How do you make a living from industrial real estate? The answer can be found in smart deal-making and understanding the needs of landlords and tenants.
Our guest, Chad Griffiths, has been an industrial real estate broker since 2005 and an investor since 2014. As a member of a global commercial real estate company and a partner with his local firm, he’s completed 500+ deals with clients ranging from small companies to large institutional owners. In this episode, Chad shares how smart deals can help you to succeed.
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The Benefits of Investing in Industrial Real Estate with Chad Griffiths
Hey, everybody, welcome back to another episode of The Real Estate Rundown. And you know, it’s really kind of neat today because I get to interview a gentleman who really is involved with what I started, and what I really believe in. So I’m gonna bring Chad Griffin to the table, and we’re going to have some conversations about what’s going on in industrial, and why industrial might be a great thing for you to be in recession or not, and why it’s a pretty bulletproof industry. But let’s talk about who Chad is. Chad has been involved as a real estate broker in the industry since 2005. We’re gonna have to have him explain why he started in 2005 as a broker, and it took him until 2014, to become an investor, but I’m sure there’s a good story in there. And since then, he’s done over 500 deals, 500 deals, that’s a lot of deals, he wouldn’t be considered an expert at that time frame. So guys, I want you to help me welcome Chad to the show. Chad, how are you, man?
I’m doing very well. Shannon, thanks so much for having me on the show. I’m excited to talk anything industrial real estate.
Well, you know, that was really where I grew up. I mean, cutting my teeth in, you know, my childhood and everything being involved with my dad building industrial. But let’s talk about you for a minute, give us an oversight on where you came from, how you got involved in real estate, take about five minutes and just kind of educate us on who Chad is and how he got to where he’s at now.
Yeah, great way to tee up the conversation. So I didn’t come from a real estate background at all, actually, I blue collar parents that had expectations that I would just go to university and get a job which both of my sisters did. I took more of the entrepreneurial route. I was that kid selling hockey cards on the side of the road when I was 11 years old at a landscaping business. I mean, I tried taking my neighbor’s yards and charging the money for it. I was always that entrepreneur kid, and ended up through a series of jobs actually dropped out of business school. So I was about to go that route, took a management position at a restaurant that I was working at instead figured I’d like to learn business instead of doing it from an academic standpoint, didn’t last very long in that, but I started flipping some houses with some friends didn’t really do well at that either. But I had an itch to get into real estate. So long story short, I ended up joining a commercial brokerage in 2005, which just so happened to be heavily involved in industrial real estate. That was the main focus. And I thought that I’d be working with sexy office towers or big shopping centers. And I got thrust into this environment where I had no idea what industrial real estate was, much like a lot of people, I’m assuming there’s people in your audience that are similar, they might have a relatively vague idea of what industrial real estate is, but not detailed enough to actually try and make a living in it. So I had no choice. But to follow along with people in the office that were doing this. I’ve made a lot of mistakes along the way. But fast forward 1718 years now I’m still at the same company that I started at, I became a partner in 2014. And then I started investing late 2014. Myself and with some partners and a whole lot of debt. We’ve got about a 20 million portfolio right now. So we’ve continued to grow, basically trying to add one property a year. And for the foreseeable future. I’m very bullish on industrial real estate, and I do it full time and passionate about and I’ve got the majority of my net worth directly invested in it.
Well, you know, and let’s talk about perception. Because I agree with you, right? I mean, most people when they think about what is industrial, they think of the cement plant, they think of, you know, the smelting factory, they think of this heavy use industrial, cold, grimy, you know, place, but, you know, and I think a lot of people are starting to see it in a different light. Because now if you go and ask people what industrial as they go, Oh, well, it’s Amazon last mile warehouses, right. It’s these million square foot warehouses that you find in Tucson and find in Baltimore and, and these huge, huge things, but, but it’s a lot of things, right. I mean, there’s all different I mean, there’s as many different genres of industrial as there is in multifamily whether you got a duplex, a fourplex, you know, 12 Plex apartment complex, you know, a single tower, you know, of industrial or residential living. But let’s talk about what you found when you started diving in and really dissecting what is industrial. And what did you start to see was the benefit of industrial that attracted you as an investor?
