RE MINISERIES PART 3: CHRIS POWERS – BORING BUSINESSES AND INDUSTRIAL REAL ESTATE – EP. 70
My third and final guest in this real estate miniseries is Chris Powers. Chris is the founder and GP of Fort Capital, a real estate private equity firm in Fort Worth, TX focused on industrial real estate. He’s also a fellow podcast host with his show called The Fort Podcast, which is excellent and I highly recommend listening and subscribing to.
While it was a shorter episode, Chris and I covered a lot of ground. We discussed how business owners should view their ownership in company-specific industrial real estate, options available if an owner wanted to acquire other industrial property, trends he’s seeing, and why he loves boring businesses.
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Welcome to the podcast Chris, as a fellow podcaster it’s fun to have you. And especially as a fellow Twitterer and commercial real estate expert, I’d love to hear about your background first before jumping into it.
Alex thanks so much for having me. It’s been fun getting to know you and love your show. The quick kind of two minute pitch on me is grew up in Texas, El Paso. Texas born and raised and grew up there and went to TCU in Fort Worth in 2004, where I was fortunate enough to meet a gentleman that taught me how to start buying houses. And so I started buying houses in 2004 and 17 years later we have built a company today called Fort Capital that primarily acquires class B industrial across the state of Texas. Have a wonderful team of now 28 folks. And we’re nearing about a half a billion of assets under management. So it’s been a really cool ride. We’re fully vertically integrated company. So we raise our own capital and we operate all of our own assets. And that’s a little bit about who I am.
So why industrial, why not continue down the line with houses?
So, we wanted to get into the game of being able to work with tenants and lease and kind of create value that way and really more than anything the belief in industrial and where it was headed. We got into it in 2016 and really just felt like the fundamentals of the world were going to push a lot of great things in industrial’s direction. And so having been kind of a developer for a lot of my early part of our career, we decided on buying actually class B industrial, which is more of a vintage industrial that’s built anywhere from the sixties to call it the mid nineties. So we like buying assets that are already built so we kind of know what we get the day we close on them. We’re trying to be in all of the major Texas markets.
Can you share a few examples of what the ideal class B industrial property would be for you? And then just what is a class A and class C building look like?
So class A and class C they’re really in industrial. For some reason class C never really describes the asset class. It is in other asset classes like multifamily and you’ll see it in some office, but it’s really class B and class A. So class A is really newly built stuff, call it 2010 and to where we are today. So recently built. So they’re usually built with different specs, so larger clear heights, much larger facilities that are housing kind of the tenants that you might see like Amazon or Target or Home Depot that have these huge distribution and warehousing facilities. And then class B tends to be one based on when it was built kind of more infill, which means closer into the city more in mature neighborhoods. They’re typically smaller buildings with smaller base sizes. So a smaller base size just kind of handles a smaller tenant.
So whereas in class A you might see these quarter million to a million square foot tenants, a lot of what we’re buying you’re seeing 5,000 to call it 50,000 foot tenants. So we have kind of a different tenant demographic, a fastball property for us would be multiple tenants in a building. So we don’t really like buying single tenant buildings would be in a mature neighborhood somewhere that’s had mature infrastructure built around it forever. That is mostly occupied but has some vacancy that we could lease up, maybe is a little bit tired so it could use some paint and maybe a new roof and some HVAC systems and things of that nature. So we can clean it up and then has rents kind of below market. So that as tenants roll on their leases if we’re renewing them we can kind of mark to market their rents.
And that helps kind of drive in a way. We like clear heights anywhere from call it 16 to 22 feet. We’re kind of agnostic there. And we really like all different types. So we like warehousing, we like distribution, a little bit of manufacturing. We’ve actually done some cold storage, but most importantly we really like to buy kind of below replacement costs.
Is there any particular reason that you find the class B properties more interesting than class A or developing or some other part of this industrial real estate world?
So, in class A, especially in development you’re really manufacturing real estate at that point. You might be building a speculative project, but to some degree your returns are going to be a little more let’s just say you already have a tenant in place. You’re really building to a certain cap rate. And you’re kind of it’s more of a manufacturing with kind of a built-in margin. There’s a lot of people playing in that space. The sizes of deals are much larger. So you see a lot more institutional players in there. In class B you actually see a lot less sub institutional groups which is better. It makes buying these easier and they’re not as competitive. Once institutional capital comes in that has a much lower cost of capital, the game changes. So we like that. We really love the locations of these. So they’re almost irreplaceable, meaning you really can’t go into these big cities anymore and find land that is just available to build new industrial.
