GI260: Industrial Real Estate Investing with Cody Payne

GI260: Industrial Real Estate Investing with Cody Payne

Cody Payne is Senior Vice President at Colliers, Texas, specializing in selling Flex/Industrial investment properties across Texas. Over the past 19 years, Cody and his team have closed more than 850 real estate transactions. Before joining Colliers, Cody worked with Sperry VanNess/Dunn Commercial for 10 years, specializing in Office and Industrial investment sales, management, and leasing.

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Transcript:

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Cody Payne. He is Senior Vice President at Colliers, Texas, specializing in selling Flex/Industrial investment properties across Texas. Over the past 19 years, Cody and his team have closed more than 850 real estate transactions. Before joining Colliers, Cody worked with Sperry VanNess/Dunn Commercial for 10 years, specializing in Office and Industrial investment sales, management, and leasing. So thank you so much for coming on the show today, Cody.

Cody:
Absolutely. Thanks for having me.

Charles:
So before becoming a commercial broker, can you tell us a little bit about your story both personally and professionally that led up to that happening? I,

Cody:
It is pretty simple. You know, I got outta high school. I didn’t wanna go to college. So I went and sold cars at Westway Ford out here and just kind of worked my way through real estate school at that point. And got my license convinced a guy out here to hire me. He didn’t wanna hire me ’cause he only hired people that had college degrees, but he needed agents and he was a small local firm at that time. He didn’t have the spare Vanessa franchise, and so he said he’d hire me if I went to college at night. So we made that deal and you know, just kind of started doing small bay flex, you know, off industrial mix and just, you know, did a lot of leasing there. Advanced up, started getting into the sales side, built a really good team that has been with me for a long time.

Cody:
We were actually at Marcus and Millichap and then came over to Colliers. And so you know, we’ve kind of been riding the, the small bay side for a long time and, you know, since 2018 and 2020, it’s really seemed huge improvements and impact on the, on the CRE investment world. And so but yeah very good, very easy upbringing. Easy story, local, high school, ready to go. <Laugh>. I just wanted a ca I just wanted a Cadillac, really, now that I think about it. When I was younger here, I just wanted a job that could get me a Cadillac. Yeah.

Charles:
And real estate’s definitely that that vehicle <laugh>,

Cody:
Well, when I got it, it was actually a big piece of junk. So it just kind of shows you the dreams aren’t always what they seem, but yeah. So

Charles:
Can you break down a little bit about flex Bay, small Bay Industrial, what that is, kind of what your team focuses on right now?

Cody:
Absolutely. So the small bay, flex industrial side you know, you’ll typically see those, they’ll generally, you know, have tenants anywhere from, you know, a thousand, 2000 up to, you know, maybe 10,000 square feet. They, they really operate in smaller general contractor, you know, subcontractor garages, things of that nature. And so we specialize in selling these as investments. We help real estate funds pull ’em together, some to institutions. We help private guys get into it. Family offices we’re consistently going out bringing in new cross asset investors as well. We’ve got a lot of folks coming from the multi-family sector, from the office sector, retail sector. I think that, you know, this asset class is one of the better ones that can kind of fight against inflation. So you take like, you know, office or retail for example, you know, anytime those guys have tenant turnover, the ti cost is just been skyrocketing on a lot of those.

Cody:
And even same thing with multifamily. Well, the good thing about this stuff is there’s not as much, and you know, the only asset class that I know of that has virtually none is gonna be self storage, but it’s a much different management intensive style deal. You know, it’s not for everybody. You know, shorter lease terms, a lot more rollover, a lot more management intensive. It’s where these flex spaces are generally a little easier for people, especially coming from other asset classes. We haven’t had anybody that we’ve sold to from another asset class that had any difficulty with it whatsoever. I mean, all the managers love it. They, especially the multifamily ones, they’re like, we don’t get calls after five. We rarely get calls in general because, you know, a lot of times they’re triple net leases to where the tenants maintain the spaces themselves anyways. And so it’s really just a been a, a great rental increase in, in conversion asset class for the past few years.

Charles:
Cody, if you don’t mind just clarifying a couple of the definitions of words you use in terms you use because we’re mainly multifamily investors here use ti, can you explain tenant improvements to people that maybe have never been involved with a kind of a retail building before?

