically low vacancy rates themselves. And that’s an inland market. So we’re seeing that across the board, there’s, there’s still pockets of vacancy in in many markets, it’s not nearly as bad in Dallas for vacancy rate perspective as it would be in Los Angeles. But there’s still a lot of demand. And given the long turnaround time, right now to actually get a product from the just piece of dirt all the way up to a finish building. There’s constraints in the bottleneck to get building construction materials like steel, and it’s just making it cumbersome for these guys to actually build as quickly as they want to. So even some of this inventory that’s planned or in the process of going up, it could still face 12 to 18 month delays. So it’s I would expect that we’re going to see a lot of demand continuing for the next number of years, and the supply will try to catch up to it. But it’s, it’s only going to be able to catch up to it as quickly as the developers can build. And I suppose to some extent that leads to a potential problem down the road. And you and I both know that the development community has a propensity to keep building until someone tells them that they shouldn’t build anymore. And that’s usually in the way of vacancy rates rising because they just overbuilt so that that could be a problem at some point down the road. But if if you believe and I believe myself anyways, is that E commerce is going to continue to slowly take away market share from the traditional brick and mortar retailers. So I think this this trend will go for for some period of time still. But at some point down the road, whether it’s inflation, interest rates having arise as a result, or just overbuilding, there could be some uncertainty at some point in the future. But from my standpoint, I’m not making I’m not making decisions based on what might happen in five years. I’m just trying to make the best decision I can with the information I have available right now. And that information says that industrial real estate should be a very hot commodity for the next few years.

J Darrin Gross  23:31  

Yeah, that’s, that’s consistent with what I’m hearing. I’m curious, you know, like there have been some leaks here in the States. And I would assume that it’s true up there in Canada as well. But some of the the large retail centers have kind of lost their pizzazz. Have you seen any, like conversion of of those types of properties into maybe a light industrial warehouse? option? I don’t know if that’s plausible, just to me, it’s always been amazing how some of these make some of these retail malls for you know, huge, and to just have them go dark or be knocked down just seems kind of like, you know, there should be some sort of an opportunity there, but maybe not.

Chad Griffiths  24:19  

I think that will be a big trend going forward. We’re not seen as much in my market. And I think it’s more reflection that we just we don’t have as much retail inventory per capita as as some markets in the states do. Where there’s going back to that overbuilding problem, like retail for the longest time developers just loved building retail shopping centers and and they they were all Everywhere you go it’s you’d look at it at a shopping center and in I found name was in the US that there’s just a lot more retail per capita. So we’re we’re not seeing that as much. In fact, I was at a mall the other day, just getting some some gifts and I couldn’t believe how busy it was. So I thought the same thing we’re in this middle of this once in a century event, and everybody’s ordering stuff online. But here I am in a shopping mall having to wait to get a parking stall having to wait to wait in line to pay. And I couldn’t even believe it. But I think that that E commerce will still continue eroding that market share. So I think that that’s going to be a trend that that happens all over. And to your point, that this is already on the radar of a lot of these big distribution companies that want to get that last mile delivery service. And that last mile delivery is, is essentially, it’s not an actual mile, it’s just used to describe the final stage of getting that product. So it could have come from across the ocean on a container ship, it could come across the country by train, or it could have went to a factory by a semi truck. But it there’s that last stage where it gets from that final warehouse or final retail store to your front door. And what a lot of these distribution companies are trying to figure out is how can we do that as economically as possible. And in many cases, there, there are all these underperforming malls, especially in the US that are strategically located in in communities. That’s that’s where a lot of the shopping malls have set up. So I think that there’s going to be a big appetite for these distribution companies to figure out how they can economically enter into the shopping malls and converted into a giant warehouse distribution center. But the challenges that that they’re going to have to overcome are first can they pay, can they pay the retail rates that the landlord might have been receiving from the previous tenants that were in there? Or does the landlord just recognize that any rent is better than no rent. And then there’s also going to be some sort of zoning ordinance challenges on how they can convince the municipalities to allow a go to go from me commercial use to a an industrial use. And that’s, that’s not easy headed, I’m sure you’ve dealt with this as well, you start getting into all the red tape and bureaucracy, dealing with a city and trying to get them to change their minds on how they do this is not a quick or easy or certain process. So there’s still going to be a lot of hoops that go through there. But it really is a perfect setup. If for these distribution companies that need that last mile logistics, the shopping centers are in a fantastic location for it. And typically they have high ceilings, there’s lots of parking, so that it’s set up for it. It’s just there’s the economic factor. And then there’s the uncertainty of dealing with a municipality. But I noticed some great insight there isn’t I your 100% right on that, that will be a trend that we should watch going forward.

