Episode 25: Property Case Study
Every CRE investor has a different process and experience during each acquisition. Joe and Ryan walk through a recent industrial property they acquired in Sacramento from start to finish.
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Joe Muratore:
At that off site, on that day, I got a call from a broker in Sacramento that I had not worked with before, I'd worked with his firm quite a bit, and he said, and I'm not making this up. He said, I've been trying to reach you for three weeks. I've got a property that would be perfect for you. And he went to describe it and he says, well, it's industrial. And I'm like, okay, keep going. He says, well, it's right on the edge of the downtown. Great. It's multi... You got to be kidding.
Speaker 2:
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Joe Muratore:
Let's talk about a case study that happened this last quarter. We purchased Nine15, North B Street in Sacramento, right on the periphery of the Downtown. And I think in this case study, we're going to share the story of how we got to the property, why it was interesting to us, the upside we saw and in general, how we think about properties and investing.
Ryan Swehla:
Yeah. It's interesting this is an industrial property and we love industrial, everybody loves industrial. It's the darling child of the four property types right now. But because of that, it is a picked over, low return, low yield environment. And so we're in the value-add space. And the value-add space, we expect a certain level of return for the risk that we take of doing a value-add strategy.
Ryan Swehla:
So it's been interesting during this market environment, especially accelerated by COVID, it's been challenging to find those properties where we believe that we're getting appropriately paid in return for the work that we're doing. And so maybe talk a little bit about how we found this one.
Joe Muratore:
This is an example of several investment themes coming together and having the eyes to see an opportunity. We were actually at a quarterly off site, which we do four times a year. And we had set this goal of adding industrial into the portfolio. And it's interesting. We had a couple themes we wanted to drive. We wanted to add industrial into the portfolio, we had invested quite a bit on the periphery of the Downtown in Sacramento. We wanted to do something in the Downtown.
Joe Muratore:
So industrial in the Downtown, traditionally we've done multi-tenant properties and we've done value-add. Okay. Those are some great themes. So part of this story is it's just a unique one. When you do enough of the right things, sometimes things come together. And at that offsite, on that day, I got a call from a broker in Sacramento that I had not worked with before, I'd worked with his firm quite a bit, and he said, and I'm not making this up, he said, I've been trying to reach you for three weeks. I've got a property that would be perfect for you.
Joe Muratore:
And he went to describe it. And he says, well, it's industrial. And I'm like, okay, keep going. He says, well, it's right on the edge of the Downtown. Great. It's multi... You got to be kidding. 110,000 square feet, opportunity to add a few more thousand feet of occupancy. Rents were 20 cents below market.
Joe Muratore:
And most importantly about this story, well, number one, that investment on its own made great sense. We were at a conservative 18% IRR and I thought, okay, we're going to get some more room to run beyond that on a five year hold. But beyond that, Sacramento's been working to have an MLS stadium, major league soccer, and there's been some hiccups to it lately, but the rail yard site, this is right across the street. So this industrial building-
Ryan Swehla:
From where the MLS stadium would go.
Joe Muratore:
Stares at this MLS stadium. I think the MLS stadium is still going to happen. It's a great investment, whether it happens or not, but what is happening for a fact is two parcels over the State of California is building, I looked it up, it's a 20 story office building, high rise, it's amazing.
Joe Muratore:
What is happening is multifamily development is happening like crazy around the site, both to the north and to the south. Kaiser is developing a hospital. So this rail yard site, which has been 15 or 20 years in the making is really getting some legs, and that's going to add additional wind to the sales of this property.
Ryan Swehla:
Well, and I think it speaks a little bit to our broader strategy, which is very straightforward value-add. Renter below market, owners haven't maintained the property the way that we would, that sort of thing, but in either a market, or a location, or a submarket where there's strong tailwinds, because those strong tail simply allow us to add to the otherwise pretty basic value-add strategy.
Joe Muratore:
Yeah. Well, and this property had been owned by the same family for 40 years. It needed fresh reinvention. So as we approach it, we've got a very modern color scheme. We're thinking almost like an Oakland tech loft sort of look to it. It's still going to be an industrial property, but over time, especially if this MLS stadium happens, it'll be likely redeveloped. It's just too well placed, but it's a great building.
