Rich and his team oversee the industrial commercial division of Avistone’s capital market operations. They love what they call “flex space”. Warehouses with offices in the front and industrial operations in the back, and a lot of small businesses operating in them. Another big advantage to the industrial space is the leases are short term (3-5 years) and allows them to add value over time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Rich Kent Real Estate Background:
- Oversees Avistone’s capital markets operations
- More than 30 years of experience in financial services, real estate investment, and capital markets
- Completed transactions in commercial properties valued at more than $2 billion
- Based in Laguna Niguel, CA
- Say hi to him at https://avistone.com/
- Best Ever Book: Siddhartha by Hermann Hesse
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Rich Kent. How are you doing, Rich?
Rich Kent: I’m doing well.
Joe Fairless: I’m glad to hear that, and welcome to the show. A little bit about Rich – he oversees Avistone’s capital markets operations. He has more than 30 years of experience in the financial services, real estate investment and capital markets; he completed transactions in commercial properties valued at more than two billion buckaroos. Based in Laguna Niguel, CA. With that being said, Rich, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Rich Kent: I’d be happy to. Avistone is a buyer of multi-tenant industrial properties nationwide. We’ve been in operation for about four years. We started buying properties in 2014, and today we have 19 industrial business parks, all multi-tenant, in a number of different states, including Florida, Atlanta, GA, Columbus, Ohio, California and Texas.
Prior to starting Avistone, if I go way back, I actually started in the financial services industry as a stockbroker at Paine Webber Jackson & Curtis back in 1979, which obviously is dating myself…
You know, it’s actually a pretty good place to start in financial services, because as a stockbroker in financial services you really get in touch with people’s ideas and needs of investing, and what the different options are, and portfolio management, and optimizing out asset selection… But in the 1980’s I went to work for Drexel Burnham Lambert, and I was in the institutional mortgage-backed securities group, buying up Fannie Maes and Freddie Macs, and hedging out pipeline interest rate risk in the financial futures market.
In later years I worked for Salomon Smith Barney’s Commercial Real Estate Group in New York City, doing commercial mortgage-backed security loans all over the country. After the merger with CitiBank, I went to work for what became Deutsche Bank Berkshire Mortgage making large Fannie Mae loans on large apartment complex and senior facilities all over the country.
During the downturn in commercial real estate about ten years ago I was very fortunate to be one of two people hired by Auction.com, which was then REDC, the large single-family house auction firm. I was hired with Dan Culler who’s one of my partners now, to start the commercial division at Auction.com. We started an online auction for distressed commercial assets, both REOs and loans, and we grew that to several billion dollars in auctions. It was a very successful platform, I really enjoyed working there; it was a really good place to ride out the storm in real estate.
But right about 2013 we saw the market starting to turn around, and the reason we knew that is that we had fewer and fewer assets at auction. We elected to start our own firm and jump on what we believed at the time to be a very good bull market in commercial real estate, which has proved to be correct, and we specialized in the industrial space, for a lot of reasons that we can talk about.
Joe Fairless: Please, yeah. I’m very curious to know why you specialized in the industrial space.
Rich Kent: Well, what we liked — now, everybody is pretty aware right now that industrial is the new darling of commercial real estate.
Joe Fairless: Real quick – maybe not everyone listening knows even what industrial space is, so can you give an example of what that is and why they are, in your words, the darling?
Rich Kent: Sure. When most commentators or financial magazines talked about industrial, they’re really talking about in today’s market what we call the big box or the big bomber spaces that Amazon would be in, Costco, FedEx… Very large distribution, logistic warehouse operations.
After all, look how successful Amazon and the internet has been. That has been a huge boom to industrial properties. But those are the big single-tenant spaces. We specialize in what’s called flex space. Flex space is a combination of office and industrial in the back, and you see them in most major cities, you’ll see this type of properties. They’re not really sexy; they’re single-story, they’re concrete tilt-up… Again, offices in the front, warehouse, roll up garages in the back, but it’s really where small businesses go to grow.
We love that space right now because so much of the economy is based on small businesses. In fact, we were just looking at this the other day… 47% of all employee growth is in small businesses, businesses under 100 people. We like that space, and we like it also because we could buy these properties at a fraction of their replacement cost.
If you think about it, these properties are not expensive to build. They’re single-story concrete tilt-up, but they take a lot of land. So where are you gonna find 30 acres of land along a major highway in Atlanta that you could hope to buy right now at a good price? But number two, even if you could buy it, you would not build this type of product. So everything that we see that we buy was built in the 1990 or maybe the early 2000’s. It is not getting constructed today. So what we do is we go into major markets – we like to buy in NFL-type cities, because when you have a robust city, you have a lot of different economic drivers and you’re not building this property type anymore, typically we see occupancy levels right between 90% and 95% in these submarkets.
