Why Industrial Real Estate Is Booming (And Where It’s Headed Next)

Aviva (00:00)
This week's listener of the week is eBay God 1000. eBay God 1000. Thank you so much for leaving us a five star review.

And for those of you listening, if you leave us a five star review below, you might be next week's listener of the week, week, week. This week on Commercial Real Estate Secrets, we have Mr. Cliff Booth. Mr. Booth is the founder and chairman of West Mount Realty Capital. Mr. Booth, thank you for being on the show today.

Clifford A Booth (00:32)
Pleasure. Thank you for having me.

Aviva (00:34)
Mr. Booth, for the listeners, who are you, what do you do, and how did we get here today on Commercial Real Estate Secrets?

Clifford A Booth (00:43)
Boy, that's a lot. Who we are. So I founded Westmount Realty Capital about 40 years ago. I'm originally from Montreal, Canada. Have lived in the United States for 45 years. We're a Dallas based real estate investment and development company. We have been doing industrial real estate for 40 years, along with other products too.

but industrial is two thirds of what we do today. It's the basis of our company. And we've always been intrigued and excited about industrial real estate because of how it's performed for us. now it's kind of the hot ticket or one of the hot tickets. I can guarantee you that when we started off, it was not.

It was kind of what we call the Rodney Dangerfield of the real estate business. It didn't get any respect. It was not sexy. didn't have all the conferences and everything else. But I think finally the world has woken up to it and for justifiable and good reasons. That's good news and bad news. The good news is that it's appreciated and certainly values have increased and liquidity and everything. The bad news is that it's now a much more competitive space than it ever was.

Aviva (02:00)
Mr. Booth, tell me about your beginnings in industrial real estate. What drew you to the industrial space and how did you get there?

Clifford A Booth (02:12)
As I mentioned, I'm from Montreal, Canada. I had bought some warehouses before this, I ended up meeting a number of investors in Canada who are still investors, friends, mentors of mine who had been doing real estate for a long time.

And I'd say it was their influence and their experience with industrial real estate that really alerted me and brought the industrial side of the business really to the forefront to realize that it was more stable. There was less capital required compared to, let's say, office buildings, triple net rents compared to apartments.

And that just kind of set us on the path where, you know, then deliberately searched out more and more industrial opportunities, first in the Dallas area and then, you know, I think we're in 15 markets today and have been in close to 30 in the U.S. at this point.

And so we have a national profile and we're vertically integrated. So we manage and asset management, we do all that stuff in-house and that's helped. And we do various kinds of industrial really, right? A lot of times people talk about industrial, but you know, it's important to know which kinds of industrial. So we do everything across the board from bulk distribution buildings, high cubed, a single tenant.

sale-lease back, manufacturing buildings. But I'd say most of what we do, we call multi-tenant light industrial. And most of what we own is infill. So mature locations, you will not see us owning too much building, too many buildings that are not close in. Close to airports, on freeways, in mature parks.

And that's been, and multi-tenant, more than single-tenant, I would say is also what we generally do. The other thing we do is cold storage. We're big proponents of cold storage and we've owned a lot of cold storage and then we're developing ground-up cold storage as well.

Aviva (04:17)
Tell me, look, I could talk about the evolution of industrial real estate all day long and what it looked like 10 years ago, 20 years ago, et cetera, but I'm really interested in extracting information from you on cold storage. Obviously with industrial real estate, e-commerce has taken it from, like you said, the ugly duckling of commercial real estate to the bell of the ball.

And that happened, you know, 2010, 2015, 2020 was huge. Can you tell me the story of cold storage? Because I know it's exploding right now. What did it look like in the past decade and compared to where it is today?

Clifford A Booth (05:01)
Yeah, and that story is still unfolding as we speak. think we're in early stages of where Cold Storage is going for a variety of reasons related to, as you were saying the, well, first of all, COVID, but just shopping online. And even if you think about your own grocery store, you might've noticed that the salad bar where you take out,

has changed over the last few years, right? It used to be kind of a small section and now it's expanded quite a bit and people want more choices, more diversity, better quality and quicker in their food choices now than ever before. And that's just one part of it. There's so many other uses of cold storage, but I would say...

