Unlocking Value: The Elk Grove Industrial Complex Deep Dive | Durable Value Ep 81
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Joe Muratore: Ryan, today let's do a deep dive on Elk Grove Industrial Complex, one of our recent investments.
Ryan Swehla: Yeah, so Elk Grove Industrial Park, uh, it's a 300,000 square foot industrial park in Elk Grove, California, which is part of the greater Sacramento metro area. It's in the south part of Sacramento. One of the benefits to this property is it's in a very high income demographic area, has very tight vacancy.
But before we talk much more about the property, let's talk a little about sourcing. How did we find out about this deal in the first place?
Joe Muratore: This is a beautiful case of how marketing works. Uh, every time we close on a deal, we send out a just purchased blast to 1,600 brokers in the Western United States talking about what we just bought, why we just bought it, and what we're looking for next.
Ryan Swehla: How does that, uh, get brokers interested?
Joe Muratore: Well, it turns out brokers get paid when they sell properties. And, uh, we're a great client in that we buy things off market. So brokers all the time get leads on things and they're not quite ready to list, or they don't have a listing, or it's a stale listing, or they, they have some information, and, uh, we are a trusted, uh, way to monetize that because we work through brokers.
They're a great lead source for us, and we had sent out an e-blast, and the very next morning, I, I will not forget this, I sent it out on about a Wednesday, and on a Thursday morning the phone rings. And this young man on the phone calls and says, "Joe, I, you know, I think I got a property for you." And this was not a broker I'd worked with before and i- actually there was three guys on the phone.
He had his whole team, and he was ready to p- uh, pitch this property. And I, I, I could... The funny thing is, from the start of the call- I just knew this was going to be good. Just like y- y- sometimes you get a vibe, but I, I won't forget that when that call started, I was like, "I can tell this is going somewhere."
I think it was the tone of his voice, the fact that he had the whole team on the line. He said, "I read your email. We have this lead we just got, and we think it would be perfect for you." And it was like, "Oh, thank you. It's gonna be a beautiful Thursday." And he went and he said, "I noticed that you only buy multi-tenant, that you want something from 15 to 30 million, that you like newer industrial assets, that you're active in Sacramento.
Well, this is in the, in a submarket of Sacramento, that you buy off-market. Let me tell you about the Elk Grove Industrial Complex. This seller has owned it for 20 years. He's ready to move on. He has existing debt on it at a favorable interest rate, and he wants $103 a square foot," as I recall. Th- he wanted 31 million, and we ended up buying it for 30.5 million.
I think we closed at $102 a square foot. But $102 a square foot for 1998 construction, concrete tilt-up, 28-foot clear height, with new roofs, or relatively new roofs. Just, uh, 11 tenants was just unheard of. I got the call. I was there at the property within an hour or two. It was like, "This is perfect. This price is amazing."
We went to underwriting. We had an offer out within 30 hours. I think, you know, it was the next day, and we had an agreed-upon price within a week. It was, you know, it was one of those magical stories. And one thing that was great about the property is it was... It had been owned by a contractor for, you know, 20-plus years.
It wasn't a private equity owner. They weren't used to putting the money in the right spots. So you usually don't put a new roof on something right before you go to sell it, because you usually don't fully recapture the roof cost in your sale price. Uh, normally you sell that story to the next, the next guy.
But in this case, the roofs had, had just been redone. Another really great thing about this complex is it's across the street, I mean, there's, there's, like, half a block in between, from a giant Apple computer complex, where they do light manufacturing, customer service, some R&D. But that speaks to the location of, uh, of, a- and the quality.
Ryan Swehla: Yeah, it's interesting because a lot of times we are buying from what we would call is dysfunctional sellers or sellers that have mismanaged the property, and certainly that was the case. The rents were below market relative to what they could have been. But it, from a capital expenditure standpoint, I, one thing I remember is, uh, you know, this was a $30 million purchase And it had the smallest PCA report, property condition assessment report, in terms of recommendations for the property of anything we've ever purchased.
Mm-hmm. Because the owner, while they had an optimized rent, they had kept up on all of their preventative maintenance and all of the routine maintenance. So it actually was a, a very clean property f- just from a physical standpoint.
Joe Muratore: And rents were low They were at 50 cents triple net. We're now achieving 75 to 85 cents triple net.
We're at 96% occupancy. The tenants that are in there that are rolling over in this next year have all reached out. We're renegotiating or, or we're negotiating their, their next, uh, segment. But point is that the s- buildings take on the psychology of their owners, and this owner had owned it a long time.
There was a distortion in that he was seeing the market as it was five years ago. He wasn't seeing the market of today, the market of the next five years, and truthfully, he was, he was charging rents from five years ago. And even the brokers on the property, the existing brokers, as we interviewed them, they also were like, "Well, n-" I, I mean, just tired, just- Mm-hmm
tired. We put on an, a, a new broker set, and we got the rents that we saw that the market was calling for. So a lot of times properties just take fresh eyes. In this case, the owner had priced in old eyes. He'd priced in yesterday's story and really missed out on a lot of upside in pricing in what, what was happening today.
He, he wasn't seeing the market for what it was today.
Ryan Swehla: Yeah, and a lot of times, uh, w- we say that, you know, a private owner, who we are usually buying from, compared to an institutional owner, they just often have different investment objectives. So it's not necessarily that this owner on this hand is dysfunctional.