And again, because you’re not building it, where are the tenants going to go when their leases come due? So we get a lot of retention on our rollover. We like the shorter-term leases (usually 3-5 years), because that’s what allows us to build value over a period of time.
I know you’re really active in the multifamily space – well, that’s another great market, because every year all the leases come due, so you could adjust your rents to the activity in the market.
Joe Fairless: Yeah, so the business is able to get a good foundation and they’re all set up, and now three years has come up, and assuming that they are doing well, then they’ll wanna stay there and continue to grow and be there permanently.
Rich Kent: Correct. And before we buy any asset, we interview the tenants, and the tenants say to us: “We don’t have very many options where to move to.” We like that. And again, if you’re not building this property type anymore, that puts pressure on rents.
Joe Fairless: Now, with not building this property type anymore — and by the way, I love how you described the flex space… Office in the front, industrial in the back. It reminded me of you being the real estate mullet, business in the front, party in the back. [laughs] I immediately thought of that. But am I imagining things? I thought that there’s a lot of industrial being built for data centers and things like that.
Rich Kent: Exactly, that is where data centers and the big distribution warehouses – those property types are being built. What you’re not seeing built are these flex industrial business parks.
Joe Fairless: Describe a handful of tenants. What is their business?
Rich Kent: Well, when I say that we appeal mainly to small business, that is true for maybe 75% of our tenants. The other 20%-25% are Fortune 500 companies. I’ll give you some examples. CVS Pharmacy – if anybody orders medicine from CVS online, it probably comes from our property in San Antonio, Texas. They’re one of the tenants in a multi-tenant project there. So that would be an example.
General Dynamics has space with us in one of our Tampa properties. Subaru is a big tenant of ours in one of our Columbus, Ohio properties. So we have those kinds of tenants, but we also have a lot of smaller businesses. If you look at the construction trades – where do plumbing companies set up? Where do carpenters set up? Where do a lot of those supply companies set up?
We also have smaller tenants that have their own online distribution. Maybe they sell a product in retail stores, but when you don’t wanna take it home and you order it, it comes out of one of their spaces in a project like ours. So in that respect, we are the last spoke in that big distribution network of online shopping.
We have medical testing facilities. Some of our projects have dialysis centers, because they’re easy for people to walk in and out of. They’re single-story, there’s no elevator. So any small business that you can think of, from a bakery, to Joe’s pool supply are housed in our properties.
Joe Fairless: I’ve got a lead on a deal for you. I’d like to send it to you, but I’m not quite sure of your criteria. What is it?
Rich Kent: Our criteria – the first major filter is it needs to be in a dynamic, metropolitan area like Dallas, like Atlanta. We find that you need at least 1-2 million people in a metropolitan area to really mitigate a lot of your lease-up risk. That’s number one.
Number two – multi-tenant and in the flex category is a little bit of inside baseball, but if a project is near an airport, let’s say, we like to see it have more a percentage of warehouse space, because after all, why something by the airport? They’re probably in some type of delivery service.
If it’s in a more affluent, residential area, we like to see a higher percentage of office, and that’s because people that live in those areas don’t like to commute downtown if they can avoid it. Maybe they’re an escrow company, maybe they have a law firm, so they will pay up for office space in their submarket if it’s near their house. So it depends on where something is.
We like to see 3-5 year leases. As I mentioned, that gives us the ability to adjust rents to the market in tight-growing markets. That’s another thing – we like to see occupancy at least 90% and stabilized. We don’t worry so much about new construction, because I just mentioned they’re really not building it, but those would be the major factors.
Second, we target maybe 8 to 25 million dollars in purchase price. That’s pretty key, because we like to be above some of the local buyers in the market, the so-called mom-and-pop buyers, but we wanna be underneath the institutional radar. Once you get over 25-30 million in asset size, now you’re competing with some of the big institutions, and their cost of funds is a whole heck of a lot lower than ours. We also like to get at least an 8% cap rate going in, so that we could pair investors anywhere from let’s say a 6,5% to an 8% cash-on-cash from day one. So in other words, we like stabilized; we don’t like a lot of lease up risk. Our feeling is at this point in the cycle, if this type of property has a lot of leasing risk, in other words it’s 30% empty, there’s probably a problem that we can’t solve.
Joe Fairless: Like what?