First of all, on cold storage, most of the buildings in the US are owned by users. So if you look at inventory of buildings, those buildings are not for rent. If you look at it from an investment or landlord standpoint, that's number one. Number two, the age of most of these buildings is quite old. I there's buildings that are, we have a bunch of buildings that are 50 years old.

Aviva (05:59)
Hmm.

Clifford A Booth (06:15)
with low ceiling heights and poor energy management systems, et cetera. So it's kind of an antiquated inventory, but it just speaks to the demand that, even for drugs, chocolates, flowers, food processing, there's a lot of different uses now besides the proteins and just regular kind of things that people think about for refrigeration, not just freezer.

It's come into its own in a more dramatic way, really because of e-commerce and because of COVID. But it was a great space to be before. And I think it's only going to continue to be better as we start to sort of elevate the quality of the buildings to meet the market demands of where people get their needs satisfied.

Aviva (07:02)
So you're saying, correct me if I'm wrong, a lot of the existing product type in cold storage are these older buildings that have been retrofitted to support cold storage. But now you and obviously other developers are developing properties that are retrofitted initially to be cold storage properties.

Clifford A Booth (07:26)
They're not retrofit. You're building from scratch. So give me a simple

stat. The buildings that we're building are 50 foot clear, right? The people who are in cold storage or refrigeration, they live in the cubic world and pallet world. They don't live in a per square foot world. So when you go up 50 feet and most of the buildings that are older and that we own, that others own,

You know, on good day, you're 24 foot clear at 20 at 50 foot clear. You can go up seven pallets. So the efficiency of these buildings before you even get to, know, new energy management systems and everything else you can do in a brand new building, but just kind of on a, on a distribution space, but on a pallet cost per pallet basis, there's so much more efficient. Yeah, it's, it's, think.

Aviva (07:56)
Yeah.

Clifford A Booth (08:20)
It's an exciting time in the cold storage business.

Aviva (08:24)
In terms of inventory and cold storage, how much of a lack of supply do you think we have in America?

Clifford A Booth (08:34)
I don't know how to quantify that. I would say that I've rarely seen in my career a supply, demand imbalance that we see now. Now, you know, I'm going to give a big proviso here.

That doesn't mean that anything works or any location works or any strategy works, right? There's a lot of different demand drivers and we have a particular philosophy that we're using in our developments. But if you do it right, in the right location, think most buildings that are being built for the large tenants,

coming out of some of the big 3PL providers. And that makes sense and will continue to be. I think there's an opportunity for the smaller tenants too, that market that has not been served as well. And that's probably where we're gonna focus more.

Aviva (09:35)
Interesting. What size properties are you finding to be like the sweet spot?

Clifford A Booth (09:39)
We think

kind of the sweet spot is in that, let's call it 250 to 300,000 square foot range. Yeah.

Aviva (09:49)
Sure.

What are unique challenges you are finding when developing these cold storage buildings?

Clifford A Booth (09:57)
finding a

great piece of land in a terrific location is tough. Most of our industrial markets, as you all know, are mature. And there's been a lot of warehouse development in the last 10, 15 years in the US. So there's been a lot of absorption of land.

So, and as I said, we're infill oriented. So trying to find a a really good piece of land in a mature location with good access without environmental problems. It doesn't need too much, you know, work on the site. You're putting a lot of ornaments on the Christmas tree. As a friend of mine says, don't put too many ornaments on the Christmas tree or the Christmas tree will fall over. So.

I think that that's the challenge. I'd say one of the major challenges to find a good site. And that's similar in just warehouse development in general, but even more so for cold storage problems.

Aviva (10:59)
Say I'm developing a 200,000 square foot warehouse. And we'll say just for round numbers, it's 100 bucks a foot to build. How much more is it to build a cold storage facility as opposed to just a regular class? Whew.

Clifford A Booth (11:17)
It's 300, 300 foot.