Cody:
Absolutely. So tenant improvements is something that so let’s just take like a retail space for example, and say you’ve got a you know, clinic or a restaurant in there when they leave, you are spending ti dollars tenant improvement dollars to refinish out that space for the next tenant. And so those costs, you know, since, you know, covid inflation has just been on the rise. And so take this for example, we actually just looked at this on an office building. Their tis in like 2019, were around 10 bucks a foot, that same exact building. Today, they’re at 50. The only difference is the rental rate has virtually not changed whatsoever. It’s pretty much the exact same. And so your bloodline, your capital costs, that’s where a lot of those tis go. That’s what is really hurting the, you know, office sector, the, the retail sector and, and you know, investments like that when it comes to these small bay warehouses, they’re usually very minimally finished out. A lot of times it’s one office, a restroom and the rest is garage. And so there’s just not much to it when someone leaves and then someone goes back into it. And also a lot of times in many cases, not every time, but in many cases, a lot of times tenants will finish up the spaces themselves. And so it’s not uncommon to find flex spaces that tenants have a significant amount of their own money into the space.

Charles:
Okay. Yeah, there was, one of the questions I had that you kind of covered was the benefits of this asset class. And one of the things you mentioned was triple net lease. And just to, before you dive in deeper to what that is and let people know if people, for instance, with multifamily, we’re gonna have really like a full service lease where the landlord is covering taxes, insurance, which everybody knows about insurance and taxes, especially if you buy a property these things are being pushed back onto the tenant in your asset class, flex industrial. Can you explain a little bit just high level how triple net lease works versus maybe a full service as I kind of just briefly explained it?

Cody:
Absolutely. And, and so you’re right, that’s actually one of the big things that we’re hearing about and seeing right now is, you know, taxes and insurance, right? Those are your biggest drivers of expenses across the board right now. And especially if you’re in states like Florida and whatnot, their insurance premiums are just through the roof when it comes to leases. So, I mean, you’ve got a lot of different leases, right? You’ve got, you know, gross modified gross net, double net, triple net. The ones that you’ll see mostly in small bay flex are gonna be like industrial gross, where a tenant just pays their own utilities, but taxes, insurance, commonary maintenance is on the landlord. And then you’ve got a lot of them are triple net leases. And those will essentially be the tenant pays a portion of the common area expenses, whether that’s landscaping, trash, repairs and maintenance.

Cody:
They’ll pay that portion. That’s, you know, usually budget that out, figure out what that cost is, and then you make that their, you know, add it into their monthly rent and then reconcile it every year. But they’ll pay that, they’ll pay the insurance taxes. And so you’re getting majority of your expenses back, obviously, depending on your occupancy. But if you’re, say you’re 90% leased and 90 per, you know, all those tenants are on triple net leases, that means 90% of your properties expenses are being reimbursed by those tenants. And so that makes it a very, very friendly investment to kind of understand what your actual net dollar is, instead of having to go through and consistently raise base rents, which, you know, is on the multifamily side or sometimes on the office side to kind of hedge against that continuous taxes and, and just common area maintenance for, for a whole part, you know general expenses for office and like, just take a a, a tower in las cleanest like 10 years ago was probably 4 25 a foot, now it’s like eight 50 a foot and the rental railroad hasn’t changed.

Cody:
Now that’s the office sector, but I’m just, you know, giving you an example of it. A lot of times, you know, we’ll see throughout Texas and, and many other states operating expenses for small bay flex will run around a buck 50, maybe up to $3 a foot just ’cause there’s not a lot of common area maintenance involved in it and not a lot of shared utilities either.

Charles:
Yeah, I could see that there’s not. Yeah, that makes perfect sense. So with commercial properties real estate in general, we always like to have some sort of value add plan when we’re purchasing it. What is a value add plan, a typical value add business plan look like for flex industrial space for a so a potential you know, client of yours that’s coming to you to buy a place. I mean, what would, how would they usually structure a business plan to build value in that?

Cody:
Well, and that’s a good question. And so, you know I worked at like I said, I worked at Marcus Milch for a long time. We had some really good multi-family guys there. And I remember in like, you know, 2015 through like 2019, I mean, people were going in changing out sinks or doing whatever, increasing rent, 25, 50 bucks a month, $75 a month doing that year over year. And, you know, nowadays people say it’s really kind of hard to find value. Like it’s much harder to find than it was back then. Well, that’s the best part about the flex space. It’s pretty easy to find right now because it’s a newer, it’s not a newer asset class, it’s, it’s a differently evolved asset class than what it’s traditionally been, and it’s changed so much. I really think that everything you know, about flex space prior to 2020 is kind of out the window and it’s just changed so much because it also pulls tenants from other asset classes.