And so what you see in the inner cities are these older buildings that already have these mature neighborhoods around them. And a lot of your class A stuff is happening kind of on the outskirts of town. And so you don’t have land, the cost to replace is too high. So even if you could find a piece of land you can’t really rebuild this stuff because tenants in this space they’re not going to go pay a rent premium to be in a nicer building. When you’re occupying class B industrial, you’re using it as a function of your business. And so I always like to joke the CEO is not trying to have a platinum toilet in their class B industrial facility, that’s for the class A office building. So you don’t see people building new because there’s no rent premium for folks building new.
So it’s a supply constraint class. And the last thing I’ll add to that is we actually believe it’s a shrinking asset class. And the reason why is if you go into a lot of these major cities where they have these districts that are kind of being revitalized and you see kind of buildings being redone and you see things being demolished, those are always typically happening in old industrial parks, almost virtually across every city. So you’re either seeing them be repurposed for like a retail kind of use or maybe an entertainment use, or maybe they’re being torn down altogether and you’re seeing multifamily built. So it’s a really supply constraint class, but the tenant demand is growing considerably. And I can get into that if you’d like just on the tenant side, but that’s kind of why we focus on class B.
Well, I’d be curious too is if this strategy of buying class B properties, if you buy them… If part of your strategy is to buy closer to the city, such that perhaps down the road 10 or 15 years you get some of that redevelopment where that property is now perhaps worth a lot because you can now repurpose it into other properties or something like that. Is that part of what you do or is that kind of an ancillary trend that you’re just seeing?
It’s part of it. Every thesis we have is we at least look at the property and kind of wait. I would say this, we don’t buy anything with that being the exit, but we buy everything with an idea of where could this fit in that narrative. And so these industrials tracks come in these large kind of square contiguous tracks. It’s a beautiful piece of land especially for a developer. And as we know with industrial, they need to be built on really flat land. You never just see an industrial building built on lots of Topo. So it’s a developer’s dream if it’s a clean site with no environmental issues. So that’s a long way of saying we don’t underwrite to that, but we certainly think about it quite a bit. Especially as we buy properties that are kind of closer to that path of growth already.
One question I wanted to ask you is actually around the tenants and owners. A lot of small company owners will own their if they use manufacturing or they’re just some distribution business they’ll own the warehouse or they’ll own the manufacturing building. I’d be curious first off, is that something that they should be doing? And is that something that perhaps they should be doing more broadly? So if a manufacturing company owns a building, is that now a specialty of theirs? And should they consider buying other similar buildings around town since they know how they operate, or is it too different in your opinion and they should just stick with one building.
I think the business of buying lots of them is much different and they should stick to their core business. But in manufacturing owning your own building is almost key because you put so much investment into the facility itself. And for a lot of these legacy manufacturers it’s really not even an option to pick up all the equipment and just move it to the next building. I mean you talk to a lot of manufacturers that have equipment that’s still running from like the sixties, seventies, eighties, and they’re like, “Look, it works fine. But if we pick this up and we even adjust it like an inch and something goes off it could be obsolete forever.” And so what you’ll find is I think manufacturers depending on the level of equipment should own their own buildings.
My kind of two cents is I don’t think they should get into the game of buying lots of them though. And candidly there’s really not a lot of manufacturing buildings on the market for sale. Again, because most manufacturers want to own their stuff. And any good landlord that has a manufacturing tenant in there that’s been there forever kind of knows what they have. So they’re the least likely sellers that we’ve seen so far in the market.
That’s interesting. Is this a asset class that any business owner should consider investing in or are there pockets where it might make sense to build a portfolio? Because we’ve talked to other small business owners as you have as well, who own apartment buildings or they own some other commercial property as part of just their own personal net worth. I’d be curious if you have a view on industrial just broadly for small company owners.
I think ff you are investing outside of your primary business, it’s a great asset class. One, you don’t have to do huge mega deals. You can buy these buildings as small as kind of half a million dollars all the way up to a few million if you’re just kind of looking for a side deal. I would recommend probably doing a multi tenant deal rather than a single tenant so you’re not feast or famine. At least with multi tenant you’re never 0% occupied, hopefully. And then really from a management standpoint these are some of the most humble and great to work with tenants out in the market. So they’re not expecting this really crazy property with all this fountain and marble in the lobby and all these crazy things. They’re very kind of humble in that nature.