Yeah. But the rents support that. Yeah.

Aviva (11:26)
My fear, and correct me if I'm wrong, be your user base is so much smaller, right? If I rent out a warehouse and just four walls and a garage door, could have the tenant, my tenants are endless in terms of who I could put in that building.

I suppose my question would be how do you get over the fear of vacancy when you have a such a

huge specific type of property.

Clifford A Booth (11:57)
Yeah, no, it's fair point. You got to be careful. There have been markets where we've overbuilt. We'll probably do that again. And I think you really need to be careful because at 300 bucks a foot and, you as you say, that, you know, there's a more restricted amount of tenants that are available and interested in leasing them.

You gotta do your homework. It's like anything else. And we'll be very careful, very conservative. And I would say there's things you can do to mitigate that risk, right? So, I'll give you a couple examples. So our strategy is to lease multi-tenant, not single tenant.

we could lease to a single tenant, but we wanna outfit the building and we'll spend more money upfront in the infrastructure of the building, flooring, walls, et cetera, so that we can divide up the space. We think that's a risk mitigator, right? So that if...

you're opening it up and not only dependent on tenants who want large blocks, but for tenants who need smaller blocks. And the same would be true about convertibility between how much freezer and how much cooler. So if you did outfit the building so that it could be flexible in terms of, you know, how much does a tenant need of a freezer versus cooler, and you didn't get that

Aviva (13:09)
Hmph.

Clifford A Booth (13:21)
ratio right if you had a fixed sort of amount and you you had a tenant that came along that didn't fit that need that that existing what was in the building then you're going to lose a tenant so we're spending the money I'm trying to that's fully convertible so there can be

Aviva (13:32)
Sure.

Clifford A Booth (13:37)
you know, all freezer, all cooler, 50, 50. And don't forget that's also, that's not just for first generation, but for second and third generation tenants. So I think between designing the buildings for multi-tenant and for fully convertible on the cold spectrum, we think that it opens up the leasing possibilities.

Aviva (14:00)
What are your lease terms? How long do these cold storage users want to commit to?

Clifford A Booth (14:06)
Yeah, typically they're longer leases than in general because though we're supplying the cooling systems and the building itself, there's still, in some cases, could be pretty significant investment that the tenants put in terms of racking systems or whatever else they're doing specifically. So you're seeing a lot of 10 and 15 year leases.

Aviva (14:30)
Wow. Hey, I know these folks going into 50, 100,000 square feet of cold storage space. know moving is not a weekend endeavor. And that's why we love our large industrial tenants because they come and they stay.

Clifford A Booth (14:31)
Yeah.

No, for sure.

So

yeah, they're sticky. Yeah.

Aviva (14:51)
Let me ask you, more round numbers. In Denver, we're seeing rents 10 bucks a foot, 12 bucks a foot. But I like to use round numbers, we'll say 10 bucks a foot for just a class A facility. How much are you seeing rents or are you placing rents with cold storage users? How much more are you? Wow. Hey, that's great.

Clifford A Booth (15:11)
over 20.

Yeah, it depends on the market, Southern California is going to be more than Dallas.

Aviva (15:17)
It's fascinating.

If you could only choose three markets

in North America to invest in, what are the three markets?

Clifford A Booth (15:30)
in general in our cold storage.

Aviva (15:33)
cold storage.

Clifford A Booth (15:37)
Today, geez, you're making me give away all my secrets here. Is that why you call it secrets broadcast? I would say Dallas and Houston would be two of them for sure.

Aviva (15:41)
you

Yes, that's why it is.

Hmph.

Clifford A Booth (15:54)
The third one, I'd have to give a little more thought. Phoenix is interesting. Atlanta is interesting. We're probably, you we own a lot of product in the upper Midwest, Chicago, Milwaukee, et cetera. On this strategy, we're probably going to be focused more on the southern half of the country and the Sunbelt. So.

It could be a Nashville or something like that.

Aviva (16:21)
Interesting.

Clifford A Booth (16:22)
Most markets are good for cold storage right now.

