Multi-Tenant Industrial: Apartments for Industrial | Durable Value Ep. 90
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Ryan Swehla: So today we wanna talk a little bit about the idea of multi-tenant industrial as the apartments for industry. And before we get into that topic, let's talk a little bit about what is multi-tenant industrial. So multi-tenant industrial is Industrial parks that have anywhere from 10 to 25 tenants. These are smaller spaces, 5,000 to maybe 20,000 square feet.
And the uses, when we hear the word industrial, a l- lot of times we think of Amazon distribution. Um, and really we're not talking about distribution centers, we're talking about tenants that do service, they provide services like pool service, landscaper. We're talking about tenants that do, um, construction, that do light manufacturing, maybe specialty distributing.
This is really, um, kind of your cross-section of American industries in multi-tenant industrial parks.
Joe Muratore: Yeah. We probably have almost 500 tenants in our, uh, commercial por- portfolio now, uh, doing all sorts of things in-
Ryan Swehla: Yeah ...
Joe Muratore: all sorts of places. But the, the main idea here is that, um, uh, multi-tenant industrial is the apartments of industry, and that's the- Yeah
title here. And by that we also mean these aren't the anchor tenants of centers. We mean that one tenant goes out, another tenant goes in. In most of the markets we s- well, actually in all 12 that we serve, uh, vacancy is, uh, about 4 to 6%. That's, that's sort of where... Th- that shows strong demand. That shows, uh, that when we lose a tenant, there's another that can go in usually.
Uh, usually they don't have the ability to demand, you know, extravagant tenant improvements which are expensive. Usually commissions stay reasonable. But usually we're in, uh, more affordable landlord-favoring environments, uh, which allow us to, uh, function and, uh, do what we set out to accomplish with value creation, uh, instead of being in tenant-favoring environments where we're like, "Oh, man, gotta fill that space.
How can we help? How can we help?" Translation, uh, leakage on, uh- Costs ... investment returns.
Ryan Swehla: Yeah. Yeah, and, uh, multi-tenant industrial is also very, um, fungible. You know, one space compared to the other space compared to the other space, it's all got an office, a roll-up door, maybe a truck dock. You know, it's, it's very standardized, whereas, uh, you know, as you get into more specialty industrial, um, it's unique functions for what is specifically in that space.
But much like apartments, it's like do you want the one-bedroom or the two-bedroom? Do you want the balcony or not? Uh, you know, do you want the 5,000 square foot or the 2,500 square feet? Do you need two offices or one? It's a very functional, um, fungible asset type.
Joe Muratore: A big part of our investing thesis is that if you wanna develop something, you have to, uh, spend 100% of the money to build it, and then you have to get 100% of the rent to justify it.
Uh, most of what we've, we've bought has been at 50% of what it costs to build, is what we've paid. Uh, and we still get 75% of the rents. And by that I mean for '80s, '90s, 2000s product that, that we own, um, average tenant size is 3,000 to 7,000 square feet. Uh, commonly we're at, we're in it at 100 bucks a foot or less.
Sometimes we're as low as $80 a foot, and for really nice stuff we can be, you know, 120. But, um, y- you know, we're, we're able to buy in a market that's much less than what rents would be required for to justify new development. So in that, uh, sense, we're ... There's not new supply coming on.
Ryan Swehla: Yeah. And, y- you know, just to drill down on that a little bit, there's a unique dynamic within multi-tenant industrial that you don't see in the, in the big box.
With big box, uh, development, you know, big Amazon distribution type, um, two things. Number one, uh, rents have grown to a spot where it justifies new construction because construction costs for those are generally less than multi-tenant industrial because multi-tenant industrial, you've got extra demising walls and service panels and office space and lo- you know, a lot of other infrastructure that when you're building a big four walls and a roof you don't have.
So the construction costs in multi-tenant industrial don't really justify ... Or the rental rates don't really justify new construction, which has created this kind of long-term supply constraint. The second aspect to it is when a developer goes out and builds for a new distribution center, they are building based on the credit of the tenant that they are able to sign there.
With multi-tenant industrial, you're, you never have strong credit tenancy. You're ... Just like apartments, you're, you're relying on a diversity of tenants- Mm ... to create the credit or the strength of the asset. And so that's a much harder project to finance if you're looking to develop a project. I
Joe Muratore: think a big attribute of the types of things we buy i- is yard space, and you, you don't see that very much anymore.
I- in modern new development, you have to really maximize the value you get per square foot because that's what the economics require. But, um, in the deals we've purchased, they ... You know, when, when you look at '80s product or '90s product, it had more yard space, um, more than would be justified today. And that's really interesting because in some of our markets we have product with yard space that we bought at You know, $80 a square foot.
One comes to mind that we paid 84 for. But then you've got new product coming on that costs $150 a foot or more to, to build. Um, sometimes as much as $200 a square foot. So they're forced to get higher rents, but they're... Even though they're newer, they're less amenitized in that the tenants there are not having the yard space that our product offers.
So devel- You know, it's a, it's a tough balance, but we fix up the properties we purchase, so-
Ryan Swehla: Yeah ...
Joe Muratore: in most cases, w- when we buy it, it doesn't look that great, but when we're-
Ryan Swehla: Yeah ...
Joe Muratore: six months later, it looks, it looks pretty good. And, uh, and yet we own it at a significant value compared to our competition.
Ryan Swehla: Well, and that outdoor yard space, uh, we're able to collect rent on, so essentially we're buying a income-generating component for free.
Joe Muratore: Yeah.
Ryan Swehla: It's not being valued into the equation, and a lot of times the prior landlord hasn't been charging rent- No ... on the yard space.
Joe Muratore: It's a key attribute that has gone unpaid for.
