Hi there WSO, it’s been some time since I was last active on WSO, but for those of you that aren’t familiar with me and my older activity on WSO, I go by Trunk Yeti. WSO played a pretty big role in my knowledge growth early on in my career. Now that I have the opportunity to truly be a net contributor vs consumer of info here, I want to make sure I’m taking the time to pay it forward.
I went to an MRED program in the Southeast (thank you @CRE for talking me into it so long ago), and ultimately landed in Texas where I live today. After the MRED, I immediately jumped into industrial acquisitions working for a very well known owner/operator acquiring Class-A/B industrial across the U.S. over the first 4 years of my career. After that, I hopped over to the developer side of the business where I’ve been ever since leading acquisitions/development in the Western half of the USA for a very active merchant-build industrial platform. I live my deals soup to nuts, from land sourcing/acquisition, pre-dev, capital raising, dev/construction, leasing, and disposition.
I am incredibly passionate about what I do and am thankful everyday to get to do something I love. AMA.
How do you think the Industrial market (especially newer developments) is gonna shape up over the next couple years compared to other asset classes?
Fundamentals are definitely softening, but I think overall industrial is going to continue to outperform the other asset classes. Tenant demand is begin to return to the pre-pandemic trendline which was still very strong. Some markets/submarkets are about to have a lot of supply to absorb over the next 18 months, but overall there is still a significant supply/demand imbalance that has a lot of runway left. The X factor for me is sublease space. What happens if there is a deeper than expect recession and a ton of sublease space hits the market over the next 2-3 quarters? That could compound on top the frothy supply pipeline.
I am continuing to do deals, but am focusing on paying up for infill dirt in supply constrained submarkets. The gross returns take a bit of a dent, but risk adjusted we’ll be in a better position. Also very focused and active on the border play.
Overall, I am thankful every day that I work in industrial. It feels like we’re the one asset class, alongside maybe retail, where the wheels aren’t completely falling off.
This is a bit more niche, but MHPs still have excellent fundamentals as well. Average YoY rent growth as of Jan for our portfolio comps was ~9%. Occupancy hasn’t dipped, unless you’re in TX there’s essentially no new supply.
What did you do prior to your MSRE? Why did you decide to go back to school? How did employers perceive your graduate degree when recruiting?
I continued straight from undergraduate to my MRED program. The decision for me wasn’t really a pivot, but more of a decision to just knock the graduate degree out before getting into the real world and to rebrand my GPA. I thought I was smart, but was a bit distracted in undergrad and didn’t have the strongest GPA due to those distractions. It would’ve been very difficult for me to break into acquisitions straight out of school without the MRED, and being able to delete my 3.2 GPA and show a 3.95 really helped, plus it legitimized me as being committed/invested to the career path. I don’t think MREDs/MSREs are for everyone. They’re best for people trying to change careers, or in my case, academic rebrand.
Any insight into your back of the envelope type calculations relating to how many loading bays/dock doors per 1000 SF you're typically considering, what % of land is going to buildable SF vs trailer parking vs dead space, commentary on ceiling heights and the number of pallets/racks that can be accommodated at say 28 vs 32 feet. Really any insight into the quick math and thoughts behind the actual space and how it's used would be great.
Dock Doors
I always max out the dock doors and don’t really see a reason not to. In the dock face, you can get 6 dock doors per 2 bays. You lose two doors due to needing an emergency exit door. I don’t really look at it as a ratio to the square footage.
Coverage
Most of the time FAR ends up being between 30%-35%. Less than 30% is pretty bad coverage, and over 35% pretty good. Most I’ve ever seen was 40.1%, but the site was the perfect geometry for a rear load building and we also had underground detention.
Clear Height
Unless there is some sort of height restriction in the zoning code, I’m going for 32’ clear at minimum. The number of levels of racking is dependent on the tenant’s pallet size. With 64” & 72” pallets, tenants can get another level of racking with a 36’ clear building. As just a general rule of thumb, <250KSF 32’ clear is fine, between 250K and 350K I would begin to consider 36’ clear and evaluate what is standard in the market. Over 350K I would almost never have a building less than 36’ clear. Over 500K I think begins to make sense to evaluate 40’ clear.
What does FAR mean?
Not a real estate monkey so may be some dumb questions haha.
If you say you work in industrials real estate, that is mostly factories and warehouses? Is much differentiation within the sector? Do people specialize more in one or the other? Or is that not really a thing?
Have you seen an uptick in new developments from the Biden IRA and any ‘re-shoring’ of manufacturing? If not yet, do you think it will happen?
May not be thing, but if you had an idea for a project in North Texas, is there much competition between yall industrial guys and residential developers? I ask that since I’m from the area and have seen the huge residential sprawl seemingly all over the place. Does zoning take care of this problem ahead of time?
Almost always warehouses. We don't want to develop specialized facilities that are only used for a singular manufacturing process. There is definitely specialization within the industry, but it is more geographic. Most developers are chasing a similar strategy.
Definitely yes on the re-shoring of manufacturing. We are barely into the first inning on the re-shoring trend, and I truly believe these next 10 years are going to be a defining decade for US commerce. Northern Mexico is going to be the largest beneficiary of China's declining relations with the USA. The Biden IRA is a bit upstream from us in the tenant space, and from my understanding, the allocation of funds from that program really hasn't even started yet. We're seeing a ton of Taiwanese companies coming to North Texas which has been an interesting, very noticeable, change.
Thanks for the response! Super interesting stuff
Hey @Trunk Yeti. How does your promote structure work? Do you personally gave to come up with your GP equity? What if you don’t have a few hundred k to invest in deal, will firm spot you?