J Darrin Gross  27:34  

Well, the facility itself, that to me makes a lot of sense. But as we as we’re talking and I’m just thinking about the traffic and the zoning would probably be one of the biggest push backs because if you’ve all of a sudden got a you know, it was a retail center and now you’ve got semi trucks backed up forever trying to get in and out of that property, I can see a little bit of resistance to that. I guess if a if a property were situated close to interstate or, you know, major roads, and it was something easy on Easy Off, it might be an easier sell, but I could certainly see if it was you know, deep in some sort of residential section, there’d be a little bit of pushback on that, which, you know, if you’ve ever there’s a I think it’s a FedEx distribution center near near where I live, and if you’ve ever been in in the morning traffic trying to, you know, go through that zone where they’re pulling out I mean, it’s like there’s just like a line of these trucks you know, pulling out through that one light you know, kind of thing.

Chad Griffiths  28:35  

And they’re not they’re not they’re not quiet they’re so yeah, it’s It’s intrusive for just how big they are and how much they block the road. But they’re they’re loud when they’re if they’re hitting their their brakes or just backing up the sound of backing up if you’re in a house next to that shopping center. You’re not going to be very pleased to have that tenant move in there.

J Darrin Gross  28:54  

Yeah, yeah, no, it you know, I think more about it it’s like there’s definitely some you know, method to the madness and and to try and you know, keep the peace if you will kind of thing so, but yeah, it seems like there’d be an opportunity for those you know, the failed retail centers that are further out. I often think of Kansas where I grew up and in the retail center where I bought every pair of Levi’s and every pair of shoes that I ever wore growing up they you know, basically went dark and they knocked it down and I think there’s a Lowe’s there but, but you know that overbuilding of retails a lot of it was accelerated based on the way that there was no, no like land use laws that prevented the urban sprawl or the suburban sprawl and you know, you had this just just ongoing and basically the, the valuation of your residential property was directly proportionate to how new it was. So you know, every couple of miles or be another intersection look just like the one you went through, you know, a couple miles back and it would have a Starbucks. On one side, and, you know, the grocery store and all that, and, you know, but there was kind of a recognition, I think, over time or people started going, like, we’re really a long ways out, you know, and so there was kind of this migration that’s kind of started back in and is that started with cursor moves further out, retail centers, lost some of the support. And I think they went dark and and and to me, that would make sense for those to have a chance based on, you know, the traffic patterns and where they’re located in proximity to a major thoroughfare and, and just based in a space, we’ll make one sounds interesting know how that, that, you know that, like you said, the most developers don’t stop and tell some, he says, Stop, there’s,

Chad Griffiths  30:50  

well, you can see the problem that retail is having right now is that they’ve got waning demand just from losing some market share to ecommerce, and they have too much supply. And I’m just basic economics will say that that’s a bad problem. And right now that’s afflicting retail. But you could extend that to Office, same same problem, that there’s a lot of uncertainty on which home office is going to be needed going forward. But they’ve got a lot of supply. Whereas industrial right now, it’s the opposite problem. There’s increasing demand, and there’s not enough supply. But there’s it’s cyclical, I wouldn’t be so naive to think that industrial is going to continue growing at this rapid pace indefinitely. Nor did retail nor did office. So there will be some turning points on that. But it’s how long that is and what the implications are. And whether it’s just a temporary setback, or whether it’s more systemic. I, it’s really hard to extrapolate that far out into the future and know what’s gonna happen. So I’m, I’m kind of trying to make my plans based on like, short and medium term objectives. And just I guess, maybe it is naive, but just kind of hoping that things work out over a 1015 year time horizon.

J Darrin Gross  32:02  

Yeah, a couple of questions I have for you about the deal. Lens lending is a lending environment favorable for for industrial, is it? What kind of terms are you seeing on a regular basis,