Cody:
Now, it’s not uncommon to see like a Subway or a Papa John’s or, you know, little restaurants or even office tenants and flex spaces, which they didn’t have that before. But when it comes to value add prime example, we just sold a park up in Rome, Texas which sounds far, but it’s just North Fort Worth. But that project, I mean, the rents were almost half of the market older ownership, we run across those all the time. Older ownership, they were gross leases. Half the market that owners already gone through had started converting leases, triple net bumping guys up. And we’ve been doing that all across the us and so it’s, it’s, it’s still still newer and easier to get into for a lot of people. It’s not like it’s where other asset classes, like I said, it’s a lot thinner.

Charles:
Yeah, no, that’s, that’s definitely true. I mean, you have these different asset classes that they become popular, then they become saturated. I mean, we all know this multifamily definitely, you know, sell storage. You have, you have mobile home parks coming there, so there’s all these different asset classes that have caught popular one way or another. They get a little saturated. Now. It’s difficult after so many years to find the deals, like you were mentioning where you could do a value add and really drive value in a shorter window. So that brings me to another point because when we’re doing this, we have to find tenants and I mean, I’ve been a multifamily investor since oh six, and it’s something that it’s pretty easy to rent out you know, apartments, right? How difficult is it to find tenants for industrial properties?

Cody:
Much easier than it was when I was leasing 19 years ago. I can tell you that. I mean, the, the tenant sizes we were dealing with back then was like, you know, 5, 6, 7, 8,000 square feet. Now the most ideal size is like 1800. And, you know, that’s because like I said, a lot of this goes back to covid. I mean, think of all the small businesses, e-commerce, dropshipping, all this stuff that started really coming about. And I mean, how many, how many people do you know that have like multiple businesses? And so a lot of these guys are not working outta their garages. They’re working out of, you know, complexes like this. The tenant pool, like I said, the, the craziest thing about it is the tenant pool continues to expand. And before we never saw retailing off the tenants coming to it.

Cody:
And so it’s not just tailoring to your landscapers, plumbers and electricians, it’s now going to, you know, gyms and, and you know, baseball, you know, training facilities and, and stuff like that. And so the tenant pool just continues to expand on it, and it’s reaping so many benefits from, like I said, we’re actually selling a project out here right now, and they’ve got two retail tenants. One of them makes like really high-end cakes. And I was actually talking to them and they came from a retail center where the rents were like 36 bucks a foot plus triple net. Well, they came here and they’re paying like 12 and a half plus triple net and they got more space and they’ve got the ability to expand and downsize a little easier. And so the, the, the tenant pool, we haven’t really seen an issue with that whatsoever. The time on market is very, very good. We’re seeing a lot of areas experiencing 1, 2, 3 months vacancies at, at max. And, you know, the benefit of flex space is it’s very easy to kind of create a waiting list of people because it, you know, you approach your tenants a certain amount of time out and you can start marketing the property and get somebody to lease it before that tenant’s even gone. And so there’s a lot of different ways that you can do it to keep a building a hundred percent leased.

Charles:
Yeah, Cody, that’s really interesting you said that because I was driving through a flex space park like this maybe a month ago here in West Palm, and it was one of the things where it was very diverse from a tire shop, a specialty custom auto shop to someone that was selling rents out items for like weddings and stuff like this, you know, it’s such a, oh yeah, it’s, it’s everything. And then you have the, then you have the landscaper. I mean, there is so many different industries that can be covered, and I just, I didn’t think of putting two to Q together, but you’re right. I mean, it’s not just like your, your regular, oh, it’s just automotive people there, or it’s just landscapers there. It’s everything

Cody:
That’s, and you’re right. And I think that’s why I, I think it’s probably out of all the commercial real estate asset classes, I think it’s the most diverse because it is pulling from so many others. And so you’re right, you’ll go to these guys and you’ll have landscapers and plumbers, but you know, you’ll also have retail style tenants in there as well. And with retail not being as reliant on frontage as it used to be, right? Just like, like remember back in the, the early two thousands and nineties, if you needed car insurance, what’d you do? You drove to a retail center and there’s a State farm office and a retail center. Well, you don’t do that anymore. A lot of things have changed. And so the retail side has changed exponentially. The commercial kitchen side has like blown up quite a bit.