Rich Kent: Well, we were looking at a property – I think it was in Phoenix. It was a really nice property, it seemed to have a pretty good location, but it had about a 40% vacancy rate. So we’re asking ourselves, “Wow, that seems pretty high.” So we talked to one of the property managers in the area and he said “Yeah, nobody wants that project. They’re all going across the street to the other project.” Oh, okay…
So in other words, there’s always a reason, just like you’d find in the multifamily space – why isn’t somebody going into a certain project? There’s always a reason, and that reason is not usually something we could solve, because we’re in a good market right now. Now, if it was 2008, you could just take a dart and throw it at anything and probably make money on it. So we’re sensitive about how a project has done.
Joe Fairless: Even with purchasing a 90%+ occupancy I’m sure there’s been a challenging property that’s — maybe the tenants weren’t what you thought they were or maybe the economic occupancy wasn’t what you ended up wanting it to be. Can you tell us about a property like that?
Rich Kent: You bring up a really good point. When we buy a project, we do extensive due diligence. But a buyer will never know 100% of what’s going on with the project. We interview tenants, we do all of the appraisals – environmental, physical needs reports – but usually in that first year we’ll find out something we didn’t know, and we expect that, and that’s why we always build a very healthy amount of reserves… It’s a known unknown, let’s just say.
So we just bought a property down in Tampa. Well, we actually bought of two of them and we crossed them in one transaction with one loan. Two great projects, but they were at 88% occupancy in a market that’s about 94% occupied, so we knew there were some problems with the property, and we knew what the problems were.
The current owner that we were buying from was not doing any capital improvements and not fixing deferred maintenance. So one thing that we were a little bit surprised about on that is how upset some of the tenants really were. We lost some tenants, we asked some other tenants to leave, because they weren’t paying their rent or they were behind… But we went in there and we made millions of dollars of capital improvements. We improved the property, we weeded out the bad tenants, and now we’re actively re-leasing the space.
That would be a scenario that does occur and we expect it to occur, and we reserve around it. But to your point, we don’t know what the mindset is of all of the tenants, and we never know when we buy it, but over time, in a good market, we’re able to improve not just the project, but the credit-worthiness of the smaller businesses in the project, because we just look for more credit-worthy tenants.
Joe Fairless: If you hadn’t focused on multi-tenant industrial properties that are in the flex category, what would you have focused on?
Rich Kent: That’s a difficult question, but let me answer it like this. Some of the best advice that I could give people is really look at replacement cost. That’ll tell you whether you’re gonna have competition from new development. So while I really like multi-family, in a lot of markets, like the market that we’re based in, apartments are [unintelligible [00:16:15].04] and as a result there’s new construction all over the place.
I look at retail, and if it’s not a grosser-anchored center, I wonder about the future of retail with online purchases. I know myself, I use Amazon. I don’t like to go to the mall. Suburban office is another product, and the TI/LC (Tenant Improvements/Leasing Commission) in suburban office are maybe ten times what ours are in the industrial space. You’re looking at $20-$30/square foot to [unintelligible [00:16:45].23] maybe $3-$5/square foot.
I’ve always like mobile home parks, but again, they’re [unintelligible [00:16:53].03] So it’s almost like a process of elimination, that we think we picked a really good niche. Now, within our niche we do see some possibilities. Let’s just call it a vertical integration, if you will.
We have a project that we bought in Atlanta, multitenant industrial. We would have bought it even without the concept that we went into it with, and that was to take some of the vacant space in that project and turn it into what we call creative industrial space. Now, everybody is familiar with creative office space, because that’s what the millennial market wants. They want that open area, they want a pool table, they want a little bar, a little waterfall… Well, in this project we are doing that with industrial space, which lends itself to that type of refitting very nicely.
You could take the concrete floors and glass them, you could take out the T bar in the ceilings and make that industrial ceiling look pretty cool… So we do see an opportunity in certain markets, where there’s a large millennial population, to convert some of our make-ready units to what we call collaborative industrial space.
We also see some opportunities in potentially buying maybe abandoned factories, or maybe older industrial properties, and creating training facilities. We know there’s a way with robotics — everybody says robots are coming; the reality is robots are already here, and a lot of people are probably gonna get displaced by automation and the 3D manufacturing.
So we see a big opportunity in creating facilities that are aimed at retraining of large numbers of the population for new skills, in robotics perhaps, or 3D printing. So there’s those kinds of opportunities.
Joe Fairless: When you venture into something like buying an abandoned factory and creating a training facility, how do you test that concept before jumping in and putting some money at risk?
Rich Kent: That’s a good question. What we would look for – and again, this is on a drawing board, and I hope I’m not giving a lot of people a great idea here, but–
Joe Fairless: Well, you are giving a lot of people a great idea, but there’s a high barrier to entry, that’s for sure.
Rich Kent: There really is. Don’t try this at home. There’s a lot of nuances in industrial, and I could talk about that in a minute. A lot of the projects we have purchased, we have purchased from multifamily operators that thought they can get some extra yield in industrial and they didn’t understand what they were buying.
