thoughts on our April 2023 meeting...
Although I still feel strong about my WPB thesis, I think I could've done a better job at addressing the following:
Insurance Costs - Hurricanes are a problem here, which means insurance expense is a problem. To plagiarize Moses, it can be a "tapeworm in the P+L." One option is to forgo windstorm and flood insurance, but I recall Moses tweeting something to the effect of investing in FL real estate and not having insurance is akin to writing mother nature a blank check, which I agree with. How I rationalize the environmental risks of South Florida is I can take steps to minimize damage by installing impact windows and doors, hurricane tie downs on all roof trusses to supporting concrete bearing wall, only buying CBS construction, and avoiding flood zones. Having the experience of being in markets with demand risk and legislative risk, I feel more comfortable dealing with environmental hazard risk where I at least have a shot of combating it, where as the former leaves me with very little in my control. Certain buildings in WPB I would not feel comfortable forgoing insurance on, while others I believe it is a reasonable risk to take if the stars align for certain variables of construction and location.
PSF vs per door - Rhett asked me what Class B/C buildings typically traded at in WPB and I gave my answer using a per door basis instead of psf. Right away I knew Moses likely cringed when I said that. I fully understand why psf is a superior metric to use.
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Quantitive analysis of deals - If I recall, I don't think I did an effective job describing how I look at RE deals. With Lantana Cove, it was such a distressed property, a lot of the issues were more fundamental and had to be fixed no matter what. Because of that, I didn't lean heavily on quantitative metrics there. In addition, if I have walls open or a bathroom mostly torn apart, I am going to take that opportunity to ensure it is remodeled, plumbed, wired, put back together for the long haul. I'd rather spend now and take care of issues rather than kick it down the road and pay for it in future opex, capex, or vacancy (which is the most costly of all expense of all).
When operating using other people's money, I can't employ the same liberal capex spending I did on Lantana Cove. I fully understand the need to make sure LPs get their preferred return. In a more traditional syndicated RE deals I'd typically not take on a remodel project if my return was going to be less than 12%, give or take market dynamics and treasury rates. Difficult to have a rigid rule of thumb since all deals have unique variables, but I understand the dynamics at play when using investor capital vs. your own. Every dollar spent needs to have a hard quantitive reason behind it.
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small bay, flex industrial projects
I updated the "projects" section to include two industrial buildings I own with my family. One in Chico, Ca and one in Sacramento MSA (Rocklin, Ca.)
From a management point of view, small bay/flex industrial is significantly less complex than multifamily. In addition, the value add component is more function over fashion. For me, this removes a lot of the decision fatigue I encounter with multifamily remodels. You don't have to worry about a "look" going out of style. Also, these small industrial warehouse spaces benefit from lack of new supply. Not a lot of these are getting built for various reasons, but mainly they aren't as financeable as MF. Most developers in this space are going to build large industrial complexes because the economics are superior. In addition, municipalities much prefer new housing over small bay industrial.
I also think small bay industrial can be relatively recession resistant. In a growing economy, you are going to get people starting businesses or outgrowing their garage based business. In a contracting economy, you are going to have businesses looking to downsize and take a smaller footprint. The small bay asset class attracts tenants in both environments.
I like WPB small bay industrial for the same reasons I like it for multifamily. A growing population base and job market is going to drive the demand for small bay industrial. This would be my preferred market to invest in.
I also like Sacramento MSA as a market for small bay or flex industrial. Hard to find a market less "sexy" but as the capital of California, it is a steady, low vol, employment hub that attracts families for its relatively low cost of living when compared to SF Bay Area. Sacramento metro also isn't exposed to extreme weather or natural disasters. Flooding near the Sacramento River is probably the biggest risk. And although it is in California, seismic risk tends to be low. For long term RE holders, it also offers the benefit of prop 13 and is not subject to California legislative risk that multifamily faces.