WS1916 Understanding Flex Spaces | Grant Reaves

In this episode of the Real Estate Syndication Show, our guest host Jim Pfeifer speaks to  Grant Reaves, co-founder and managing director of Stoic Equity Partners. They delved into the intricacies of the real estate market, particularly focusing on the value-add multi-tenant flex industrial properties in the Southeast.

Grant shared his journey from starting in commercial real estate brokerage right after college to transitioning into the principal side of the business during the COVID-19 pandemic. He and his business partner, Jeremy Friedman, formed Stoic Equity Partners in 2020 and have since been actively involved in underwriting and acquiring properties.

Grant provided insights into what flex industrial properties are, typically ranging from 30,000 to 150,000 square feet and housing a mix of office and warehouse spaces. These properties cater to a variety of tenants, including general contractors and service-based businesses.

The conversation also covered the current state of the flex industrial market, particularly in secondary cities in the Southeast. Grant highlighted the low supply and high demand, the ability to purchase below replacement cost, and the resilience of these properties to work-from-home trends.

For investors looking to vet operators like Stoic Equity Partners, Grant emphasized the importance of examining supply and demand metrics, cash flow from day one, and the operator's in-house capabilities and use of local management and brokers.

Listeners can connect with Grant Reaves on  LinkedIn or via email at greaves@stoicep.com . For more information about Stoic Equity Partners, visit stoicep.com.


Today’s guest host, Jim Pfeifer, is the Founder & CEO of Left Field Investors – a Community of like-minded individuals interested in creating financial freedom through passively investing in real assets that generate real cash flow. The Community works together to provide education, a network and deal flow for its members. For more information, you can visit www.leftfieldinves, or reach out to Jim via email at jim@leftfieldinvestors.com.

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Transcript

Grant Reaves: So, different markets have different things. Mostly we see about 3%. We do own some stuff in the Atlanta Metro, though, and that market is just very, very hot. So you can even push up to 4, even 5% we've seen, but kind of our typical 3% annual bumps.

Jim Pfeifer: Welcome to your daily real estate syndication show. I'm your host, Jim Pfeiffer. And today our guest is Grant Reeves. He is co-founder and managing director of Stoic Equity Partners, a firm focused on value-adde d multi-tenant flex industrial properties in the Southeast. Today, we talked about why Grant loves self- storage but pivoted to focus on multi-tenant flex industrial, why they look for deals in secondary markets , and why they use third- party property management. And then Grant talked about how to vet an operator, how to analyze the deal in this industrial asset class and much more. Grant, welcome to the show. Let's start with who you are and how you get to where you are today.

Grant Reaves: Yeah. So my name is Grant Reeves. I'm co-founder and managing director of Stoic Equity Partners. We are a commercial real estate investment firm based in Fairhope, Alabama. Most people probably don't know where that is. It's down near Mobile on the Gulf Coast of Alabama. uh, about 45 minutes from Florida. Um, but yeah, started right after college, went to our Auburn University, uh, kind of North part of the state, and then got into commercial real estate brokerage right after that. Um, always specialized for the most part in limited service hospitality, uh, started for kind of a regional firm, uh, down here on the coast and then kind of moved over later on to Marcus and Millichap, the national firm to do, um, kind of bigger properties and throughout the country. So I've sold stuff. Kansas, Texas, all the Southeast Carolinas, Florida, all that. So that was a lot of fun and did that, I guess, from 2013 to around 2020, 2021 is kind of when I started transitioning out of that. My business partner, Jeremy Friedman, we started the firm together. We were both brokers together at that regional firm that I started at. And then kind of quick backstory on him. He was a bond broker in Memphis for a long time. Ended up in commercial real estate through around 2010, and 2011. And then we met in 2013, 14. And so throughout 2013 to 2020, we always remained friends, but we're just kind of working on our stuff. But through COVID actually, everything had come to a stop. We had some time to kind of sit down, and start talking about getting on the principal side, raising money. It's something we always wanted to do. And so that's kind of how Stoic came to be. Formed an LLC actually in 2020, started underwriting deals, chasing deals, and all that kind of fun stuff. And then did our first deal in 21 actually, which was nice. But yeah, it was really funny actually how we came together. Again, we'd always talked about getting on the principal side, but never really done much work on it. But around 2019, I decided to get serious about it. So I started taking a lot of online classes, watching videos, and reading books about underwriting. Um, we knew commercial real estate well, but actually like the operations of an LPGP structure. Uh, so I'd spent, I'd say probably a year at that point, really figuring that out. And then when Jeremy called me in 2020 during the COVID situation, uh, he was like, man, I had this building. I want to put it together, but I have no idea how to structure on how to raise money. I don't know how any of that works. And I was like, well, fortunately, I've spent the last nine months of my life figuring that out. So it worked pretty well for us. Um, it was, it was, it worked well. So that deal unfortunately did not come to fruition. It was an office building and our whole plan was to get it under contract. It has like two years left on the lease, get it under contract, get the tenant to extend the lease, and then flip out of it for a much lower cap rate. I think we put it under contract for the second week of 2020, March 2020, sorry. So the office wasn't going great there. So the conversation quickly went from You know, um, went from, yeah, we'd love to extend our lease to just work from home. Things working okay , Hey, we're not going to do the deal at all. And so that was the first deal we ever bought. We bought it a year later and, um, they paid us to get out of their lease and we turned it into self-storage.