Cody:
There was a project that we sold it had a space in there, leased a Chick-fil-A, they had a Chick-fil-A right down the street. But because the catering and whatnot, that side of their business has just grown so much, they couldn’t support it out of the store. So they rent into space for it. And so that was another big thing that when Covid hit and, you know, people were buying so much, you know, food and stuff from restaurants and grocery shopping, the commercial kitchen side also kind of went up quite a bit. But yeah, no, it’s a very, very diverse tenant mix.

Charles:
Do you guys have anything that goes with cold storage? And I mean, do you have people that are buying two rent out, the tenants that are cold storage?

Cody:
So we don’t see a lot of that in the small bay flex side. Now we’ll see little restaurant operators go in there or commercial kitchens and they’ll put, you know, big freezers and stuff like that in there. But cold storage, you’ll see a little bit more of that in your kind of more mid-size and, and bigger box. You know, when you start exceeding, you know, 40, 50, a hundred thousand square feet, that’s where you really see the cold storage at. We don’t, we don’t see a whole lot of it. It’s a unique asset because there’s not a lot of it. And it’s something that’s needed across the US and that’s why when those trade, they traded very good prices, generally.

Charles:
That makes perfect sense.

Charles:
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Charles:
So if I’m looking to purchase a small bay industrial complex, one of the things, I mean, I’m gonna look at is kind of seeing what market rents are. And I find it one of the most difficult things with buying multi-family properties is that trying to do apples to apples, right? Find this place over here, this is what it’s renting for, and then if this the same or how do I get it to this, right? And how do you do that for your tenants? I mean, is there enough of these properties in enclosed proximity where you can really pull and say, this is what this unit’s renting for and this is what it could rent for. Is, is that really easy to pull those comps?

Cody:
It is pretty easy to do that. Like I said, you know, the other thing is it’s also benefiting off of the other asset classes. So you’re looking at more than just the general flex side of it. But you know, one thing that you’re looking at, if you’re looking at a property and say, Hey, Cody, I’m looking at this building, it’s got these tenants in there, what should I look for? Well, you wanna just look, you also wanna look for the type of leases that are in there, right? We’re running across a lot that are gross. And you know, just by people converting to triple net, in many cases that can be a 30% increase just by the conversion, but keep the base rates the same. So you got the current conversion capabilities. But it’s, it’s also similar to I think multifamily is, you know, sometimes people go into multifamily and figure out how do we amenitize the asset, right?

Cody:
How do we make ourselves a little bit better than the competitor right next door because just like, you know, storage and just like anything else, I mean, flex has competitors and so you always wanna make sure that you understand what the competitor offers and how you can be different and what amenities you can add. And so there’s a lot of amenities you can do to these, whether it’s, you know, adding mezzanine space, adding side yard storage, covered parking, additional parking iOS, which is industrial outdoor storage, which is becoming huge. And really all that is, is fencing off an area and leasing that portion out and they’ll, you know, people will store vehicles, containers, equipment and materials, whatever. And so there’s a lot of things you can actually do to these parks depending on, you know, what you buy and, and what it can do to be, you know, amenitized.

Cody:
But that’s another thing that we always say to look into. It’s not just look in the rent in the area, but look at what amenities you can add and what other people don’t have. Because a lot of people when they build these, they build them, we call ’em efficient builds, which is, you know, the same thing as saying the cheapest build possible. And, you know, they’ll have lower ceilings, they’ll maximize the building square footage to where they don’t really have any parking or side yard storage or anything like that. And so there’s a lot of little things you can do to older parks to, to help them out and continue to increase rents and building a brand, you know, you wanna build a brand.

Charles:
Yeah, renting out a a fenced in lot. I don’t, I don’t think you could get any better than that for a investment property. But <laugh> I mean

Cody:
Easy maintenance, no,

Charles:
Sure. I have friends that are contractors and they’ll tell me about, you know when they’re going into a new area, you know, going back between finding a lot where they can rent, put equipment in. It’s a big thing that you don’t really see. I mean, it’s like you don’t really notice as if you’re not involved with that industry. But

Cody:
Oh, iOS is, is, is massive. It’s on a huge rise across the us. Any, any construction company or, or anybody that they’ll tell you finding fenced in yard storage, secure yard storage is very difficult to find.