Chad Griffiths  32:16  

it’s definitely very favorable from the capital market standpoint, but it’s not necessarily favorable for buyers that are new into it. And by that, I mean, a lot of investors that want to consider industrial probably have some multifamily background. And that’s just seems to be the the path that a lot of investors take that get to industrial not saying that everybody does get to industrial even wants to but for the ones that do it’s the first time or the small investor anyways will usually have a couple of houses. Though they’ve made some money, then they’ll parlay that into a multifamily project and, and maybe they want to diversify, so they start looking at industrial. When you compare industrial financing to multifamily financing, there’s a lot of really good financing packages you can get from multifamily where where you can be putting down much less from a loan to value perspective. Whereas an industrial, you’re still looking to be probably not 25 to 35% down to buy an industrial property. And that’s using conventional bank financing. If you wanted to get a get a second mortgage or, or do more aggressive terms, there’s certainly lenders out there but you’re probably paying anywhere from 400 to 800 basis points higher on your interest rate. So it’s it comes with a lot more risk. So what what a lot of investors do is they want to get that conditional, conventional financing, whether we did one renewal on a term that we had last year, we got 2.57% on a I think we did a four year fixed on that one. So you can get some like really cheap money, but those those are ones where you’re you have 25 to 35% even downpayment or equity in the property if you’re if you’re refinancing it, so it’s it, whereas like multifamily, you can get much, much higher loan to value ratios. So I think that that’s might be the one surprising part. But the thing that that I like about industrial is that if you’re putting down that much of a downpayment, and you’re getting really good terms, you’re cash flowing right out of the gate, that we’ve cash flowed on every single property that we’ve bought from day one, we didn’t have have those issues where our loan was so high that it was it was stressing the cash flow coming in we’ve cash flowed on every property and then once you couple paying down the principal, and if you can get some appreciation in there, those three factors the cash flow appreciation and and mortgage pay down. If you can hold that property long enough. It can be a very lucrative investment. But people have to wrap their head around the fact that it’s you’re not going to be able to get as high of a loan to value and industrial as you couldn’t in multifamily.

J Darrin Gross  34:56  

And I think that’s that’s creeping into the Alliance. As far as multifamily, just based on you know, the the concern of interest rate increase, what are the mean and the pricing still going higher, but just to get your debt service coverage ratio to be what the bank wants, they’re, they’re looking for a little bit more you know, downpayment or equity in the in the deal. So, but but I, you know, I don’t have any issues with that, I mean, being conservative on that, I think that prevents us from having, you know, another cratering event that just, totally undoes the market. But, but that’s, that’s, I appreciate you sharing that. What about under Oh, and I want to ask you, are those 25 year am amortization terms? Or?

Chad Griffiths  35:51  

Yeah, thanks for asking. That’s important point as well, industrial, it’s much more common to see 20 year em on deals, newer properties, you could certainly push to 25. If it’s older, their lender might even try to push that down to 15. But the most common that, that I’ve seen as a broker and an investor be 20, at the end, everything that we have is 20. Year amortizations.

J Darrin Gross  36:14  

Okay, well, I mean, you’re building equity that much faster. So yeah, that’s exactly. That’s good. Good. Let me ask you about underwriting your tenant, you know, in, in a residential multifamily kind of thing, you’re, you know, you’re looking to they have a job. You know, in any prior evictions or convictions or, you know, I was her past experience, the little bit that I’ve looked at industrial, I mean, I’ve come to recognize that the value of the property is directly correlated, to the quality of the tenant. Lisa, that’s, that’s kind of my perception on it, can you speak a little bit to that?

Chad Griffiths  36:53  

Great point. And, and I and I would, I would have been on that same mindset as you until recently, actually, where I was talking with the, the regional, I can’t even remember what his position was, he was essentially in charge of industrial acquisitions for a very large fund, like in the tune of six $7 billion. And I was talking him on that very topic. And he said that he’s more concerned with the building itself than who the tenant is in there. And his mindset was that if it’s a good building in a good market, you’re always going to be able to find a tenant for it. And you if you take the approach that a tenant is always going to have moving on on their mind. And I think that is a reality is every tenant does think at some point about moving because if they weren’t, then they’re not in growth mode, or the non expansion mode, or the non repositioning, they’re built their business for optimization, every tenant is thinking about moving at some point. Now, they might stay for 30 years, and that’s great. But the tenant might also stay for five years. And at that point, you’re going to have to get another tenant in there. So his position and I’m coming around to this as well is that the building and how it’s how the building is set up so that it can attract future tenants at at the rates that you need, is more important that the tenant themselves. And I think that that’s from like a institutional mindset, which this this fund would fall under. I think that they can do that because they’re it’s investor money, and the people that are managing are making a salary and they’re going to make a salary, regardless of whether the buildings in 90% occupancy or 100% occupancy might affect their bonus, but they’re still going to get paid. Whereas a small investor like myself, I need that cash flow right now I need that cash flow to support the debt, I need that cash flow so I can keep reinvesting it and deferred maintenance and all the things that come with it. I’m I’m hypersensitive to that cash flow that’s coming in right now, whereas the institutional guys aren’t. So I, I balanced that short term mindset about needing to have cash flow by the long term objective that at some point, the tenant could leave the tenant they could go bankrupt. There’s big companies all the time that go bankrupt for for reasons that weren’t clear at the beginning, it was a surprise. So that is a factor or they could just leave once their lease term is up. So I look at it that cashflow up front is vital for for me as an investor as with my own capital and bank obligations. But I also do want to have a property that that is releasable or sellable down the road in the event that they leave in terms of how you can look at a tenant and and underwrite them as a viable entity leasing space from you. I think the easiest way is any information you get from them on their on their financial statements. If you can get two or three years of financial statements, you can decipher pretty quickly how much they haven’t retained earnings, how much they have sitting in cash, what their expense line item was for rent previously, and you can get a pretty good sense of whether they’re capable Have paying their bills and they have a history of paying their bills and can continue to pay your rent. And you can supplement that by getting references from their banker, previous landlord, anyone else that can help give you some comfort. But there’s undoubtedly risk that comes with renting to anybody, whether it’s a small mom and pop manufacturing company, all the way up to the biggest company in the world, there’s some area of risk, like Sears, who would have thought 50 years ago that Sears would have went bankrupt, but it did and in in the context of history in a very short period of time, they did. So I think that that is just a risk that comes, no matter what you’re investing in and into that large institutional investors mindset. If you take the approach that that is a risk that the tenant can leave at any time. But the underlying real estate, the property that you have, so long as it is competitive with the rest of the market, and you don’t have huge expectations of of overperforming, what your neighbor’s property might be leasing for, you’ll always be able to find a tenant. So I balanced both of those. I know, it’s a very long winded question, my long winded answer to your question, but I do think it’s important in industrial to have that short term outlook, especially if you’re like a smaller investor, like myself, that cash flow is key, you need to have cash flow, and but you also need to balance that, oh, by having that long term vision that that tenant will leave at some point.

