Also known as The Warehouse Whisperer, Erik focuses on industrial real estate. Erik's specialties include active tenant/buyer representation, landlord representation, land sales and development and investment sales and analysis.
Erik's real estate career now spans over 20+ years in the Inland Empire. Erik has achieved recognition for many notable transactions he has been involved with over his career, having been involved in over $1 billion worth of commercial real estate transactions during his career.
Erik is known as an expert in Inland Empire industrial real estate for his knowledge and analysis, and has been a guest speaker and moderator at many local and regional business events over the years.
In this episode:
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
Video Link
Radio Show
Also known as The Warehouse Whisperer, Erik focuses on industrial real estate. Erik's specialties include active tenant/buyer representation, landlord representation, land sales and development and investment sales and analysis.
Erik's real estate career now spans over 20+ years in the Inland Empire. Erik has achieved recognition for many notable transactions he has been involved with over his career, having been involved in over $1 billion worth of commercial real estate transactions during his career.
Erik is known as an expert in Inland Empire industrial real estate for his knowledge and analysis, and has been a guest speaker and moderator at many local and regional business events over the years.
In this episode:
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
Video Link
Radio Show
Welcome to The Norris Group real estate podcast, a show committed to bringing you insights from thought leaders shaping the real estate industry. In each episode, we'll dive into conversations with industry experts and local insiders, all aimed at helping you thrive in an ever-changing real estate market. continuing the legacy that Bruce Norris created, sharing valuable knowledge, and empowering you on your real estate journey. Whether you're a seasoned pro or a newcomer, this is your go-to source for insider tips, market trends and success strategies. Here's your host, Craig Evans.
Craig Evans:So let's fast forward a few years. We had great recession, obviously, the residential market, so probably one of the biggest hits of our lifetime. What what did the industrial world go through in that market? That area? And what were the effects? Were the effects the same as throughout the country? With different California? What did you see in the industrial market of that?
Erik Hernandez:So in the Great Recession, you know, and I talked a little bit earlier about how we did not have the type of liquidation in the industrial market that we did in the 90s.
Craig Evans:Right.
Erik Hernandez:The difference this time was a lot of people, you know, had built opportunity funds. They were so sitting on money for like a year, right. And they would come in and say we're, you know, we're buyers of industrial real estate at eight caps. You know, what, 8% is a capitalization rate for our investor friends, and the prices were coming down, but they weren't coming down quickly enough, a lot, because the lease rates were also coming down, the cap rates weren't going up as much as investors were hoping to start picking up assets. And so we keep having these meetings, and it turned into, well, maybe we're a seven and a half cap buyers, you know, and after a year of of these people go into their investment committee, you know, reporting, okay, what you buy this quarter, we didn't buy anything, you know, what do you mean, you didn't buy anything, you know, you're sitting on hundreds of millions of dollars, you haven't bought anything. And eventually, you know, people started buying again. And at that point in time, there were probably two or three buyers that were incredibly active in the market that were run by really smart guys. And they were the first groups that you know, if you had something to sell, they were your first phone call. And for the first two or three years coming out of the Great Recession, they were buyers of anything they can get their hands on, it was an if you go back and look, it was incredible on the concentration of buyers by this handful of individuals. And so when a lot of people thought that the land market would not come back for five or 10 years, you know, in 2008, land started selling again by 2010 and 2011.
Craig Evans:Wow.
Erik Hernandez:It was off to the races again. And at this point in time, the technology I think, had caught up with the or maybe really it is the infrastructure was starting to catch up with the technology. And you know, the second wave of the E commerce boom, had begun. And that's, you know, at that point in time, I don't believe Amazon had a single warehouse in California, you know, for all the Amazon warehouses that you can drive around today and see, and Amazon has been around, you know, since the mid 1990s. They didn't have a warehouse in California. They're probably the biggest occupier of warehouse space in California.
Craig Evans:Yeah, I didn't know that because I knew that their ranking in California now was one of the largest space holders here. So that's interesting. Well, so from an industrial side, let's jump forward again, let's jump into the pandemic, right COVID. hits. Where 2020 COVID hits, walked me through what that looked like an industrial sign.