And really I didn’t even hit on this point, but in most asset classes. So if you live in a class B apartment building and you get a raise, or maybe you make some money, you might opt to go buy a house or move into a class A office building. Same thing could be said for office, if you start a business and it does well, maybe you move out of a class B office building into a class A office building. But in class B industrial, you would never move out of a class B building into a class A building unless your business function required it. So there is no, “Oh, I made some more money I’m going to go be in a class A industrial building, because that would be a nicer place to occupy.” So what you find is, as tenants do better they grow within the asset class. So you have a very kind of sticky tenant base.
So all that to be said, I think they’re much easier to manage. The tenants are kind of easier to manage the buildings don’t require a lot of cap-ex work. And so it’s not your core business, it’s a growing market with a relatively easy to manage building. I would recommend it to a lot of people.
On our last episode with Moses Kagan, I asked him about different ways to invest in residential real estate. And I love the different breakdowns that he gave. And be curious, what are the different options for someone who wants to invest in industrial real estate? What options do they have available to them?
One, they could be a business and do an owner occupied building so they could get an SBA loan and do it that way. Two, they could just be like we just talked about, they might just have some extra income and they feel competent enough to buy their own building and kind of manage it. Three is they could participate in syndicates, which are kind of what we do. So they might say I have 50 or a hundred thousand dollars, I want to put it to use in industrial. And they could find a sponsor like me or any industrial sponsor on the country and invest in one of their deals. The fourth would be to find a group that may have a fund that’s focused on investing in industrial and invest that way. And really the last way would just be going there’s several REITs that invest in… There’s a REIT that only does class B industrial there’s REITs that just do logistics properties. Then there’s just industrial REITs in general.
So those are kind of like five different ways you could put money into the industrial space relatively. Wouldn’t say relatively easy if you’re looking for a syndicator or a fund, but if you’re trying to buy your own building or buy a REIT, that might be easier. But that’s kind of five ways you could get exposure to the asset class.
This seems like an asset class that stays pretty stable. Are there any trends that you’ve noticed that you think may change how you invest in real estate today?
I was actually having this conversation at dinner last night. You never want to hear the words it’s different this time, but there’s a lot happening in the world. And as it relates to industrial, there are some things that are different this time. And really what I mean by that is on one end you have kind of what’s been stable, there are all these legacy tenants. So I’ll just make one example like when a city is really growing and homes are being built, where is all the housing material that’s going into these homes staying before it’s onsite? They’re in these warehousing facilities. So you might have all this roof material or something of that nature. Well, as these cities grow, that legacy tenant base is going to grow as well as more is needed. Not just for homes, but for highways and buildings and supplies and all this stuff. So they’re growing, but why it’s different this time is on the other side you have this whole new generation of tenants that are starting to come out driven by the online world and the e-commerce world.
And that demand for e-commerce and how consumers are consuming is not growing kind of linearly it’s growing exponentially. But what you can’t do in real estate is you can’t just develop exponentially. These things take time. They could take two, three years to get a building ready to go. Well, if we just took COVID for example and you see this older demographic of the boomer generation that a lot of those folks learned how to get online. So this is just one example. They’re not going back and so you have this whole new demographic and now they may go back a little bit, but it’s adopted online it’s going to order online. But even you and I that’s part of the online generation, I still think I use online more now post COVID than I did pre COVID. I mean I was just kind of forced to.
And so as you think about this tenant demand, it’s growing like crazy. And so you’re seeing all these new types of tenants spin up, but the buildings aren’t exponentially kind of keeping up with demand. And so in the short-term you have this unbelievable rush demand, but buildings aren’t just popping up everywhere. So that’s a trend that’s very interesting to me. The last mile is unbelievably important. So in a supply chain 45 to like 60% of the supply chain costs happens in the last mile. Then there’s 10% for personnel and then rent is usually three to 6% of the overall supply chain. Well all these companies are optimizing for how do we get that last mile cost down? And as long as they continue to chip away at that, their rent number’s relatively small in the grand equation. So there’s a lot of room for rent to grow as long as supply chain costs are shrinking in other places, which is what most companies are optimizing for.