I am phantom carried in all my deals and get a portion of the various fee streams. No co-invest, but there is some talk about potentially getting rid of the carry, and basically having the firm loan us (at zero interest) our portion co-invest. Basically just shifts more deal risk onto us if we have true equity ownership in the deal as we can actually go negative and have to pay the firm back if equity gets wiped out. Hopefully it will be more tax efficient, as right now all of my earnings are taxed as ordinary income. I haven't looked that much into the tax implications yet so I'd be curious to hear if anyone else has a similar comp structure.
What are key demand drivers for flex space?
Location driven, usually near high income / high quantity of roof tops and in tech hubs where lab space is a thing. I avoid flex deals as it is a bit outside of the fairway / niche, and very capital intensive on the tenant buildout.
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How often are you building/acquiring land on spec? I'm assuming existing demand is a key factor to determine the viability of a site - how do you gauge demand?
Pretty much always spec. This is kind of a shitty answer, but it is just understanding the market over time. What do tenants want, why the location is superior to the competitive set, understanding comps, etc. It becomes second nature when you're engross in the industry and live/breathe it every day of your life.
We are fortunate in the industrial space that for the past couple years it has been "build it and they will come". We had a flood of people from other asset classes come into the space thinking it was easy and developing non-functional buildings in locations where it doesn't make sense. It worked when tenant demand is busting at the seams in 2020/2021/2022, but we're seeing a reversion to the mean (which is healthy). Broadly speaking, the froth is quickly falling off of tenant demand (see 3PL recession we are currently in), and these marginal developments, which have mostly been in greenfield areas with limited barriers to entry, are going to be the last to lease. Whole lot of vulture PE firms with 'hope they default' pref equity & rescue capital strategies gearing up right now. Definitely going to be some developers out there making deals with the devil because they do not have alternatives. I have definitely heard of some borderline sad operating company deals getting done. 30%+ of the op-co being sold off so that the business don't implode.
Thanks for doing this
Of course! Thank you for the thank you.
Do you still have the industrial primer? I remember seeing a thread you made about this a long time ago.
I unfortunately lost access to it when the link expired. I've tried to recover it from the website, but they process payment through Coinbase Commerce, and I can't get it to work.
Thank you for your time and insights Trunk Yeti.
Question on sprinkler systems. For older buildings that use wet sprinkler systems with a fire pump, have you found that you can retrofit to accommodate ESFR system or do you find that you need to scrap the existing and start from scratch?
Any rules of thumb for ballpark pricing on ESFR or new roofs?
I've actually never personally done an upgrade/retrofit to a sprinkler system. In my previous role, we didn't upgrade wet systems unless a tenant specifically needed ESFR as part of their occupancy. At that point, it was in asset management's hands and I didn't really have the visibility into cost.
On roofs, I feel like I am an industrial expert first, and a commercial roofing expert second. There are a ton of variables that go into this, but if it is just a simple TPO overlay on an existing roof system, $4-$5 psf is a good ballpark number. I pretty much always spot check this with our roof consultant to make sure the assumption I'm using is good as this is the single most important capital assumption in Class-B acquisitions with an aging roof.
I don't even remotely want to know how long ago that was, but I gotta say, this makes me smile.
Now for my question, are you a YETI-branded trunk or a yeti that lives in a trunk?
Yeti from the trunk. Old high school inside joke.
Looking back are you glad you went into development? What skills do you think helped you land into development?
I am happy that I made the jump. I get to learn something new everyday and be the tip of the spear for some really cool projects. There is a special level of intimacy with a project you incepted from a piece of raw land and spend 3+ years working on. It’s hard not to get emotional invested in deals when so much time and effort (and sometimes a shit ton of stress) is put into a deal. It’s even more emotional when you realize how many people are putting faith in your ability to execute and deliver on promises (sometimes in straight up blind faith). I take my responsibility to our financial partners very seriously as I take their investment in the project as partially an investment in me as a person. With me controlling nearly every piece of my developments, I take project failure as borderline personal failure. It can be a lot of pressure sometimes, but I’m thankful that I have the opportunity that I do at a relatively young age.
That being said, development can be an exhausting PITA sometimes. It’s truly shocking sometimes how bad well paid consultants can be.
On skills, I think persistence and a willingness to learn are two of the more important skills. As a developer, you’re pretty much always the dumbest person in the room when it comes to specific knowledge sets (architecture, civil engineering, real estate law, capital markets, etc.) That’s not to say that I don’t know a lot about those disciplines, but I’m far from a Civil Engineer’s knowledge set on civil engineer. As a developer, I’m the guy tying the project together with these disciplines doing the heavy lifting in their various fields and being able to effectively communicate what I need to all these various disciplines.
What’s your total comp in an average year? How is it generally structured between base/bonus/carry? How do you think this sizes up to someone with equivalent yoe/title on the institutional LP side. Thanks!
At one point I let my license go and was accepted into Clemson’s MRED program. I decided to forego the program, though, for a corporate real estate gig with a manufacturer. Ground-up development has always been interesting to me, but I decided on the safe gig instead of paying for more schooling.
I think it was the right decision and it’s taken me down a separate path, but I do sometimes wonder what I missed out on.
How valuable was the program you studied at? Do you think you’re better off than if you’d entered RE out of undergrad?
I'm a private capital multi broker in SoCal and in a prior job got a little exposure in an analyst role on the capital allocator side looking at a few industrial sponsors.
Obviously, there are a lot of issues in multi that are causing transaction volume to slow down. I've been wanting to start working on a new asset class. Do you have any recommendations for getting educated quickly to understand the economic demand drivers + getting educated on which submarket to focus on?
Anyways, happy to hear your recs on industry news/publications/resources/etc.
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