Erik Hernandez:So there's a good analogy that I like to compare. The founder of Lee and Associates was a guy named Billy, who has since passed away. But he wrote a letter effective if I can find it all set it to you, that in hindsight, was just tremendous foresight, because he had been a real estate person, you know, his whole life. And he sent this letter out to, you know, all the agents at Lee and Associates. And I want to say, I want to say was 2009 or 2010 is very early in the recovery process. And he basically said never in my career, have I seen a time when basically everybody is in agreement, that the haircut on real estate is about 40%, right? The lenders were basically agreeing to it, you know, the users, the owners, the investors, everybody was saying, okay, that feels about right. And he was like, 'Hey, I know it feels bad right now, but this is tremendous opportunity'. And boy, after, you know, he'd been through many more cycles than I had. And he was really right. You know, in hindsight in terms of the tremendous opportunity that happened. So now here we are, you know, we went through COVID, for industrial real estate, here's the crazy thing that happened for about two months, when the pandemic started, you know, when, you know, when the NBA canceled their season, and, you know, it was like, hey, stayed home for two weeks to, you know, stop the spread, and two weeks turned into whatever, depending on where you're at, right.
Craig Evans:Now, you do remember, I'm in Florida, right, so.
Erik Hernandez:I do. That's why so wherever you're at, and I don't want to go down that road. But clients of mine, you know, were very concerned that their businesses were going to be heavily impacted. And they, you know, to save money, they started laying people off, unfortunately, to keep the lights on,.
Craig Evans:Right.
Erik Hernandez:That lasted about 45 to 60 days. In fact, I actually listened to a podcast I did with Bruce, right in the middle of that, I think it was June 2020. And at the time I joked with Bruce, I said everybody wants to COVID 19% discount, it was something I had coined into time, right? Everybody wanted, you know, a discount, right to rent space, the moment in time, that you were able to get a discount on real estate was probably three months.
Craig Evans:Right.
Erik Hernandez:That's it. And the Irvine company, was one of the companies I remember reading about, where they got way ahead of the curve. And they went to their tenants, and basically said, 'Hey, we know its problem, the next three months rent are free, you're gonna pay us back that rent, you know, the following year, we'll break it up into 12 monthly installments, and they went to go try to save their tenants, because they knew that it was going to be an issue for them, and really a good example of being ahead of the curve on that. And we worked with tenants and landlords to help work with their tenants, you know, to figure out solutions so that everybody keep the lights on. And then the government came in and did the helicopter drop the money. And in the industrial real estate, what happened, everybody was at home and they started click and buy, right, because they didn't want to physically go to stores will have Amazon delivered to it. I know, whoever have it delivered to my doorstep. And the one ad reversal that happened for the demand of industrial real estate. I mean, it was incredible. I'm not sure we'll ever see that again, in our lifetimes. Because the one ad that happened, and we went from buildings that maybe were empty or under construction to having multiple offers on them, the vacancy rate by the end of 2021. was effectively zero, right? It was like 0.25%, you know, depending on what number you look at. And basically, if you were in the market at that time, some of the only buildings you can look at were buildings that were under construction, because everything that was existing was occupied. I mean, it's just an incredible time. And the market, the pricing doubled, the lease rates doubled, or even tripled in two or three years.