So as a real estate owner that’s great because it leaves room for rents to grow and tenants to kind of be agnostic about it. So those are a couple of trends that are super interesting to me.
Can you dive into a little bit more of the e-commerce demand? Is that a type of building that you’re seeking out a little bit more often? Or could you repurpose any existing buildings to e-commerce or are you taking advantage of that trend in any particular way?
The answer’s yes. So typically we’ll just talk about the big gorilla in the room, Amazon. They are taking these million to 3 million square foot facilities. That is not what we do. But what now you’re starting to see, if you look at DFW, Amazon’s come in and DFW is this huge metroplex and they’ve planted all these million square foot warehouses almost around the city and then they drive in to deliver. But now you’re starting to see them take these 50,000 square foot leases and 20,000 square foot leases. And those are happening in buildings like ours. We don’t have one with them yet, but they are starting to form. And so what you’re seeing these huge companies do is they get their major facilities on the outskirts and then they’re just marching in towards the customer. You can just see it happening. And so as e-commerce continues to infiltrate our asset class, it’s not like all those other tenants that used to occupy those facilities are going away.
They need to find somewhere to be and so we’re really excited about the next kind of decade, because we’re starting to see how these big e-commerce companies are taking these much smaller spaces and using them. Then you take things like a ghost kitchen, which that’s not necessarily e-commerce, but it is in that they’re used for online food ordering. So online food ordering is at an all time high. Chipotle doesn’t care anymore to make them out of their restaurant. They want to make them out of a warehouse facility. As long as the burrito shows up at our house, Alex like we like it, we don’t really care where it came from. So we do have a couple of ghost kitchens. And then I think lastly is it’s easy to talk about Amazon but there’s all these small businesses that are on Shopify that are making stuff and selling stuff.
Well, they’re definitely not in the million square foot warehouses. You’re starting to see a lot of those kind of smaller boutique e-commerce brands start leasing these types of spaces. So I think the big trend is for every billion dollar increase of online sales, there’s a 1.25 million square foot need for industrial. And so if you just kind of say are we going to have more online sales 10 years from now or less? If that was just one big thesis, there’s a lot you could build off of that thesis and industrial’s kind of one of the macro tailwinds that happens as those sales continue to grow.
That’s insane. That’s crazy. What class would you teach in college if you could teach about any subject you wanted?
You sent me that. If I could teach any subject I wanted in school I would probably teach personal finance. I think it is one of the most I wouldn’t say simple to understand, but the core tenants of personal finance actually are not rocket science. Save more than you spend, things of that nature, but making a little more practical for people to understand. I would love to teach that course. I’ve actually taught something similar to a nonprofit here in town, but I would probably teach more on personal finance and how people can set themselves up to build wealth over life without it feeling so unattainable. I think a lot of folks in this world think of wealth as like this thing they could never achieve, but for a lot of people if you just look at kind of their actions it’s unachievable, but that’s more because of how they think about money than because of what their circumstances are. And so I’d probably teach on personal finance.
What did your teaching at the nonprofit look like?
So it was just for a younger group of children, maybe middle school-ish, but that was at its most basic level. So that was teaching like the very fundamentals of what a checking and a savings account is. I mean because you think a lot of this demographic of the countries, they don’t even think about a checking or a savings account. And this was a little more than just personal finance. But we talked about how to think about a job interview and what to wear to a job interview. But as it related back to finance was like how to read the Wall Street Journal or get your local newspaper and read something that could teach you about what’s going on in the community. We did a little QuickBooks lesson on how to balance a checking account. We talked about credit cards and why credit cards could be good, but why they could be bad.
And what interest rates are, why paying lots of interest could inhibit you and that comes you typically are borrowing money when you’re spending more than you’re taking in. We talked about ways to make ancillary forms of income. And then we talked about just things like savings accounts. And we talked a little bit about the stock market and using kind of index funds and things of that nature. And so it was a very basic course just laying out here’s some low-hanging fruit and it was just designed to kind of get people thinking about what they want to do with their money.
And then it was also harder courses on where Americans just blow money and why it’s nice to want that new shiny object, but by spending a hundred dollars on that today rather than investing it in a Vanguard fund 10 years from now you have $0. Whereas you could’ve maybe had three times your money or something of that nature. And so getting in their head that every dollar you blow instead of invest over time it’s not just that $1 that you spend it’s that opportunity cost to make X. So that was kind of the core tenants of it.