Yeah, great question. Along the way, I’ve I’ve realized that every property is different and unique, but they still fall into similar subcategories of industrial. So I’ve started grouping it into three different subcategories. Warehousing being the first and you’re right. Amazon has dominated that conversation as late because there’s a Amazon million square foot facility or off the highway in every major city, so people are driving by these now as opposed to them traditionally been tucked away in industrial parks. But it can be anywhere from a million square foot Amazon facility all the way down to a 2000 square foot warehouse bay that’s just used to store some type of product. So anything warehouse related, I would say it’s basically storage, repackaging, and then getting shipped out. So truck bring stuff in, it’s packaged, stored for some period of time that gets sent out anywhere from a 2000 square foot to a 2 million square foot warehouse. The other major one is manufacturing. And that’s kind of the one you talked about earlier, it could be any anywhere from heavy manufacturing. One facility I just walked through the other day used to be a fiberglass manufacturing facility. And it was 48 foot ceilings the process involved in making all this was incredibly complex. But these manufacturing facilities can also be very basic, it can be a 2000 square foot welding shop, or it can be a 2000 square foot CNC machining shop can really even be an automotive Bay. So that manufacturing space I’d say is where anything is made, produced, assembled, manufactured as you will. So it’s typically going to be like a medium to heavier industrial versus light industrial of a warehouse where things are just stored. And then the third category would be flex spaces, but most people are calling it flex spaces, and miscellaneous catchall. And this is where you really start getting into how broad industrial real estate can be. Because you can look at bottle depot was self storage, some industrial buildings are built out entirely as office space. I’ve seen industrial buildings that were retrofitted to be art galleries and major suburban markets. So their industrial properties can actually fit a wide array of businesses, there’s almost no business out there that couldn’t fit in some type of industrial property. So once you start looking at how broad that category is, in my mind, it opens up a lot of opportunities, but also opens up a lot of risks. So if you look at if you buy a well positioned industrial property, and it’s versatile enough that it can essentially lease to any amount of different tenants out there, you’ve got a lot of opportunity to attract tenants if the existing tenant leaves. Conversely, there’s a lot of risk with it. Going back to that fiberglass manufacturing facility I just went through, if that property was specifically built for the tenant that was in there, when that tenant eventually leaves, and every tenant is going to leave at some point might be one year, it might be 40 years, but every tenant is eventually going to leave the building, what is the prospects of releasing that property down the road and I’ve got countless stories of investors that had property that was specifically built for one, one tenant. And when that tenant left it cost them a lot of money in retrofitting that for the next tenant. And quite often it’s also accompanied by having a vacancy for a period of time. So I love it from the standpoint that I think if you’re an educated investor, you know exactly what you’re getting into. And you know that market really well. And you can avoid those pitfalls, tremendous amount of opportunity. But if you get into a green and you don’t have systems in place to make sure you really understand what you’re buying, it also comes with a tremendous amount of risk. So full spectrum can be a great investment, it goes to be a terrible investment for the wrong investor.
You know, and I agree with you on that, you know, we I just bought a building that I’m going to repurpose that had a bail bondsman, a bookstore and aquarium in a gymnasium.
Wow, that’s That’s amazing, diverse group of tenants. Exactly.
You know, but I mean, we also do a lot of flex space, you know, we’ve got people that I mean, flex space for me is very popular, because when you do have that Amazon guy that moves out of 2 million square feet, you’ve got to find other large users. And usually, users tend to grow and constrict at the same time. Right? So if you’re dealing with shipping and receiving, like Amazon, they’re all growing until they’re all constricting, right? In just the sub market of who the AEC is. But you know, what I’ve seen is that is that flex space that, you know, that repurposing space, I’ve seen a lot of things done very creatively. Like you said, I’ve seen Self Storage go into old buildings where you’ve had the pods that are being stored at different kinds of uses. But, you know, there you said something there about how, you know, to assess the risks, and there are ways to assess the risk. When you’re looking at purchasing an industrial property. What are some of the risk factors that you look at when you’re looking at how to decide what that cap rate is and how that how that purchase price is going to lay out?