Craig Evans:What you know, that's the interesting thing, because in that process, you know, our main space is is residential, single family multifamily, with the companies, you know, outside The Norris Group that I own with Douglas Brooke Homes and DBL capital, all that. And I never forget, that was the first week that that everything announced on COVID, you know, and our first priority, we were a little over 100 employees is like 'Alright, how do I not lay people off?' You know, 'how do I make sure that everybody still has a job, and I protect people's livelihoods and our family'. And we started going into kind of crisis mode trying to figure this stuff out and working through this. Within the residential side, some of the US and some of the largest regionals and then some of the big nationals in the country we were having, every other day, we were having zoom meetings between us all. And never forget within 10 to 14 days, business days, all of a sudden, we were literally on a call and we're looking at 'wait a minute where's your sales at last week? Where's your sales at?' We're like, we've sold more houses in the last six days than we've sold in the last three months or the last three weeks. What are we talking about? And I never forget it was crazy because we realized, wait a minute, this is getting crazy. And in especially in Florida as well, because you know Florida to handle it different than many places in the country. But I mean, we were off to the races, we, like there's there's a builder here in southwest Florida, they knew their production rate was in the Tri County area was about 176 doors a month that they could produce. You know, as far as you know, units, they were pre selling 280 to 290 a month, knowing that they couldn't sell it. But they had buyers that were putting down 20 and 30%. And then that started. So I appreciate this conversation, because I love to hear what is through these cycles, what's happened in the different worlds of real estate. So let me ask you what what do you see then have been some of the, you know, everybody talks about we're out of COVID we're, you know, we're through that weather. But, you know, I was just traveling two weeks ago, I was in New York for some stuff, things like that. And I still see people, you know, kind of walking around with masks or different results of COVID. Just in day to day life of perceptions of it or real or not real what wherever it's at, right. I'm not I'm not trying to get into that political side. I'm not trying to go down that mantra there. But what do you see in your world? From the industrial side? What are the lasting effects of COVID? Are? Are people coming back to office space? Are they coming back to the industrial space? What do you see out of that?
Erik Hernandez:So in the different food groups, right, you know, call it multifamily, residential, and then retail office and industrial. I think in it the beginning stages, everybody thought retail was the one that was going to probably get hurt the most. And they definitely took it on the chin the most early. But it actually turns out that office is the sector that, you know, has really gotten hit the hardest, because a lot of these companies realize that, you know, when they went from work from home, and then come back to the office, you know, a few things happen. You know, a lot of people revolted. And were like, wait a minute, you told me I was just as productive working at home. And now you want me to come back? I'm not coming back. Right. And so there's a lot of companies, including Apple that have had to compromise with their employees on you know, like, well, I'll come you know, come back two or three days a week or, you know, so that's one part of it. But a lot of other companies have realized that, unfortunately, that they can be just as productive with a lower headcount.
Craig Evans:Yeah.
Erik Hernandez:And so like, you see, a lot of these technology companies are laying off, you know, 1000s of people, right, because they realize that they can be just as productive. And so a lot of these office buildings in major metropolitan areas are, you know, taking the hit as a result. And so the lease rates are depressed. And, you know, if the office buildings sold in, you know, 99, or not 99. But, but like, 2018 2019 2020. You know, a lot of them are under significant pressure, because the valuations are probably half of what they were, during that time, and there have been some recent office buildings in Orange County in LA, and they've sold for half of what they sold for five years ago. Yeah, and then other buildings, if they can't sell them, you know, they've been given back to the lender, or whatever their joint venture partnership is, because there was no more equity left in the deal. And so that's been the, probably the sector that you've seen, you know, in major, major cities in the country, really get hit pretty hard. And now the, you know, they're trying to figure out well, what do you do with an office building? Now how do you repurpose it? And I think at first everybody thought, Ah, you just, you know, converted to apartments, right? Which in theory, okay, that's a pretty good idea. I had this explained to me by several different people, that it's not as easy as it sounds, to repurpose those office buildings, into apartments or condos or whatever. And one of the big issues is plumbing. In an office building, you might have a central core of restrooms, right? For apartments, condos, you got to have multiple restrooms in each of those units. And those buildings were not designed to handle that capacity. So you're talking about massive investment to repurpose these buildings. And it will eventually happen when the prices get attractive enough. You know, and that'll be a good thing. The one thing about real estate is it always figures out a way to repurpose itself, you know, and creative people and we'll go out there and they'll figure it out. On the industrial side, we had a parabolic rise in the price of assets, you know, in what lease rates did and when anything goes into a parabolic price curve rally, unfortunately, it has to come back to earth a little bit.
Craig Evans:Right.