Aviva (16:27)
I believe it and I love to hear it. Mr. Booth, what makes you happy with what you do every day in commercial real estate?

Clifford A Booth (16:29)
Yeah.

a couple of things I enjoy working with our team. we have a great team, smart, dedicated, hardworking people. And that I get a lot of gratification about just interacting with them. I would say, so for example, on this cold storage opportunity, I love the, endeavor of.

conceptualizing, so we set out to do something, we have a piece of land under contract, we're in the pre-development stage, so getting an idea, finding a piece of land, pulling it all together, designing the building, and then actually seeing it come to reality, I find that very, very enjoyable too. So it's...

It's challenging. It's intellectually challenging. It's a bit of a, as we were talking about sort of a, you know, a jigsaw puzzle, Rubik's cube to understand sort of what, how, what is it going to look like multi-tenant, single-tenant location, you know, get doing really deep dive into the different systems. But yeah, that that's fun to sort of.

Today there's a piece of land and it's important not to just future there'll be a building there that will hopefully meet the needs of the marketplace. I think that does give me pleasure.

Aviva (18:03)
Mr. Booth, okay, I know that was supposed to be my last question, but I have to ask, how are you navigating challenges in the debt market right now while developing these properties?

Clifford A Booth (18:13)
Yeah, by putting in more equity. That's the short answer. Yeah, well, you know, not for everybody. It doesn't work right. Some people have chosen to go the other way by putting on mezzanine or preferred equity. That's never been our play. It's not our play, especially in this higher rate interest environment. We've chosen to in effect to buy down the debt and that on

Aviva (18:18)
That always works.

Clifford A Booth (18:42)
We're doing that in just regular acquisitions. Then you take a cold storage deal or a development deal, let's Development is the last place for us that we want to have too much debt on. So it's another risk mitigant. I would say it's been a big part of our philosophy always is that what I've seen over my career is the way people get in trouble, generally speaking, in real estate is on debt.

Now, you could make a mistake or you could have some bad luck or sometimes things change that you didn't account for. But even if you look back to the great financial crisis, the unfortunate people that had debt come due in a 24 month period, even in a city like New York or Manhattan.

They were the ones that suffered. If your debt came due, even if the values had dropped in that period of time, but your debt wasn't mature at that time, you probably were okay and lived to see another day. So for me, the lesson is about debt. If you can handle your debt, you can probably live to see another day. And if you can live to see another day in real estate, generally speaking, you probably come out okay.

Aviva (19:53)
you

You know, that was the vein I was always taught in. That was how my family has always pursued real estate is low debt. But I know, you sometimes I'll talk to folks on the podcast or and it's debt, debt, you know, lever, lever, lever. And I'm sure there's, you know, there's a million ways to make money in this business. But we come from the more conservative approach as well, where you can't really lose as big.

with lower debt.

Clifford A Booth (20:26)
That's it. And listen, you you can make money, you can make more money, certainly more IRR with using more leverage or preferred equity or mezzanine equity until you don't. And on a portfolio basis, constructing a portfolio, it sounds like your family's done and certainly what we've done, you don't know which deal is the one that's gonna...

Aviva (20:39)
sure.

Clifford A Booth (20:51)
provide challenges for you. So we've just chosen to say, don't do it. And you sleep better and maybe you're leaving somebody on the table that I couldn't, I don't care about that. It's more just sort of, you know, how to walk through the world in a safer way.

Aviva (21:06)
Yeah, smart. Mr. Booth, we really appreciate your time today and spilling your commercial real estate secrets. Where can the listeners find you, follow you? Any final words? Yeah.

Clifford A Booth (21:16)
Yeah,

we're on LinkedIn. have a website www.westmountrcforealtycapital.com westmountrc.com.

Aviva (21:28)
Mr. Booth, this has been a great show, westmountrc.com. We really appreciate your time and appreciate having you. And for everybody listening, we'll see you next week.

Clifford A Booth (21:40)
Thanks, Aviva. I appreciate it very much.

Aviva (21:42)
Thank you.