Yeah, it’s a great topic because I think that there is a methodology that investors can follow. And not only do I think they, it’s something that they can vote, I think it’s something that they should follow every investor irrespective of the asset class should have a system in place and industrials is no different. I look at industrial first from the standpoint that I want to understand what my downside risk is, before I start analyzing what any of the upside potential might be. So before I start getting into a Proform, in figuring out what my five or 10 year, cashflow is going to look like and making all the assumptions that come with it. The first one to understand what my true downside risk is, and this is where industrials, fairly unique. Unlike read Tiller officer multifamily, if you’ve got a property in a good area, there’s a good chance that you’ll find a tenant at some point. Industrial is different. If you don’t fully understand what that asset is, at a fundamental level, then you could get stuck holding a property that repurposing is a great way of describing it, I have one client that cost them a million dollars to repurpose an industrial building. So larger property, so the numbers scale and proportion of the size. But there’s not many investors that can just go and handle a $1 million retrofit cost. So before I do any, any forecasting, I want to understand what does that property worth if it was vacant, even if I’m buying a property with a 10 year tenant in there, what’s that property worth, if that company went out of business, if they decided that they just wanted to leave at the end of their term, I’m a firm believer that every tenant will leave the building at some point. So you need to have a solid understanding of what is that building worth. And that just takes, that’s an exercise of going through that building, identifying the strengths, identifying any weaknesses, identifying any things that might have to be corrected. And I’d hate to keep going back to this fiberglass facility. But it’s a relevant example, the the process involved in their fiberglass manufacturing meant that they had these sub basements underneath the main the concrete floor, and there’s unusable to every other tenant that was in there. So it was it was a massive cost, among other things, just to go and fill in those those concrete holes that were in the floor going to the sub basement. So if you have a really good understanding what the property is, and you can say, if this tenant were to leave tomorrow, here’s all the other properties that are on the market. I believe that this one has the the loading doors are comparable to the market, the yard space is comparable, there’s adequate marshalling area for trucks to get in and out ceiling heights, the right height, there’s great power that’s in there, if you can identify the core things that a tenant is looking for, and recognize that there’s always going to be some things that you’re going to have to address when a new tenant comes in. But as long as you can keep that to a minimum or have it even cosmetic for the most part, you don’t have to make, you have to you don’t have to bring in more power because your building is underpowered compared to what comparable properties are, as long as you can identify that this is what I think the property would lease for if I if it went vacant, or this is what it’s worth, if I had to sell it, then you can at least realize your downside risk. So if you’re buying a property, maybe there’s a 10 year tenant in there, and you’re getting, let’s just say $10 a square foot, if that’s great, and you could model out your performance on that. But what happens if that property is only worth eight? What happens if the rest of the market is saying what the comparable properties are going for $8 a square foot? Well, there’s your potential downside risk, in my mind, and things can look a lot different 10 years old, when that cash flow is up in the term is up. But what happens, what happens if that tenant left and you had to release it at $80 a square foot? Well, you just going on a simple cap, you just lost 20% of your of your market value instantly that quickly. So that’s that’s the biggest thing that I always recommend is fully understand what that property is worth vacant before you start making any assumptions and building over performance.
