December 17, 2022

JF3026: 3 Ways to Beat the Market in Warehouse Investing ft. David Cruz-Palmer

David Cruz-Palmer is the principal at Corridor Capital Partners, an industrial real estate investment company. In this episode, David tells us how he gained a competitive advantage as a warehouse investor using his understanding of supply-constrained markets, his ability to recognize and take advantage of market inefficiencies, and going directly to the seller whenever possible.

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David Cruz-Palmer | Real Estate Background

  • Principal at Corridor Capital Partners, an industrial real estate investment company that makes value-add industrial real estate investments available to ordinary investors.

  • Portfolio: 

    • Over 500K sq. ft. of industrial and flex warehouses in VA, and soon to be more in FL

  • Based in: Charlottesville, VA

  • Say hi to him at: 

  • Greatest Lesson: Invest in yourself.



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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with David Cruz-Palmer. David is joining us from Charlottesville, Virginia. He's a principal at Corridor Capital Partners, a value-add industrial real estate investment company. They currently have over 500,000 square feet in industrial and flex warehouses in Virginia, and are expanding currently into Florida. David, can you tell us a little bit more about your background and what you're currently focused on?

David Cruz-Palmer: Sure. I was initially a commercial real estate broker, worked in San Francisco, helped lots of companies find their office space, negotiate leases, valuate markets and negotiate with landlords. So I did that for about 15 years and parlayed that into investing in commercial properties. So I had a lot of experience, you know, a lot of that turned translated into things that would be valuable for investments, so I put investments together for myself and for my investment partners. During syndications, I'll find the properties, I'll negotiate on them, I'll raise capital from investors and go through the whole syndication process of finding debt, the right debt, matching that up... And then coordinating all the vendors for PCAs, and phase ones, and all that; and I'll run the asset, do asset management as well.

Slocomb Reed: It sounds like you're a one-stop shop as a general partner. Are you doing everything?

David Cruz-Palmer: Yeah, we're vertically integrated.

Slocomb Reed: "We" - how big is your team?

David Cruz-Palmer: We've got five people.

Slocomb Reed: Nice.

David Cruz-Palmer: Yeah. Maybe that's a stretch. That includes virtual assistants. We've got a couple of virtual assistants, and then I've got two other people who work with me every day.

Slocomb Reed: Gotcha. Cool. I work with virtual assistants as well, to varying degrees of success. They are varyingly capable of completing some tasks.

David Cruz-Palmer: But also super-valuable when it works out, right?

Slocomb Reed: Yes. When it works out. So you were a tenant agent for office space in San Francisco, and you said that parlayed into what is now industrial investing in Virginia. That doesn't sound to me, and probably most of our investors, like a natural segue... Where did that come about, that you went from West Coast to East Coast, and you went from office to industrial?

David Cruz-Palmer: Yeah, so I grew up in Winchester, Virginia. I live in Charlottesville now. And I went to San Francisco right out of college, because you want to go to the West Coast; the draw and the allure of the West Coast as the best coast... You've got Steph Curry, you've got the Pacific Ocean, and all that's really appealing stuff when you're 22 years old. So I found my way out there, and found my way into commercial brokerage as a tenant rep, commercial brokerage... And I start to hear what you're saying - how does that translate...? I did mostly office and industrial, and a really common lease structure in San Francisco they have - I don't know if you've been [unintelligible 00:04:07.05] has been the hottest market since the dotcom bubble; and what that was a bunch of these sort of flex warehouse buildings that roll up doors, and high ceilings, and great natural light, but they were built for like auto mechanics, or parking garages, and all these things, and they were converted into really cool offices. But as a result, they maintained this lease structure called industrial gross. And what that lease structure was common for industrial tenants historically, versus a full-service purchase lease for office tenants. So even when you have tech tenants that are using it for office space, they still have an industrial lease. And the real differentiator is that it didn't include utilities or janitorial. For some reason, that was a carveout that was relevant to differentiate between industrial and office space in San Francisco.

So lots of companies evaluate different markets around the country, and to answer your question about how does that even translate - you're only helping tenants, you don't really understand landlords, and I agree, there were some hurdles things I had to learn and overcome... But I actually think that I'm uniquely positioned to understand the dynamics of a market from a tenant's perspective, and I think that's really valuable for identifying real estate where the tenants are either captive, because they can't move anywhere, or a supply-constrained market, or to understand the variability in different rents, or the quality of different products... Because you can look at a Class B or class C building and compare it to Class A, and you can look at the different rent differentials, and the expenses are all the same, and the [unintelligible 00:05:36.16] the same. And usually, in a recession, there's a flight to quality for office, because the rents go down, so why wouldn't you go to a nicer building?

So from an investment perspective, I think that's the main reason why I chose industrial real estate, is because there's a 3% vacancy rate, 3% to 4%, depending on where you look. You can drop a pin on the map anywhere in the United States and there's an extreme shortage of industrial space, both flex warehouse industrial, which is like the light industrial that you have your auto mechanics, or people who are storing mattresses, or air conditioner, HVAC vendors... There's not enough space for those people to serve these growing populations. All the multifamily, if you think about all the multifamily growth and all of the residential growth and the shortage of housing - that's such a hot asset class; you need people to service that. And that's primarily what you get on a flex warehouse.