Erik Hernandez:And so we're in the process of figuring that out. On the industrial side, you know, I had a client in 2021, who had to go get into the building, because their building was so full. And if you remember, during COVID, a lot of the ships stopped coming from China, right? So you had a mix of inventory and warehouses that wasn't moving, because retail stores were closed. And product that wasn't coming in from China. Well, when the ship started coming back into container ships from, you know, China, Singapore, Vietnam, you know, all over the world into LA and Long Beach. But the stores hadn't fully gotten up and running yet, there was all this inventory that had nowhere to go. And so you would see these industrial buildings, they would have, I think, one of my clients, he would have, you know, 50, shipping containers parked, you know, outside of his building, and the city of Eastvale was coming down, giving him tickets, he's like, what, like, what do you want me to do, I literally have no place to put these. And so everybody had to work with each other, they want to get another building to put that product in. But the ports, if you remember seeing the pictures, it looked like D Day, right, France, right, with all the ships off the coast, it looked like a scene out of Saving Private Ryan with all the ships off the coast, you know, trying to get into the ports. And then there were all these other issues that happened, you know, where they couldn't process enough containers at the time. And then, you know, there were even little things like there weren't enough chasis right, to put the painters on to get them off the ports, or all different kinds of things that affected that, well, we've worked through all of that. And at the time, a lot of companies thought that they did not want to have their business model rely on just in time inventory, right? Where you only keep the inventory that you have, and you can get anything you need from anywhere around the world, and seven to 10 days or maybe a couple of weeks, if it's coming from overseas. And they went from just in time inventory to just in case, I think started taking a little more real estate than they thought they might need just in case. And now there's a little bit of overhang in that space. Amazon's probably, you know, the leading example of that, you know, in terms of the buildings they've put on the market for sublease, you know, and I think the guy that had pioneered and put their whole warehouse logistics infrastructure together, you know, they've decided to part ways. I don't know all the details on that, but you know, the, the, the level of infrastructure infrastructure they built out was really tremendous. I mean, it was a model for everyone else, but there's an overhang of inventory. So on the one hand, you'd say, okay, Amazon's got all these buildings on the market someplace. And yet, they're still taking new buildings, because it depends on what the business line is, you know, they've got so many business lines now that you may see one segment, that's maybe ecommerce just home delivery, scaling back, but then they've got all these other business models, like, like pharmacies, right, like online pharmacies and things that maybe they have to be temperature controlled or whatever, where they need more space, they don't want to put that use in with, you know, the building, right. So it's pretty interesting how that will overhang one of the issues in this market right now has been the sublease space. So we were talking about what's the difference this time, so I pulled the stat. So at the end of 2023, for our market, the availability rate was 10.47%, okay. The physically vacant part of that was only 3.9%, okay, but of the let's call it 10 and a half percent of buildings that are available. Half of the buildings are existing, 25% are under construction, and the other about 20 something percent are sublease space. Actually, the exact numbers are 54.16% existing, 26.08% under construction 19.76% sublease. So I want to think about it 20%. That's one out of five, right? So if you're a company out looking for space, one out of every five buildings that you go to look at is a sublease. About one out of every four is under construction. And two out of every four is existing right? Rough numbers. Okay.
Craig Evans:Yeah.
Erik Hernandez:So the issue in the market is, is that a lot of those buildings that are on them? market for sublease, or leases that were signed and 2018 2019 2020? Pre COVID, right. So those lease rates in many cases, were half of what the market is, right? So, so developer that has a new building under construction that's for rent. And they have, you know, performative here, the company across the street, can rent it out for 20, or 30%, less, be thrilled, because they're still getting a lot more than what they're currently paying on their lease rate, but put a de facto cap on lease rates, until we can work through that inventory. And so, last year, you know, I jokingly, with some of my clients called it, I don't know if you're familiar with the five stages of grieving? Yes, it's you know, the acronym is DABDA, right. And it's denial anger, bargaining, despair, acceptance, right. And in late 22, and early 23, you can see a lot of the sublease space coming on the market. But the market was still pretty strong, there was lots of deals happening and a lot of tech, a lot of people thought we would work through that. But as you started to see the market slow down, you know, everybody has to go through that. It's just a natural human cycle, right? It's not good or bad. It just is right.
Craig Evans:Right.