Ryan Swehla: Yeah.
Joe Muratore: And when we offer, we're not offering money for that attribute.
Ryan Swehla: Yeah.
Joe Muratore: And the landlord hasn't been collecting money on that, and so they're... They just think it's a normal thing. But-
Ryan Swehla: Yeah ...
Joe Muratore: no, it's, it's really valuable.
Ryan Swehla: In fact, it's a new asset class. Yeah, I can tell. Apparently it's called IOS, industrial outdoor storage.
Yeah. We, we've been operating in it for a while. We just didn't realize it was a new asset class.
Joe Muratore: Yeah. I think a big part of this is to understand that, um, small bay industrial is, h- has utility characteristics. It has infrastructure characteristics. Like in a community, this is last mile. This is where entrepreneurship lives.
This is where manufacturing and new ideas and, and a tremendous amount of a community's jobs- Mm ... actually occur. So it, it's Tempting or sometimes real estate is, is seen as speculative, but, uh, this particular asset class has much less speculative characteristics and, uh, more utility characteristics. Uh, u- utilitarian or public good characteristics- Yeah
uh, in that communities need it.
Ryan Swehla: And as we mentioned earlier, the businesses that are in these business parks are really kind of the heartbeat of America. A lot of entrepreneurial businesses, manufacturing, people that are creating things and creating value in their community. And s- and, um, while, you know, some investors may sleep at night feeling like they have an Amazon lease, and, you know, they, they don't have to worry about it, I would much rather have a lot of leases signed by small businesses where their livelihood relies on that business.
Mm. Their income, their gen- income generation comes out of that business. And so it's, in many senses, it's a much more durable, um, revenue stream than, you know, the triple net lease credit tenant-
Joe Muratore: Yeah ...
Ryan Swehla: really.
Joe Muratore: With a big tenant, you're great until the second you're not.
Ryan Swehla: Yep.
Joe Muratore: With, uh, it, it looks really solid.
It's, it's ... Well, uh, great systems degrade, uh, quietly, and, uh, poor systems degrade all at once. The point is, if you've got a big tenant, you're great until they leave, but when you've built a lattice of- Yeah ... tenant diversity, wow, you're in such a durable stance because when one tenant leaves, you know, you can bring another one in, and you're not reliant on any one industry or any one-
Ryan Swehla: Yeah
Joe Muratore: credit is in the economic diversity
Ryan Swehla: Y- you know, it's interesting because, uh, w- I was speaking to someone recently about the progression of institutionalizing real estate, and the first asset class in institutional real estate was the beautiful class A high-rise on Manhattan. Uh, it was the idea that, well, these are beautiful, they're sexy, we can put them on the front of the annual report, everybody likes them.
Um, and then retail was allowed into that equation. But industrial and apartments were always kind of a little bit of the stepchild of that equation 'cause they weren't attractive, they didn't show well, and yet the durability of income and the, you know, downside risk mitigation ultimately brought those into the f- the food groups.
Well, fast-forward to today, and we, if we just look at the industrial asset class, today we've kind of got a very similar situation where the big, pretty, new Amazon warehouse is on the cover of the, the marketing brochure, and everyone talks about how this is industrial and it's so sexy and, and so beautiful.
And yet there's this sub-asset class that has incredibly durable cash flow, it has a diversified tenant base, it's incredibly needs-based. It's a very sticky, durable asset, but maybe it doesn't show as well on the cover of the, uh- It
Joe Muratore: doesn't.
Ryan Swehla: Yeah, the, the brochure. And, and yet over time, as we've seen, uh, industrial became an asset class, mini storage became acceptable, mobile home parks or, you know, manufactured housing became acceptable, and in the same way we see this kind of multi-tenant industrial becoming a, uh, continuing to be a more institutional asset class.
Joe Muratore: Well, it's interesting you say that because it's also one of the most fragmented parts of the market. It-
Ryan Swehla: Yeah ...
Joe Muratore: it's so, uh, quote, mom-and-pop owned. It's still owned ... Y- it, it hasn't had the consolidation that, uh, other, you know- Yeah ... apartments have had, offices had, shopping centers have had. It's still very locally owned, and but it, that is changing, and I, we are a part of that.
Uh, when a group like ours brings, um- precise, defined conviction. You know, uh, uh, we're vertically integrated. We self-manage. We're able to make these assets, uh, attractive. We're able to manage them, uh, well. Most of them are managed, uh, sleepily. You know? It's a passive thing, da, da, da, da, da. But, um, like we're precise about knowing what the market will bear, about what our business plan is, about what we can pay.
I mean, it's a great opportunity, and that, a- and I would say it's a great opportunity for tenants as well. We're, we're beautifying these parks. Um, we're running them well. We're giving... When, you know, when, when tenants have needs, we have an app for that. Like s- things happen quickly. Customer service happens quickly.
Um, so there is a professionalization that happens as a result of, you know, our investment as well.
Ryan Swehla: And that's why we think that multi-tenant industrial is apartments for industry.
Joe Muratore: Yep.
In this episode of Durable Value, discover why multi-tenant industrial real estate is one of the most durable and overlooked investment opportunities in commercial real estate. Joe and Ryan break down what makes these smaller industrial parks such a compelling asset class. They explore the unique economics, supply constraints, and tenant diversity that create stable, long-term value.
Timestamps:
0:00 - Introduction: Multi-Tenant Industrial as Apartments for Industry
5:12 - The Value of Yard Space and Buying Below Replacement Cost
7:49 - The Heartbeat of America: Why Communities Need Small Bay Industrial
8:35 - Tenant Diversity vs. Single-Tenant Risk
10:01 - Why Multi-Tenant Industrial Is Becoming Institutional