And then for industrial, there's logistics centers... Everyone says Amazon's a canary in the coal mine, but Amazon's doing pretty well; they're actually getting rid of their really old warehouses that are under a certain size and under a certain age, and then they're looking to develop their own new facilities, and all of those are a million square feet plus. And that's because there's a shortage of new, high bay, like high ceiling warehouse space, so they're building to the new specs.

So I like industrial a lot, because there's just such a shortage, and the tenants don't really have anywhere to go, so if you can find a market that has that same vacancy rate and some good products and some good tenants, then the hypothesis is that with 5 to 15-year average leases for industrial properties, you should be able to get some really quality tenants, because there's more demand than there is supply.

Slocomb Reed: David, the majority of our guests on the Best Ever podcast and the majority of our listeners are involved in apartment syndication, which is the point of comparison that we often make to other investment strategies and other commercial real estate asset classes. That said, we do have, with some frequency, industrial and warehouse investors on the podcast; every one of them references drastic under-supply. They talk about dropping a pin in a map in the Midwest, and in other less trendy parts of the country where industrial has been more prominent and is likely to return, and talking about how there's a potential for large gains in the future as we reindustrialize the United States. That being said, with there being an under-supply, what does it take to have a competitive advantage as an industrial and flex warehouse landlord specific to acquisitions? What is it that gives a warehouse investor a competitive advantage over other investors?

David Cruz-Palmer: So is the question more along the lines of "Why would one warehouse investor be able to find and operate a property better than another one, given that there's such a shortage of supply?" Is that the question?

Break: [00:08:43.03]

Slocomb Reed: We have low supply, we have high demand. Therefore, typically, prices rise. And that wouldn't just be for tenants needing to pay higher rent to get a quality space, but also for the investors looking to purchase in that space as well. What I'm envisioning is that we're experiencing an appreciating market for warehouse, particularly flex space, and smaller -- well, I've heard that high bay, or tall bay demand is even higher. How does someone who wants to get into warehouse investing generate a competitive advantage that allows them to identify and also purchase good deals and then get them leased competitively?

David Cruz-Palmer: Yeah. So I guess I can only talk about what I know, and what my strategies are. My current strategies are based on my knowledge of what you can do in a supply-constrained market, and what options there are with the lease structures. So one of the things that I do is I'll do what I call a triple net conversion. So you've probably heard of triple net leases; they're common in retail, and they're also common in industrial.

Slocomb Reed: Of course.

David Cruz-Palmer: Just in case there's one listener who doesn't, that just means that with a triple net lease, the tenant pays all of the expenses. So the utilities, the taxes, the insurance, janitorial, and many of the costs required to run the property; even the property manager. So that gets passed along. And then there are variations on triple nets, but that's the essence of a triple net lease. But there are lots of leases that are not triple net in structure. So the landlord is paying one or all of those expenses.

So the properties that I look at, and the ways that I create value for my investors is by identifying properties that have a gross lease in place, in a triple net market. So rents have increased in some markets 20% year over year for the past three years, and they're anticipated to continue in some of these markets. So if you have a tenant that signed a 5-year lease, or a 10-year lease, and they're two or three years from the end of that lease expiration date, and they have nowhere else to go, or there are other tenants that want that space - and I'm thinking of like larger spaces, or larger quality tenants... There's a property I know that's along a major highway, with a railroad, and there's a Fortune 500 tenant in it... So that kind of example, right? And they need to be there, their lease is expiring in 24 months, you usually start negotiating about 12 to 18 months before release expiration date. So you know where that tenant's mind is, and so you have plenty of time to start evaluating the market and seeing if there are other tenants, and that's a leverage point that you can use against that tenant.

So these are the some of the tactics that, having been a broker in San Francisco - not the hardest market right now for office space, but you better believe that there's a 10 to 12 year run of just incredibly competitive demand for office space where there wasn't nearly enough... And so much of that was driven by all of the money that has been pumped into venture capital and all the successes and all of the wealth that was created there... So there's this amazing ecosystem where two guys start a company to go to Y Combinator, they get $110,000, and next thing, they get $3 million, they need 3,500 square feet for 18 months. 18 months later, they need 10,000 square feet.

So there's a model that I've seen on how to deal with tenants in a supply-constrained market, and so that's what I've been employing with the tenants that I have in the markets. And it's not to beat them up; it's a partnership, and it's a long-term partnership, so you don't want to just hit them with this hammer where you jack their rents up 60%, and then say "Also, on top of that, I'm going to give you a triple net lease, where you're going to be paying an additional 25%", because a lot of times the triple net expenses can equal somewhere between 15% and 25% of the gross income.

But it's definitely a balance, where you're trying to get the optimal returns that are as close to market as possible for your investors, and also, you don't want to have an angry tenant for 10 years who's just looking for a reason to leave when the lease expires.