Erik Hernandez:And, and we have to go through that, in our own way to get to the point where you can accept the market has changed, right. And so I think we spent a lot of 2023 going through that. And at the end of 2023, when most of them got to acceptance, the landlords started getting very aggressive, on incentives to tenants to lease their buildings. And so my professional opinion is that, I think this year, and probably in the next year, is a tremendous opportunity for tenants, and probably buyers down the road, that maybe missed out in 2021, or 2022, on this big run up that we had, or if you were a company that you wanted to lease a building, and you couldn't, right because there were 10 offers on it. Now, if you're a tenant, you can go out, and you've got, you know, depending on what you're looking for 10,20,30 Class A choices for buildings to look at and all the landlords, what's your deal? How much free rent would you like, you know, we'll cut you a deal on the lease rate, you know, we'll help you move, we'll give you an incentive to build out your infrastructure, very, very motivated landlords, and the shifting that really happened in the last probably three to five months, you know, where they all got to the acceptance stage. And unfortunately, because there's so much product that's on the market, you know, if last year was was dabda, you know, 2024 is going to be the Hunger Games. Where the landlords are going to have to compete with each other to win, the tenant occupied their building, because there's more buildings, right now, than tenants to occupy them. And the sublease, space is still also a consideration because there are sublease buildings out there that are 30% less than what other landlords were hoping to get on their buildings. And so we're in that really interesting window where it's a tremendous opportunity for tenants. And look, the pendulum swings both ways, right?
Craig Evans:Yep.
Erik Hernandez:We were in a landlord market for a really long time and a really good run. We're in the process of correcting that. And it's going to be a tremendous time it is now for tenants to take advantage of that point in time in the market. I think the leases that get signed in the next 12 to 24 months are going to rival the types of deals that we saw getting signed in 2009 and 2010. I mean, that was 15 years ago.
Craig Evans:Yep.
Erik Hernandez:So.
Craig Evans:Well, so let me ask you this, with with the 26% mentioned on new construction, the amount of sub leases that are coming on the market, things like that. How difficult is it and where's the desire for getting new projects done in California? What the biggest holdup in that?
Erik Hernandez:So, California has its own set of issues. The issue today and doing new development in California is is that we had such a huge run of development. I mean, if you think about, you know, the 1000s of acres of land that have been converted into industrial buildings, a lot of it happened so fast in some cities that there's been some maybe natural pushback against the speed of that development and so a lot of cities have started to reconsider their zoning ordinances, or putting development, moratoriums on industrial warehouse space, or making it more difficult to build new industrial space. And there's a lot of driving factors and competing interests for the reasons for that. The reality is, is that industrial real estate is still one of the great net creator of jobs. You know, a lot of people will say, Oh, they're just, you know, they're just warehouse jobs. If you haven't been in the state of the art, industrial building, like some of these buildings that Amazon has put together, it's incredible the technology that they're using in these buildings, so it takes more highly skilled labor to run these buildings. And, you know, in the past, you know, one of these buildings, let's say, it took 200 people to run, right. And I'm not saying Amazon just talking about in general, right, 10, 15 years ago, today, it might be 50, or 60. But they're better paid, they're more highly skilled. And some of them probably have to be trained to work with the robots and the automated technology that are running these buildings.
Craig Evans:Right.
Erik Hernandez:So you know, the jobs. And what they do in these buildings today is very different than what people might think of from 20 years ago. But today to get new projects develop, there's a few considerations. One is, you know, we were talking about investor capital and lending, and the willingness of people to lend, it's very difficult right now to get a construction loan, in California, to build or probably a lot, you know, major portions of the country. Some Yes, some No, it depends on where you're at. I think Southern California, from an industrial estate perspective, is probably getting hit on the chin a little bit harder than other markets, there are some markets that are not seeing the type of lease rate, reductions in pressure that we're seeing in Southern California, like there's some markets in Texas that have been a little more resilient than us. But remember, we also had a parabolic rise. And what we saw, so that's kind of a natural correction of what we're seeing. But I think in the future, developing, the real estate that we'll need, is either going to have a lot of issues from, you know, state regulations to local municipalities are really grinding down on what they will allow to be developed, there have been a few initiatives at the state level, that have started and stopped trying to basically pass state restrictions on where you can build industrial real estate, and they want to supersede, you know, local cities and municipalities, on what their zoning ordinances are, and where you can build things. I understand, you know, where the desire of some of that comes from, you know, you don't want to see, you know, big industrial building with the truck court facing a school playground, right.