In this case, these owners had owned it a long time. They had maintained the property well, but their objective was keep cash flow coming, don't rock the boat, don't risk any vacancies. We'll just have, hit the tenants with a 3 to 5% annual increase and call it good. Well, if the market is doing 10 to 12% annual increases, uh, just based on where market rent growth is, you can see how very quickly over a five-year period you can be pretty significantly out of market.
Joe Muratore: Well, and certainly post-COVID and during COVID, those kind of rent, that kind of rent growth had been achieved. I mean, Elk Grove as a, as a sub-market has about 1% vacancy in industrial. One or two, it's very tight, so-
Ryan Swehla: Yeah ...
Joe Muratore: tenants that are there, and usually they're there for quality-of-life purposes as, you know, as much as anything.
It's, uh, eight minutes from downtown Sacramento. You're getting most of the same distribution characteristics of West Sacramento, but you're getting the quality of life of Elk Grove, both on the I-5. The tenants, uh, were willing to pay market because they didn't wanna move.
Ryan Swehla: One of the interesting things about multi-tenant industrial When we're executing the business plan, it's a little bit more like chess in that, um, or puzzle pieces, I should say.
Unlike multi- uh, multifamily, where you've just got, you know, standard units and you've got regular, uh, rollover, with industrial, you always have to be thinking about, okay, who's coming up? Who's looking to expand? Who's looking to contract? Who do we think is going to stay? And you're always kind of managing those puzzle pieces to be able to optimize the property.
And we're about a third of the way through that business plan. Typically, we buy properties where the weighted average lease term is three and a half years or less, so we work through those, uh, lease rollovers, and it seems to be going well. The market is softening a little bit, uh, as, as we've, uh, seen, but because that asset is a strong asset in the market, we've been able to maintain that strong occupancy and keep the rents up at market.
Joe Muratore: A question we get is like how do you repeat this or, or, or how do you buy properties in general? And the first answer is there's always a great deal somewhere. It's a, it's a mix of, uh, the right seller, the right asset, in the right market. And so how do you reliably find those, especially in the secondary and tertiary markets that we work?
Well, the first answer is we're active in about 10 markets, and there's always a good, uh, deal somewhere. You can't reliably forecast when they're going to arrive, but we market in these, uh, markets and to these brokers. We're, we're present and active. We're dominant buyers and sellers in these markets, and we get those phone calls.
And when we get those phone calls, we act. Ultimately, this is one of those properties where when the comp hit, I- I'm sure the brokerage community went How did they get that? With all of our deals, that is something we... Personally, that's something I aim for. If, if when that closes, I want everyone else to be like, "How did they get that?"
Ryan Swehla: Yeah.
Joe Muratore: And, uh, anyhow, that, that, that certainly happened in this case.
Ryan Swehla: Another question we get asked is, okay, well, you know, if you're buying where rents are 15 to 40% below current market, okay, once you solve all those, what do you buy? You know, how, how big is this, this market? And the answer is that as long as there are private buyers that are owning properties, this is a perpetual thing.
Because private buyers buy a property, they own it for a period of time, they don't try and push rents to market, and what was a fully baked full value property five years ago, five years, 10 years later becomes that next value add opportunity.
Joe Muratore: You look at what's happening in the market right now, tariffs, inflation, construction costs have, have doubled in some cases.
Interest rates are higher, so construction f- financing is higher, uh, meaning new supply is not coming on board. Uh, that certainly is, you know, a benefit to this asset, but also adds, uh, another layer of market complexity to how, you know, the unfolding, uh, landscape of real estate is changing. And for us, as buyers of existing buildings, we're not developers, uh, this plays in our favor.
Ryan Swehla: You know, one of the other key values that we add to a property like this is really understanding those tenant needs. The property management team are on-site property management team. They're able to understand the tenant needs, understand, uh, who's growing, who's contracting, and that feedback loop allows us to make better decisions on the property and, and be able to execute the business plan in a more effective way than an absentee owner, uh, in another area.
So, uh, really helpful to have that, uh, vertical integration.
In this episode of Durable Value, we take you behind the scenes of our recent acquisition—the Elk Grove Industrial Complex in Sacramento, CA. Discover how we sourced the deal, why this property stood out, and the strategies we use to unlock value in multi-tenant industrial assets. We discuss market dynamics, the importance of fresh eyes, and how private ownership creates ongoing opportunities for value-add investors. Whether you’re a real estate professional or an investor, this episode is packed with actionable insights and real-world examples.
Timestamps:
00:00 - Introduction
00:19 - The Power of Marketing: How We Source Deals
00:37 - Building Broker Relationships & Off-Market Opportunities
01:29 - First Impressions: The Pitch and Initial Call
03:03 - Underwriting and Offer Process
03:21 - Seller Background and Property Condition
04:01 - Buying from Private Owners vs. Institutional Sellers
04:24 - Rent Growth and Market Opportunity
04:50 - Business Plan Execution: Managing Lease Rollovers
05:23 - Maintaining Occupancy in a Softening Market
05:50 - How to Find Great Deals in Secondary Markets
06:16 - The Perpetual Value-Add Cycle in Industrial Real Estate
06:37 - Navigating Market Complexity: Tariffs, Inflation, and Supply
07:03 - The Value of Vertical Integration and Property Management
07:43 - Closing