Jim Pfeifer: So. Interesting. So you started with self-storage and you did that for a, for a couple of years. Can you talk about your experiences there? And then also why the transition to now, um, multi-tenant flex industrial?

Grant Reaves: Yeah. So we live in a high- growth area. So housing is very popular. Self-storage is very popular. That's kind of the two biggest asset classes. We ended up in self-storage primarily just from that office building we had put under contract. Once the tenant did not want to extend and did not want to review, we did have it under contract at this point, but we always just kind of kept an eye on it and we're trying to figure out something to do there. And so I had the idea for self-storage and started talking to people in the industry. We have some friends who own some self-storage and dug in at that point. So, that was our first deal. We then went on and did a couple of other acquisitions, and then also just sealed about a month ago a ground-up development. We love the fundamentals of storage and still do. I think that long-term, that asset class is going to do well. But immediately, that market had gotten hot, especially in the markets we play in. And so, it just got to the point to where we couldn't scale in that asset class very effectively just because of Frankly, the, a lot of oversupply that needs to get kind of gobbled up over the next few years. Again, I think it'll work out in the long run. It is just for us, we need to be able to scale and grow our assets. And so we started looking at other opportunities. We always love Flex I ndustrial. Uh, the fundamentals just really always made sense to us. And we can kind of talk about that in a minute. And so we started looking at those deals, I'd say early 2022, and then bought our first flex deal, um, Q3, Q4 of 22. So , we spent a lot of time digging to understand what we were buying, and how we were doing it. And we've gone on to buy, I guess we have in six now flex industrial assets. We have three more under contract right now.

Jim Pfeifer: Okay, great. Can you talk about why you decided on Flex Industrial? Then also, what is it? I know industrial has been a very hot asset class, but multi-tenant Flex Industrial is a component of that, a subset of that. Can you talk about what that is and what you're seeing right now?

Grant Reaves: Certainly. T here are a lot of different ways to explain Flex Industrial and different people have different explanations for it. People also call it Class B Industrial. They'll call it shallow bay. Contractor garages get mixed in there a little bit as well. But our definition of what we like to buy is a building that's 30,000-150,000 square feet or a portfolio of a few buildings over a parcel that's made up of office warehouse complexes. The easiest way to explain it is we own a deal in Little Rock, Arkansas. It's 48,000 square feet, so it's offices on the front, roll-up to dock house on the back, and it's made up of 3,000 square foot office warehouse complexes all the way through. through that, your tenant mix is mainly going to be general contractors like Terminex, pest control kind of people. What else? We have a lot of crazy different tenants, but kind of the normal ones are a lot of times service-based, HVAC contractors, plumbers, those kinds of tenants for the most part. So, we have some national tenants and then also a large mixture of regional and local tenants as well.

Jim Pfeifer: Okay. And how do you find, or how do you, how do you screen the tenants to make sure that they're able to pay rent, that they're good tenants and how long are the leases and what type are they, they net triple net leases? Typically, can you talk about both the, um, the, how you find tenants and screen them and then also what kind of the arrangements are?

Grant Reaves: Yeah. So typical lease terms are, we like to be triple net. If we can, we do buy certain buildings that are say already modified gross. We own one in Ridgeville, Mississippi, but it's, 28 tenants and they were already modified gross, we'll end the deal for five years. It didn't make sense to go in and make it to where half of them will be triple net by the time we sell, another half are still modified gross. So we just kept those modified gross.

Jim Pfeifer: Can you talk about what modified gross is and the difference between that and triple net?