Craig Evans:Right.
Erik Hernandez:Nobody wants to see that. Right. And so hopefully, you know, everybody can get together and work together and figure out, you know, solution that works, you know, for everybody without, you know, giving another hurdle for industrial developers to build real the real estate that we will need right now.
Craig Evans:So, you know, I guess the last question I want to dive into is, especially in, the industrial space for the listeners that we're looking at, for investors that are looking at options, things, what do you what do you think is going to be the future the space that you're in? What do you think the future that space will be?
Erik Hernandez:You mean, in terms of what goes inside the buildings?
Craig Evans:Well, depending on what's going inside, what's the outlook of fulfillment of them, you know, again, with people staying home, the changing potential uses, you know, we talked about I mean, we've touched on a lot of that, I guess, I would say, you know, what, what do you see is the biggest outlook for industrial over the next, let's call it five years.
Erik Hernandez:So the interesting thing in Southern California, you know, my area is the Inland Empire, if you will, right, San Bernardino, Riverside County, and most most of my focus is on the west end around the Ontario port area. But if you think of our area is really part as a sub market of the Southern California basin, right, Orange County, LA County, San Fernando Valley, San Gabriel Valley and Inland Empire. A lot of the industrial real estate in Orange County and especially LA is older, obsolete, real estate, right? The truck courts aren't big enough, you know, the new 53 foot, you know, trailers and rigs, they can't really load those buildings unless you're loading from the street. You know, a lot of those older buildings you have to load from the street because the truck courts are cernero some of those buildings are getting demolished and rebuilt in a state of the art facilities, some of them get torn down, or they get converted to residential. And so as you're tearing down real estate, industrial, real estate, and LA, hopefully we're able to replace it, you know, with real estate, in other areas were out here, you know, so that we still have, you know, a job base, if you will, you don't want to tear down your job base and replace it with other places that people can work, you know, to make a living. And but I think that, that everything that we've seen with Amazon, all that is here to stay, I think technology has fundamentally changed how we expect to get things, you know, if you buy something today, and they can't get it to you in two days, it's like, why not? Like, what what's your issue, you know, Best Buy is probably a really good example of someone that decided that they had to beat Amazon at their own game. I don't know if you go to Best Buy at all, but I love best buy. I know, there are sometimes some issues with with customer service that people will complain about inside. I think that used to be an issue for them. But I think they really turned the corner I love Best Buy, I have the little total tech membership. And I ever have a problem with a device. I just walk right into the store. And it's replaced, no questions asked. And if you go on their app, you know, you can buy something. And if they have it in stock at the local store, they'll even deliver it to you same day, right. And their prices are always competitive, or maybe even a buck cheaper than Amazon. And it's for a lot of people, it's right down the street. So I think that's why it's a good example of someone that figured out how to compete, you know, in today's world, you know, well, but it's an interesting story.
Craig Evans:Eric, I am so grateful for you spending the time with us. It's been a pleasure to get to know you and spend some time like us. I know you've been a longtime part of The Norris group and the radio show and what we do so I appreciate you coming on and spend time with me. To all our listeners. I appreciate your time. We've had Eric Hernandez with us today. It's been a great conversation. Eric again, thank you so much for your time. All our listeners will look forward to seeing you soon. See you next week. Thanks so much. Have a great day. Bye bye.
Erik Hernandez:Take care.
Narrator:For more information on hard money loans, trust deed investing, and upcoming events with The Norris group. Check out thenorrisgroup.com. For more information on passive investing through the DBL Capital Real Estate Investment Fund, please visit dblapital.com.
Joey Romero:The Norris group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and NMLS license 1623669. For more information on hard money lending go to thenorrisgroup.com and click the hard money tab.