Charles:
Yeah, I like how you think outside the box there too. That’s really interesting. I remember talking to a self storage operator and he would tell me about just bringing in U-Haul as a value add, and you’re like, okay, oh yeah, I’m not even thinking about, I wasn’t even thinking about that as adding into the business. You’re thinking more of, you know, fixing up physically the property. So these are great value adds. So thanks for all that. I mean, what advice would you give if a new industrial investor wanted to get into small bay flex Parks? What would you advise them and to get started? What would be the best way?

Cody:
Well, obviously you want to find somebody that’s familiar with it, right? Understand it. You know, there’s, it’s like self storage. There’s not a lot of us that do it across the us so it’s pretty easy to find us. But just find somebody that understands it, knows it can kind of help direct you, not just an area, but building type, how you want it to look, kind of how you want to tailor it and kind of understand it that way. Financing, we haven’t had any financing issues with these. Obviously that’s not friendly right now, but getting ’em financed, we really haven’t had many problems on that end. But just really finding a specialist. We also, we have a book, our team, I got a great set of guides here. We actually wrote a book, flex based Domination that we put out. And it’s, it’s a great book. It just kind of tells you, hey, if you wanna build it, these are the things to look out for. This is what we’ve seen be successful, this is what we’ve seen. Some people have some issues. And so, you know, you can also look into that as well, just like multifamily, anybody that’s looking to get into it. I mean, just go to Amazon and find you a good book,

Charles:
<Laugh>, that was it’s a great way that you just segmented into it, which is like, when do you tell investors or when does it make sense for industrial investors to build versus buy a park?

Cody:
So if you’ve never developed before, we’ll sometimes, you know direct you to maybe buy existing or if you’re gonna build, do it in the, in the county, you know, in the ETJ where there’s less restrictions and less, you know, red tape to run into. But it also depends on the area, right? And so like I said, the good news about this stuff is, is there’s still really good opportunities out there to just buy existing so you don’t have to deal with the headache of building and you can buy stuff pretty close to build costs right now as well. So you know, right now I’m a big believer there’s a lot of people building it all over, but I, I think there’s great opportunity on the existing side. So

Charles:
As we’re wrapping up here, Cody, what are some common mistakes you see, let’s say real estate investors make maybe more specifically industrial investors that they make commonly?

Cody:
On the flex side we would probably see a lot of times on the new build you know, building too efficient of a model to where it can be replicated too easily and the competition just kind of can, you know, can, can beat you out if you build something you know, too cheap or, or, or you know, maybe the ceiling height’s too low or something like that. There’s a lot of things you can, can do on the build that actually hinder some of the tenant’s ability to use the space. And so it’s really getting your build down properly understanding the build that tailors to the area as well. And so and then also we’ve seen, I can’t tell you how many people have called us, so we don’t even know, just called us outta the blue saying, Hey, we bought a piece of land, but it’s not even zoned for this.

Cody:
And you know, obviously there’s nothing we can really do on that ’cause we don’t, we don’t sell, you know, medical office land, you know, Colliers does, but our team doesn’t. And so, you know or you know, a lot of times it’s buying a piece of land that maybe has a little more floodplain on it or, or elevation issues or over, you know, excavation costs. I think a lot of people underestimate excavation costs and so it’s just little tidbits like that that, that are small things that can turn very large, very easily and it’s stuff that is really just about doing your due diligence upfront.

Charles:
A lot of great points there, Cody. So how can our listeners learn more about you and your team?

Cody:
Easy flex business parks.com. You can find us there, get all the info you need on flex, give any of us fish out, we’ll show you whatever you want, you wanna develop, we’ll show you how to do it, show you some good models if you wanna buy existing. We’ll help you out on that on that end as well.

Charles:
Well, thanks so much for coming on today, Cody. I’m looking forward to connecting with you here in the near future.

Cody:
Absolutely. Thanks Charles.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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About Cody Payne

Cody Payne is Senior Vice President at Colliers, Texas, specializing in selling Flex/Industrial investment properties across Texas. Over the past 19 years, Cody and his team have closed more than 850 real estate transactions. Before joining Colliers, Cody worked with Sperry VanNess/Dunn Commercial for 10 years, specializing in Office and Industrial investment sales, management, and leasing. Cody has extensive experience in the Office and industrial leasing sector, having worked with many major companies, from Local/Regional to Fortune 500 companies and GSA leases. Cody’s team, known as Flex Parks USA, has continued to lead the investment sale market for small Bay Flex Industrial, focusing on bringing more investors, funds, and institutions to the asset class.

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