You know, and that’s one of the big differences that people look at when they look at multifamily versus industrial, right? Because, I mean, if you went to a bank, and you know that if you went to a bank and said, Hey, I’m gonna buy this, this this industrial building that has less than a year left on the lease, the bank wouldn’t touch it, right? Or they would condition it so badly because of all those things. If you went to them and said, Hey, I got this great multifamily building, there’s 80 units in it. It’s same value as Chad’s industrial building over here. But good news. The good news is all of these leases expire in the next 18 months or 12 months, they the bank would be all over it, because it is much easier to look at multifamily and go, that’s a three bedroom, two bath. That’s a three bedroom, two bath. And we can now figure out what that is where some of these things that you just talked about, where there’s a fiberglass facility or you know, it’s a cement yard, or it’s these kinds of things. There’s intrinsic value there to a particular set of users, but not to a lot of users. And so that’s that’s, that’s a huge downside potential. Let’s talk about some of the positives that that industrial brings you and you’ve talked about it several times 10 year leases, let’s talk about long term effects of what an industrial property does for you. That maybe multifamily doesn’t.
Yeah, and I do want to emphasize I’m not trying to scare everybody off negative parts. But I think having that healthy amount of fear can save people from making a big mistake. And I think the reason people are willing to accept some amount of risk is because all the reasons that you mentioned are that there is a lot of positives, particularly when compared to multifamily. So tenure leases are quite common. And even the way that leases are structured is also important. We’re in more multifamily, you’re typically just charging a gross rate to the tenant. And perhaps they pay utilities on top of that, or maybe utilities are included, but they’re paying one amount. And that’s inclusive of property taxes, the insurance, commentary maintenance, everything that’s required to operate that building, it’s a gross amount, you’re typically paying, you’re typically getting a one year term from a residential tenant there, their low credit tenants, as we talked about before, this call, you contrast that to an industrial lease, you could have a 10 year lease with a high credit, in theory, a fortune 500 company, or at least a company, you can audit and check their financial statements. And the way the leases structures that they’re typically and the terminology can vary across different markets. But in essence, they’re all going to be structured, what’s called a triple net lease. And the idea about a triple net lease is the tenants going to pay one amount called their basic rent or their net rent against might be called triple net rent in some places, that’s the rent that’s contract, contractually obligated to pay to the landlord, every year, it can be a set amount, so it can be $10, a square foot based on the whole square footage, it can be that flat for the whole term, there can be escalations in there, so perhaps it was $10, a square foot $12 a square foot, by the end of the term, those numbers are contractually agreed upon between the two parties, then the tenant is also responsible for paying their proportionate share of all the operating expenses of the property. And if it’s just one tenant in the building, then they just pay all of it, if there’s two tenants in the building, and assuming they have half the space each, they pay 50% of all these expenses. But again, that’s typically going to be property taxes, building insurance, commentary, maintenance, such as landscaping, snow removal in my neck of the woods, not in yours. But this commentary, expenses and management fees, that’s another one that’s actually quite often gets put into that operating costs or additional rent. And the the concept behind that is that the tenants also pay any associated increase in those expenses. So if property taxes go up 10% Next year, instead of that eroding the amount of money that the landlord would have been getting into gross lease, that gets passed through to the tenant, again, on a proportionate basis. So a landlord knows what their base or triple net rent is upfront, and no, that’s set for the whole term of the lease, and then any increases in the cost of operating that property get passed through to the tenant. So as an investor myself, I would much rather have a property where I know that any increases in costs aren’t going to erode the amount that I need coming in from that net rent, to either service debt or just to rely on on cash flow. So I think that that’s, that’s one of the most important elements of industrial and commercial real estate in general.