I love that. What belief do you think you’ve changed your mind on the most that you used to hold strongly?
It’s kind of easy for me to say this because I’ve been through it. And so as I sit here today and there’s several things in my life that I’ve changed my mind on. But one of them is this idea that you just have to work nonstop to be successful. Looking back at my career I used to be really part of that hustle culture. I mean just my whole identity was wrapped up in my work. And to some degree a lot of it still is, but maybe in a different way. And so as I look back, some of the benefits is I worked really hard and that gives you opportunities and you can get lucky the harder you work. But I’ve just kind of changed my mind that I think working smarter and more productive and more efficient is better than just working a hundred hours a week.
All that to be said, it’s like really hard for me to sit here sometimes and say that because doing that I think really helped me. So that’s kind of one that just stuck out immediately because as I sit here today a lot of what I’m thinking about is how do I work less and less hours and make each hour I work way more valuable. But that might not be the best advice for somebody in their younger age. So maybe for everybody kind of in there around my age that might be the thing I’ve changed my mind on the most.
Yeah, that was my other question. Is that a changed belief of yours just because you’ve reached a certain stage in your career and you probably couldn’t have applied that lesson earlier in your career. Or is this a lesson that you think could be shared by a lot more people regardless of career stage?
I think it could be shared kind of in different ways. I think like I said, I cherish those type days when I was single and I could work into the night and it was awesome. But also look back at a lot of things I did that was just a total waste of time. Again, it’s easy to sit here and say that because I can now see it that way, at the time it didn’t feel that way. And maybe I had to go through those things to know that they would be a waste of time. So if I was to give one more totally different example would probably be just something I’ve changed my mind on over time. And for the best reasons possible is like your team is all you have in a business and people are assets they’re not liabilities.
And I think it’s really easy for small business owners early on especially if you haven’t built something before is just to kind of discount people as kind of almost like robots that show up to work. And if they don’t work well that’s okay and you’re not going to invest a whole lot in them. And all I would say is I’ve so radically changed my mind on the people are the absolute most important thing. And as soon as I kind of figured that out and really put all of our attention into our people, great things started to happen. And you look across the board any great business in this world is just filled with phenomenal people. There’s no great business filled with a bunch of mediocre folks. And so that was something that took me a while to learn. And as soon as I had the aha moment, it kind of changed my life forever.
I love that. What’s the best business you’ve ever seen?
Probably Apple. That’s a big one. Apple to me seems like the most durable business in the world. And part of that’s because my phone is attached to me, it’s in my pocket, it touches my body every day and I probably am on it more than anything and I think most people are. As far as a small business goes, I can’t pick one particular and not to sound like a broken record especially on your show, but there’s so much truth that the more boring the business is and the more nobody in mainstream media would ever care to cover a business like that, I find that these entrepreneurs just print money. They’re so profitable. They have these deep understandings of what they’re doing and so to kind of it’s like Brent Beshore’s whole theory on buying boring businesses is I’ve done a lot of venture stuff.
I’ve been involved with folks that have really sexy businesses that you want to see on the cover of the magazine. But I’ve almost always found that those are not near as profitable or durable as kind of these really boring businesses of distributing parts or something of that nature. So I had a buddy looking at a business the other day, they melt old tires down and take that rubber to make floor mats for industrial purposes and repurpose the rubber from tires. I couldn’t think of anything I’d rather less do on a day-to-day basis than melt tires. But he showed me the P&L on this thing and it’s an incredible business. So maybe if the ones everybody knows Apple and I can’t specifically say one. But as I get older these boring businesses are just fascinating and they’re very profitable.
Yeah. I completely agree they’re super interesting. And that’s a big reason for starting the podcast was I didn’t see other podcasts giving some of these small, more boring businesses the attention I felt they deserved. And so I’ve tried to seek those out more. If you ever find one that you think is really interesting, please send them to me. I’ll love to have him on the podcast.
I certainly will.
Excellent. Thank you so much for sharing your time today, Chris this has been awesome. I appreciate you sharing little bit about industrial real estate and how your processes evolved and some of the things you look for and just thank you for sharing your time.
Thanks so much, Alex. This is great. I appreciate the invite.