The Current Opportunity in Flex Industrial Real Estate

Club Fund Strategy and Stoic Presentation

Daniel discussed the strategy for the club fund, aiming to invest in 7 to 10 different sectors, including oil and gas working interest groups, real estate debt groups, industrial groups, and a credit litigation fund. He encouraged the team to suggest other potential sectors. Daniel also provided instructions on how to stay updated with the club's activities through the website. Grant then presented on his company, Stoic Equity Partners, which invests in value-add multi-tenant flex properties in the southeast. He highlighted their portfolio and investment strategy.

Flex Industrial Properties and Tenants

Grant discussed the characteristics of flex industrial properties, which are typically 50 to 150,000 square feet with a mix of office and warehouse space. These buildings are flexible in layout and are often located in business parks on the outskirts of town, or in retail corridors. They cater to a wide variety of tenants, including service-based companies, logistics firms, e-commerce, HVAC cleaning companies, and some specialized life science space. Construction types include concrete, tilt-up, or metal buildings, often with a brick or stucco facade. Grant also clarified that they focus on multi-tenant properties and value-add strategies, and they primarily use regional banks for financing.

Building Flexibility, Triple Net Leases, and Location Strategy

Grant explained the flexibility of their buildings' interior layouts, which can be adjusted to meet tenant needs, and clarified that most expenses, including common area maintenance, taxes, and insurance, are passed to the tenants in a triple net lease arrangement. They also shared that their company, a private equity firm, acquires and operates assets, utilizing third-party property management for tasks such as landscaping and HVAC maintenance. When asked about their location strategy, Grant indicated a preference for secondary cities in the southeast with a population of about one million, aiming for stabilized markets with potential for growth.

Flex Industrial Properties and Investment Strategy

Grant discussed the appeal and characteristics of flex industrial properties. These properties, which typically feature a mix of office and warehouse space, have become more valuable due to the work from home trend and the need for physical locations for certain types of work. Grant pointed out the lower supply and high demand for these properties, which his company has been able to acquire at below replacement cost. He also mentioned the use of multiple tenants to mitigate vacancy risk and the strategy of converting underutilized office space into more flex spaces. Finally, he highlighted the importance of property upgrades, such as landscaping, new roofs, and parking lot improvements, to attract better tenants and improve occupancy rates.

Flex Industrial Spaces Market Dynamics Discussed

Grant discussed the market dynamics of flex industrial spaces, highlighting the current supply-demand imbalance, particularly in the southeast. He explained that the high cost of construction, coupled with rising rents, was preventing new developments. However, he predicted that as rents continue to increase, new construction would become more economically viable. Daniel inquired about the discrepancy between building and acquisition costs, to which Grant attributed it to the rise in construction prices and the lag in rent increases. The discussion also touched on the typical lease lengths and built-in rent escalations. Towards the end, Colette asked about typical deal sizes and the number of states targeted in a fund.

Asset Syndications and Closed-Ended Funds Strategy

Grant explained that his firm offers both individual asset syndications and closed-ended funds, allowing investors to choose their preferred investment style. The typical deal size is between 50,000 to 150,000 square feet, with a minimum investment of $50,000 for accredited investors. The firm's exit strategy involves holding assets for five years before selling to larger investors, with a focus on value addition. They aim to acquire properties between 40,000 to 50,000 square feet, but will consider smaller deals if they are deemed great opportunities. The overall cost for a typical value-add deal is around $93 per square foot.

Company's Real Estate Focus and Challenges

Grant and Daniel discussed the current state and future plans for their company's real estate portfolio. Grant mentioned that they primarily focus on industrial properties, which have been experiencing increasing demand due to the growth of e-commerce. They also touched upon the challenges of property insurance in the southeast and the impact of rising rents on tenant affordability. Additionally, Grant shared a case study of a property they acquired in Ridgeland, Mississippi, and its subsequent transformation from primarily office space to a mix of warehouse and flex spaces, resulting in increased occupancy.

Property Acquisition Strategy and Fund Metrics

Grant shared the success of a recently acquired property in McDonough, Georgia, which has seen a significant increase in rental rates and occupancy. The strategy for this 90,000 square foot property, purchased at $64.50 per square foot, is to continue pushing rents towards market rates, which are currently at $12 per foot. Daniel inquired about the fund metrics, with Grant confirming an average cash on cash return of 7 to 8% and an IRR net to the investor of 15 plus%. The fund, launched in January 2024, will raise money until December 2024 and aims to acquire 7 to 11 assets, primarily 1980 to 2000 vintage with upside potential. Grant also clarified that all assets in their fund have debt, with cash flows starting in Q1 2025.

Company's Property Scouting and Market Strategy

Grant explained their company's strategy for scouting and acquiring properties in targeted markets, emphasizing their focus on fledgling markets with high growth potential. They buy most of their properties off-market through brokers, and aim to own 40-100 properties in each market. Daniel asked about the risk of oversaturation in the flex market, to which Grant responded that while every asset class goes through a time of oversaturation, they believe they have a long way to go before reaching that point in the flex market. The conversation also touched on the impact of supply chain disruptions and economic downturns on their business.