Ryan Swehla:
Well, let's talk a little bit about underwriting and what our exit strategy looks like in the midst of this.
Joe Muratore:
Right. Well, fundamentally our job is to take a building that's been owned by one family for 40 years and shift it to the modern era. So that generally means moving from industrial rents to triple net rents, which the market supports. That means a new color scheme and landscaping. We're going to create some additional office space in there.
Ryan Swehla:
There's a potential for excess land that was rail right of way that if we're able to add extra yard space to the property.
Joe Muratore:
Additional parking. So fundamentally, we are going to make the asset look a lot better. We're going to let time happen over the next three years while this area continues to further develop while the State of California office billing gets occupied, while multifamily goes up while Kaiser does what they're going to do, while the MLS does what they're going to do, we're going to bring rents to market, which will drive NOI and on an industrial property with a higher NOI that looks great and is in a great location, I'm sure we're going to do very well.
Ryan Swehla:
Yeah. And on the underwriting, we really weren't factoring in all the future development potential. That's some of the tailwinds that we believe will lead to a lower cap rate. It might lead to a development play where the next buyer is actually redeveloping the property, but we're basing it on kind of a middle of the fairway value-add industrial play.
Joe Muratore:
Right. Our underwriting was built on bringing rents to market. That's it. Everything else is extra.
Ryan Swehla:
Can you talk a little bit, you mentioned the broker said, I've been trying to reach you. How does that happen?
Joe Muratore:
I try to be really responsive. So I'm not sure how that happened.
Ryan Swehla:
Oh, no, I meant the relationship. Why did he want to call you?
Joe Muratore:
Got it. Well, one of our core strengths is that we were brokers for years. I was a broker for 10 years. I speak broker, I think broker, these are my brothers and sisters in arms, so to speak. And I get the privilege now to be on the principal side and I get the privilege and I do deeply see it that way, of partnering with these and build these men and women and building alliances that lead to deal after deal after deal.
Joe Muratore:
And every time we do a deal, it's like a voting machine. It's like a vote for us or a vote against us. Were we great to work with? Were we difficult to work with? I mean, it's our job to get outstanding deals. So on the one hand, we have to be the right amount of flexible, but dogged. You have to hold both things closely, but that scenario where we excel.
Joe Muratore:
I believe and I try, it's my job, to make sure that every broker and agent and firm we interact with becomes an advocate for us. And so in this case, it was someone who's more on the periphery of this firm or someone who I hadn't worked with was not one of the normal players in this industrial market, but they knew through them, their network, that we were the right fit. And this person just kept at it.
Joe Muratore:
And so our job is to create a company, and a culture, and an environment that says, we are here, we are great to work with, we want to provide you Mr. And Mrs. Lead Generator with a great experience so that we do a lot of business together for a very long time. Our investors are thrilled, our firm is happy, your firm is happy, you and your family are happy about this partnership too.
Ryan Swehla:
Yeah. And I think in this environment in particular, that relationship approach is so valuable because business and life is about relationships. And when you're in a particularly competitive capital flushed environment, those, those relationships and those contacts become critical to being able to find those right deals.
Joe Muratore:
Absolutely. I think that's allowed us to grow the way we have, especially in the multifamily and industrial side where things are ridiculously competitive and where you get the call or you don't because they believe you're the right person. Most of what we've done has been off market and off market leads in this environment are gold, absolute gold. And I'm sure other firms are doing fine too, but our phones ring every single day and we work to sift through those leads to get to the greatest opportunities.
Ryan Swehla:
And I think Nine15 B Street is a great example of-
Joe Muratore:
We are especially excited about this. If anyone listening to this has another Nine15 B Street they'd like to talk to us about, please call.
Speaker 2:
Thank you for listening to Durable Value, an investors podcast, where we demystify commercial real estate with safe, sound investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to write it on iTunes or wherever you get your podcasts. To learn more, visit graceadapartners.com, where you'll find more information, investors tools, case studies and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodic with intro music by Ian Post. Thanks again for listening and we'll see you next time.