J Darrin Gross  41:27  

And now it’s part of the cycle there. I appreciate you sharing your your thoughts on that, because it’s a again, not having looked at it so closely as a potential investor in the past, I mean, a little bit that I did, I was like, called, like, wow, this, if you’ve got a lease, that’s like a 10 year lease, that’s, that’s where the law is supposed to one that’s got six months left on it, I’m kind of an understanding, there’s, you know, if you don’t know if the guy’s going to stay, you know, and having that that empty, empty place, and possibly a market. That’s, that’s non big demand. That could be a, you know, buyer beware kind of thing. But if you know, you’re I mean, obviously got to know your market, you know, your market know, the demand and the supply. I mean, that’s that’s kind of the starting point is, is you got to have a good good base knowledge of, of the market you’re in and, and how easily it’ll be to fill the space. That’s good. Chad, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk. And we’ll see if we could transfer the risk. And that’s what an insurance policy is. And I like to ask my guests if they can look at their own situation. In framing, however, you want to be your clients, investors, tenants, the market politics. But if you can take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Chad Griffiths, what is the Biggest Risk?

Chad Griffiths  43:30  

Right now as I see it, the Biggest Risk is that we are forced into another shutdown or lockdown in the market. And I hope that that doesn’t happen. I think everybody has fatigue from from this past two years that we’ve been going through this. And I think everybody wants to get back to business. But I think from the standpoint that if the medical community starts making more issues of this, and if the if some faction of the of the public starts pushing for more, more measures, then then I can see that happening, unfortunately. And if it is for good cause if that is the best course of action, and people agree on it, then then it is what it is. I’m not going to argue it. I’m not going to be that guy with a pitchfork out there saying we can shut down. I just I really hope that we don’t. If we do, I’m concerned that how long this is going for, it’s just going to lead to a whole set of problems. And that isn’t just the immediate ones of of some businesses not being able to be open and the corresponding pressures of revenue and their continuing expenses. But even just what happens with the government’s reaction to another shutdown, because I think that that would mean more stimulus, more spending, more money printing and considering everything that we’ve had to go through in the last two years. I’m concerned that all this spending is just going to lead to some sort of inflation and, and even though the feds are saying it’s transitory and and we should be able to get a handle on this, I’m still concerned that this is this is more than just a short term transitory problem. And I like to really only are the I shouldn’t say the only, but the biggest ammo that the feds have to fight inflation is just increase in interest rates. So I think that that’s coming, I think we’re gonna see, I think we’re gonna see inflation in the near term, or continued inflation in the near term, I think we’re gonna see upward pressure on interest rates. And this This is the status quo like this is if nothing else changes in, in what we’re dealing with right now. And interest rate increases is not good for for, for real estate, because it’s now costing that much more to borrow. That’s a that’s, I think that that this happens anyways. But if we have to do another round of of shutdowns and lock downs, and, and the government prints more money and adds more to it than I think that just adds another level to to inflation and, and trickles down to interest rates. So that that’s probably the biggest risk that I see right now. But I mean, you mentioned it as well, there’s, there’s, there’s so many areas where we could be terrified of we could be the geopolitical risk, economic risk that like it’s endless. And I guess the only solace that I take it in myself is that, in the 16 years that I’ve been in this business, there’s always been risk. Every, every time you open a newspaper at any day, over the last 16 years, and there would have been the media trying to sell us fear about what’s all these bad things going on. And I think that that’s just, that’s a reality that we have to deal with is that there’s always going to be that, that risk on the one side, but that’s what makes a market and makes a market that there’s going to be people that that look at that risk and say, Okay, now we’re sellers, and then there’s people like me who are more optimistic and not ignoring but maybe suppressing that risk and mentally, who are saying, well, now it’s time to buy, like I see a lot of reasons to be optimistic on this. So I think that’s what actually makes them a market is that you’ve got people that are fearful, and you have people that are optimistic, and that the fearful part does weigh on me, I am cognizant of that. But I I still balanced that by just thinking that over the long term, there’s there’s going to be blips on the radar, there are going to be things that manifest like, like we saw this last two years, there are going to be issues that we have to deal with. But over the long term, US and Canada have shown an amazing ability to keep trending upwards. So I’m still optimistic long term. But that, to answer your question, that’s the interest rates being the ultimate outcome, I can see interest rates going up at some point in the future.