And then the other answer I would give us I look for a lot of creative deals, especially right now in this market, especially with 7% interests and maybe rising, for the rates. If you can get a seller to do some version of seller financing, that makes the equity multiple a lot higher. Something that's really common in multifamily, single-family investing - it's not as common in commercial, for some reason, or industrial... So I'm really pushing -- I reached out to sellers directly to try and structure these deals, instead of just going to the market. So I use a lot of the wholesaler tactics for finding my investment properties; contacting sellers directly.

And then what benefits my investors is, one, the equity multiples that you get. When you only have to put 10% to 15% down, you get a 15% to 25% seller carry. That really does a lot for your equity multiples after you buy that seller out. And then one thing that I think a lot about is what that does for depreciation; I call it the depreciation multiple. So if you're only putting 10% or 15% down [unintelligible 00:15:44.04] say it's a $10 million property, that's 25% bonus depreciation from [unintelligible 00:15:48.14] depreciable assets. That value isn't going to change, because the property was still worth $10 million, and the building still had its depreciable value.

So while we're still in 2022, and we've got 100% bonus depreciation next year, we'll have 80%, but that 10% or 15% as it relates to the depreciation loss that you can take is significant compared to putting down 25% or 35%. So that's the kind of thing that I try to do to differentiate, is just put together creative deals with some variation of seller financing. So that helps my investors a lot. Also, industrial, as opposed to multifamily, doesn't have nearly the same value of depreciable assets. We don't have carpets, we don't have all of these things; a lot of times it's just warehouses, and curb cuts, and drains, and things. There's a lot of landscaping, but it's not as much on the inside of the property.

Slocomb Reed: David, specific to your own investing, it sounds like you've given me three answers here. When it comes to competitive advantages; not necessarily a generic "What can someone do", but the three answers that you gave me - the first, going back to your experience of understanding a supply-constrained market, and the leverage available to those with the supply in such a market... That is something that you've been able to use your experience to your advantage over other investors, and in understanding what kinds of returns are going to be possible with your acquisitions in today's market.

You talked about what I'm wanting to call here a market inefficiency - the opportunity to recognize when a property is, for example, gross-leased in a net lease area, or a net lease environment... And especially with rent growth, the opportunities to increase returns as the investor, and decreasing your expenses by going from a gross lease to a net lease to make the property behave more like the market norms.

The third example you gave here is that you try to go direct to the seller... In particular, how that gives you an advantage is that it's given you the ability to negotiate lower down payment deal structures, meaning that your equity multiples are higher for your investors, the people bring capital to your deals, and also that the tax advantages are amplified by the fact that they are based on the purchase price and not on the amount of money brought to the table.

So even in an asset class where there is constrained opportunity to purchase, those are the three things that you've been able to do to make sure that your deals continue to produce. Am I catching that correctly?

David Cruz-Palmer: Yeah, [unintelligible 00:18:33.04]

Slocomb Reed: Well, you gave me a lot of good content to work off of; thank you for that, David. Are you ready for our Best Ever lightning round?

David Cruz-Palmer: Yeah, let's fire away.

Slocomb Reed: Awesome. What is the Best Ever book you've recently read?

David Cruz-Palmer: I'm constantly reading Think and Grow Rich. I've probably read it seven times now.

Slocomb Reed: I'm a fan. Yeah, Napoleon Hill has a few good books. What is your Best Ever way to give back?

David Cruz-Palmer: I donate to local charities. As my revenues grow, I make sure I give back to the local communities where I live, and also where we invest in our properties.

Slocomb Reed: David, what is the biggest mistake you've made in your warehouse investing thus far, and what was the Best Ever lesson that that resulted from it?

David Cruz-Palmer: I think the funny thing is I'm constantly the bottleneck. [unintelligible 00:19:19.16] I have to say it with humility, because every time I feel like I'm up against a wall, anytime you put yourself out there and try to do something, there's something in the way, and it's constantly me... And I've learned over time to - when I don't know what the next step is... People say "Take the next step. Take one step; you can always see one step ahead, and then you'll figure out what the one is after that", and I don't know if I totally agree with that. Sometimes you don't know what the next step is. But what I've learned from that bottleneck, from being the bottleneck, is that you have to take a step, because you can't stand still; you can't stand still on a moving train. So you've got to take that step and then learn to respond. That's what I've learned.

Slocomb Reed: On that note, David, what is your Best Ever advice?

David Cruz-Palmer: Probably similar to that - take smart, calculated risks. When you think you've done enough analysis, take some action, because you can sort of sit there and overthink and that's when you find yourself standing still instead of acting.

Slocomb Reed: Last question - David, where can people get in touch with you?

David Cruz-Palmer: I'm most active on LinkedIn, David Cruz Palmer on LinkedIn; or they can find me at David [at]

Slocomb Reed: Those links are available in the show notes. Best Ever listeners, thank you for tuning in. If you've gained value from this conversation about how to beat the market in warehouse investing, please do subscribe to our show, leave us a five star review, and share this episode with a friend who you know is interested in warehouse investing. Thank you, and have a Best Ever day.

David Cruz-Palmer: Thank you all.

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