But to answer your question, I think what you’re gonna find is a lot of cities, a lot of municipalities are very concerned about what could happen to the labor force in their markets as robotics take hold. So if we could find cities that have a program, that are teamed up with universities for recurrent training type of operations and partner with some firms that actually provide training, our purchase of that factory — [unintelligible [00:19:56].28] In other words, we would do it if we had the tenant and all the component parts to go into it, and we think we could put that together.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Rich Kent: Like a single phrase? Okay, well let me answer it like this… The old adage is “Location, location, location.” When it comes to income-producing properties, I would say the best adage is “Cashflow, cashflow, cashflow.” Concentrate on cashflow. It’ll tell you what the project is worth, it’ll tell you what you’re gonna yield on it, it’ll tell you what kind of loan and what kind of debt service it could cover.
So to us, if you think about the type of product that we buy, it’s pretty boring. It’s single-story concrete tilt-up. There’s no soaring glass and steel structures, but it cashflows. That’s the key.
Joe Fairless: When you look at the underwriting for a deal – I know that’s a whole long conversation, but from a high-level, how do you assess the numbers on the type of property you buy?
Rich Kent: The first thing is we’ll look at historical operating statements from the seller, and we only care about the operating statements by looking at the levels of expense – what the taxes are gonna be, what does it cost you to turn on the lights, what utilities, and that kind of thing. So we’ll look at those historical expenses and we’ll conflate those with some inflation and some of our experience, because typically we’ll buy in markets that we already have property, so we know what it takes to operate these properties.
But when we look at the income line, what you really wanna look at is you wanna look at the rent roll. What is in place right now? And not just the rent roll… What you wanna get are some of the bank statements to see what the collections are. What money is actually being collected for maybe the last 3-6 months, because that’s gonna tell you what that upper income level is.
So now you start to put that together in commercial – and certainly in industrial – you need to have the program Argus, which will run out your expected TI’s and Leasing Commissions every year, and you need to really pay attention to those and put in very conservative assumptions… And they’ll vary, but it’ll compute what your rollover risk is, what are the probabilities of renewal. You really need to understand those numbers before you get down to the NOI number.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Rich Kent: Fire away!
Joe Fairless: Alright. First though, a quick word from our Best Ever partners.
Break: [00:22:38].23] to [00:23:15].29]
Joe Fairless: Okay, best ever book you’ve read?
Rich Kent: I’d have to say the best ever book I’ve ever read – and that’s a tough one – I would say Siddhartha, by Herman Hess.
Joe Fairless: Best ever deal you’ve done that we have not talked about?
Rich Kent: Well, I kind of like the deal we’ve just bought in Atlanta, called Northwest Business Center. It had every element that I’ve talked about, and it’s in a great area of Atlanta that’s starting to boom right now.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Rich Kent: Well, it’s hard to narrow that down to just one mistake. [laughter]
Joe Fairless: Maybe on the last deal you did, the Atlanta one. I’m sure there’s one thing you’d rather have done differently if presented a similar opportunity in the future.
Rich Kent: Well, we’ve only owned it for about a month now, so I’ll have to get back to you on that. It’s really hard to say… Having been in this industry a long time, I would say just generally the biggest mistakes are not remembering that these markets are cyclical, and when there’s good times, like there’s good times right now, you need to tighten up your underwriting, because it’s not always gonna be good times, and you’re starting to see people do some crazy things… Don’t do it.
The mistakes that I have made in the past – I didn’t think the market could crash as bad as it did in 2008, and you can’t think that’ll never happen again. You have to be prepared for that.
Joe Fairless: What’s the best ever way you like to give back?
Rich Kent: That’s a really important question… Recently, my girlfriend and I filed the paperwork for a non-profit, and we call it Aristotle’s hand. What we see is there’s a lot of kids in inner city schools that are never going to college, but really could benefit from learning a vocation. We’re setting up a scholarship program to be able to get that vocational training that all of those kids are really gonna need for the future.
I think vocational training is a really big hot button. It certainly is with me right now… And I see that in our industrial properties – people are out there and they need skills, and we’re gonna give back by helping some of these people get those skills.
Joe Fairless: How can the Best Ever listeners learn more about your company and get in touch with you?
Rich Kent: Avistone.com. They can find all of this right up there – what we do, how we do it and who we are.
Joe Fairless: Rich, I love our conversation because I love learning about an asset class I know close to nothing about, and you did a great job educating me and I’m sure some of the Best Ever listeners on what you look for, why you look for it, why you’re buying what you’re buying, and business opportunities, not only now, but what you’re looking for in the future.
Great stuff, thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Rich Kent: Thank you so much.