Yeah, you know, and one of the things that I love the highlight there, I don’t know how you write your leases, but we write out we’ve done this for 25 years, we’ve written our leases with CPI increases, right? And nobody cared about CPI until last year, right. And then all of a sudden, when we see Consumer Price Index, which is what CPI stands for, going up 789 percent, that means that my leases are going to increase 9% next year. Right. So So while I’m able to keep pace with what’s going on, I’m also not liable for the property taxes going up. 10%, like you said, right, if we have in Idaho, we was about four years ago, we had a Snowmageddon event where we had more snow than anybody had ever seen in, you know, 20 years, and we had on one of our buildings, we had $24,000 with a snowbird? Well, if I was in the multifamily world, I’m meeting that right, I’m shoveling it because I made an agreement with my tenants. And that’s just what it is. In the industrial space, it, it really plays out that people, they appreciate that because it’s their place of business. You know, the other thing that we saw in 2008 was people were losing their houses, but they weren’t giving up their places of business, because they still had to make money. Right. And so those long term tenants, they understood what it meant to own a home versus rent a home, they could do that elsewhere, but they knew they knew that they could not move their business and still be profitable. Right. And so during that whole time period, we saw a very, very small number of people actually close their businesses and, and go away during that same time period. And when they did, they had personal guarantees. We had corporate guarantees, we had access to real funds. And so those those examples that you kind of just threw out there are really, really important because we’ve all had that tenant in multifamily that trashes the place we got $3,000 worth of damage and a $900 security deposit. And now we can go to small claims court and there’s nothing that this person owns, we can get a judgment. There’s nothing to attach to where in the industrial world I have tenants that they’ve been bought by a larger operation. They’re vacant in the space they have moved completely out. But they still pay the rent because they know they have the corporate guarantee. Right? So it’s really a different space. Let’s talk about some of the give us a couple of stories of success. says that you’ve had in the industrial space, whether yourself as an investor or for your clients, where you’ve been able to see the real advantages of making these industrial deals that have worked very well for your clients.
Yeah, I’d say, I have stories of clients that have been very successful in repurposing and adding value to a property and then putting a tenant in it. And then in selling it or refinancing it, that’s pretty common. I actually don’t look at my own portfolio is trying to hit homeruns. I’m like, I’m an investor, I just want to hit singles and doubles. And given enough time, you had enough singles and doubles for using a baseball analogy, you will drive home runs, and you’ll win the win the investing game if you’re just patient enough. So I even in my own portfolio, I haven’t had any homeruns on it. But we’ve even through the pandemic, we didn’t lose a single tenant, we had to give a little bit of rent deferral, but we didn’t have to abate any rent. And those tenants subsequently caught up on their rent. So we had no no lost income during, in those first three months of the pandemic, which were really uncertain, we still didn’t lose a single penny over the ones the tenants got caught up. And it’s been a very stable asset class. So every, every year, we’re paying down a good chunk of principal, we’re cash flowing, and we’ve got properties and all different types of companies, but we’re accumulating cash and all these holding companies, the asset value is going up every time as we’re increasing our rents. So I would say that industrial real estate, there’s a couple of things that I really like about it as an investor myself. First, it’s a lot easier to scale. So if you can, one property in our portfolio is about a $3 million building, we will a fortune 500 company is the single tenant in there. They’ve got four years left on their lease or so. Compare that to a multifamily property of a quality multifamily property, I’m guessing $3 million, probably get you 20 units or so just take 150 Granted, or get more or less, let’s just say it’s 20 tenants. So can you imagine the differences between managing 20 residential tenants and all the turnover and all the issues that come up with it, versus the single industrial tenant who’s a large international company who takes care of everything on their own, it requires very little management on our behalf versus that 20 unit apartment complex. So it’s a lot easier to scale investments when you can add one tenant at $3 million. And you don’t need nearly as much management infrastructure as you do with that 20 unit apartment building. And I think from the standpoint that if you can prepare by having those longer term tenants in there, and and really just look at the long term objective, as opposed to having to constantly refill residential units and, and brain capacity and the anguish that just comes with dealing with that many residential tenants. I just liked the long term aspect. So there’s undoubtedly huge success stories out there people that have hit homeruns, they buy a property at $4 million. They add value to it and formative renovation or just repurposing it, they get a tenant in that was 20% higher than what they would they expected with the old building, and then they refinance it and sell it out. There’s plenty of stories like that. That also just comes with more risk to your typically buying a vacant building. There’s just risk that comes with that. I’m just I’m a very conservative cashflow investor, I want to get properties I can get cash flow and right away and hit those singles.