J Darrin Gross  47:46  

Yeah, amen to that. I hope to God that, you know, just just the mental fatigue of the shutdown, start, stop, start, stop, start saying I just, it wears on you and and eventually, people get numb to the noise. And just, you know, you, it’s really hard to, you know, martial anybody to get them to go after you continue to, you know, whether you call flip flop or change, I don’t know, the science continues to change that. But still, it’s just people like a message of here’s where we’re going, here’s how we’re going to get there. And just stick to it and work through it. But it’s it’s just weary. But I hear you.

Chad Griffiths  48:25  

One other thing that I would add today because I do actually want to just address the insurance issue because your that is your, your podcast, I think having an insurance broker, such as yourself on your team is probably the most underrated position that people try and fill out their team when they’re buying property. So they’ll likely have a lawyer, they’ll have an accountant, they’ll have a banker, they’ll have a broker, but a lot of investors, specifically first time investors underestimate the value of an insurance broker like yourself, and they tend to treat him more as a commodity, where they can just go to five different companies and get five different quotes and just choose the cheapest one. I I did that early in my investing career as well. And once we secured an investor broker, insurance broker to work on that we’ve built an excellent relationship with him. We’re now anytime we have a question regarding insurance. And there’s a lot of complexities you won’t be the first to say on insurance on even on industrial if you change a tenant that you have in there that could that could change the the insurance policy. So you could go into that I’m sure in depth, but there’s a lot moving in insurance. And if all you’re doing is chasing the cheapest quote that you get, you’re not going to have anyone like yourself who can actually direct you through these challenges and these risks. So I’d encourage anybody add an insurance guy to your team because it will make your your life so much easier than trying to just get the cheapest price out there.

J Darrin Gross  49:58  

Now I appreciate you saying because it’s definitely a moving target and the information changes all the time. And like you said, tenant selection can, you know, create complications for the insurance and and a lot of people don’t think about that upfront. And it’s only when you have a claim and it’s not covered that, then you’re really man. I got it. Chad, where can listeners go if they’d like to learn more connect with you.

Chad Griffiths  50:25  

I started a YouTube channel about a year ago. So it’s just, it’s just my name, Chad Griffiths CRE. And as you can tell, I just love talking about industrial real estate. So I decided to start it a year ago just to address challenges that people can come up with and talk about terminology and, and just really try to fill a gap in the market where there isn’t a lot of information on industrial real estate. And I like to pride myself on the fact that I don’t talk about my company, I don’t talk I don’t even say what city I live in. Because I don’t want to I don’t want it to come across as a as a commercial for my business. I want it to be a standalone product where I’m just trying to add information and value to anyone that’s interested in it. So even if you just search up industrial real estate, you’ll probably come across my channel, because there’s not a whole lot of people talking about it. But that’d be that’d be the best place to go.

J Darrin Gross  51:17  

Awesome. Well, I will certainly check it out myself. Chad, I want to say thanks for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I really appreciate you going in depth. And you know, I look forward to doing it again soon.

Chad Griffiths  51:34  

Yeah, likewise, and thanks again, so much for having me on. And if I’m in Portland next month, like we talked about earlier, it’s been two years since I was there. But next time I’m in Portland, I’ll look up and try and grab a coffee.

J Darrin Gross  51:44  

Yeah, now look for look forward to it. 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.

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