You know, and that’s really the thing too. I mean, this is I think of all the asset classes industrials, most like Chef Tony, right, you set it and forget it, because you can literally read the lease and you know, what you’re gonna have for longevity, you know, what you’re going to have for rent increases, you know what your broad scope stroke is in the market as far as who else would want it. And you know, just this analogy that you talked about, you’ve got 40 toilets, versus maybe six toilets, just the toilet count, right of your, of your analogy of the one tenant and a $3 million building. And then you start to pile stuff in there like lending costs, right? Because lenders love long term leases, they love corporate guarantees, they love those kinds of things. So they’re willing to go with a rate that is locked longer. In fact, I know that you can get industrial loans for 25 years locked and amortized for 25 years. You can’t do that in multifamily, unless you go with a HUD product which takes you know, forever in a day to get, but they love it because you can literally sit there and go, I locked my loan in I’m making 7%. This year, I’m going to take a 4% rent increase next year. And I’m going to do that for eight more years. And here I am. I can map this out. I don’t have the fluctuations in the market. I don’t have my tenant trying to leave, I don’t have them, you know, doing all the damage and all those other things in most cases. And it really is something that allows you to get involved in an asset class that you don’t have to pay a lot of attention to. You don’t have to have a full time management staff. You don’t have To do all these things, because most of these people, also, I think this is a big, big thing. And I learned this really, really early on when I was building a few houses and doing some industrial stuff. Most people that are looking for the for the space for their business are tolerant of a plonk toilet for a period much longer than a person is tolerant of the same plunk toilet in their home. Right? Because even if their tenants, they are still this is still their personal space, it’s their personal property. There’s that love and attachment to it. The business guys, they’re looking at it going, I need a roof over my head, and I need the tables here. So I can assemble my packages or do whatever it is I do. I’m purely looking at this from a business standpoint, it’s a much different love and attachment. And as a as an investor, I know that every time the property taxes increase, I’m not worried about it. Right? So I love it for all of those kinds of assets, or all of those reasons that the asset is super stable, you know, super stable. It also, like you said, isn’t going to go shooting up or shooting down. Right. I mean, it just isn’t going to move a lot. It’s it’s the tortoise and the hare, right. I mean, we saw multifamily going nuts and like we discussed, I do a lot of multifamily. I do a lot of multifamily. And industrial is just something you can’t hardly miss with because it does do that steady stuff. So, you know, I really appreciate your insight and how you broken this down for us and allowed people to understand that there. While there are risks. There’s a lot of things that you should really consider about multifamily that really kind of puts things in perspective and makes it steady. So that as you’re looking for cash flow, this is a great thing for cash flow, because it just continues to do what it does what it does what it does, right. But before we let you out of here, Chad, how can my listeners find you in the great worldwide web?
Yeah, so as you can tell, I just love talking about industrial real estate. So I’ve got a YouTube channel where it’s the sole focus of the channel is just trying to provide information on on the industry. I don’t talk I’ve never even mentioned what company I work for. I don’t mention what city I live in. For the sole reason I just want it to be a value add experience for someone that wants to learn more. So that’s probably the best way or I’m also active on LinkedIn as well.
Awesome. Well Chad, I sure appreciate it. If you want to know how you can get a hold of Chad, we can definitely put you directly in touch with him. Send me an email at [email protected]. We’ll get you straight to chat. If you’d like to get this episode on a regular basis. Please subscribe where you’re finding this. Otherwise, guys, we’ll look to have you guys tune back in to another episode of The Real Estate Rundown. Thank you guys for tuning in. We’ll talk to you soon.
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About Chad Griffiths:
Chad has been an industrial real estate broker since 2005 and an investor since 2014. As a member of a global commercial real estate company and a partner with his local firm, he’s completed 500+ deals with clients ranging from small companies to large institutional owners. Chad has interviewed over 50 industry experts on this channel and has been a guest on over 30 podcasts. In addition to giving numerous interviews on national media, he was recently named an Industrial Influencer by GlobeSt.com. Chad is a big advocate of continuous learning and has earned SIOR, CCIM designations, and an MBA during his career.