Grant Reaves: Yeah, certainly. So, the triple net is that the tenant is paying for taxes, insurance, and common area maintenance, CAM, as a pass-through in addition to the rent. So, for that building, the operating expenses are about $3 a square foot. So, if you signed a lease at $10 triple net, the actual rent that they would pay would be $13 a square foot total. Modified gross is a mixture of how gross, I'll give that example, gross is where the landlord pays for everything. So the tenant just pays the rent, landlord pays for utilities, CAM, taxes, insurance, the whole gamut. But then a modified gross is somewhere in the middle of that. So typical modified gross that we see is that the tenant is paying their utilities, but then the landlord is paying CAM, taxes, and insurance.

Jim Pfeifer: Okay. All right. That makes sense. Then can we dip back into how you screen the tenants and make sure that they're qualified and kind of some of the terms of the deal?

Grant Reaves: Certainly. The typical lease term is usually three to five years depending on if there's any build-out that's needed or anything like that, but usually, these are pretty turnkey spaces that we're leasing. To be able to screen them, usually, we're buying the buildings anywhere from 70 to 100 per cent occupied. We're inheriting a lot of tenants already that have been paying for a long time. We always want to look at rent histories, and make sure that there isn't a problem tenant that's late. every single month or something like that, and go ahead and move to try to get them out. But moving forward after that, we find tenants using local brokers. So, Flex Industrial is a very localized market. You don't have a lot of large nationals. For instance, in Self Storage, you have a couple of brokers up in South Florida, Atlanta, New York, and wherever, and they'll sell all the properties throughout the Southeast. Flex Industrial Market is a lot of local leasing brokers. um, local sales brokers as well that we deal with. So that's how we source the tenants. Once a tenant comes to us, we get background checks on them, and credit reports. And if it's a larger corporation, we'll get, um, financials in the company as well. If it's like a nationally traded company and look at bond ratings and that kind of thing.

Jim Pfeifer: And the, uh, three to five- year leases, do those include automatic increases or they do? Okay. And how do you, what is that typically?

Grant Reaves: So, different markets have different things. Mostly, we see about 3%. We do own some stuff in the Atlanta metro, though, and that market is just very, very hot. So, you can even push up to 4%, even 5% we've seen. But kind of our typical is 3% annual bumps. And we like that kind of shorter lease term because you're able to mark your rents to market a decent amount so that, as we all know, the past three years, inflation has been running pretty hot. So, being able to redo your rent a lot is very helpful.

Jim Pfeifer: And how should investors look at this asset class right now? Because it has been very popular. It's one of the hottest asset classes over the last few years, especially with onshoring and all the things that have been happening in the economy. So is it still hot? Is it still going? Does it still have room to grow? Can you kind of talk about how you see it now and maybe how you see the near future of the industry? Certainly.

Grant Reaves: And so first off, the markets that we play in are primarily secondary cities in the southeast, so populations of around a million. So that's going to be Memphis, Tennessee, Birmingham, Alabama, Jackson, Mississippi, Little Rock, Arkansas, and places like that. So we don't want to play in the big tier one market and compete against REITs and that kind of those kind of people. But for the most part, there are three main reasons why we think Flux Industrial does well. It's very low supplied with a lot of demand. Nobody's built any of the products . M ost markets have played in the past 20 years and more and more demand as those markets, markets grow, but there's no more supply. Um, we're also buying them below replacement cost, which is huge. We're buying on average about $93 a square foot. Uh, we have looked at building this product and would cost anywhere from 140 to 150 a square foot to build. So we're buying it way less than the cost to build it. Um, and then 3rd is protected from the work-from- home piece. I mean, obviously, anyone here's office warehouse, they key in on the office piece, but if you need 70% of your workspace to be a warehouse, you can't go work from home. That's a manufacturer. That's a logistics company. That's somebody that needs a place for people to be able to go work. They're not going to go work over Zoom and do a logistics company. That just wouldn't work. Um, and then also kind of back on the supply- demand piece of things, the fact that we're able to buy below replacement costs. is mainly because the rents don't support new construction. So it protects the supply coming in on top of us because in most of the markets we play in, we see rents from call it eight to 11, maybe $12 a square foot to be able to make a deal work. If you're building it for 140 to $150 a square foot, your rent would have to be 15, 16 bucks. So no one is coming in and building on top of us if they ever did, because there is so much supply. And we do think that somebody eventually will just say the supply will be there. The people are just going to pay more on rent. That'll help us out because we'll be sitting next door at $10 rent. We can push to $13, or $14 and still be undercutting the new competition down the street. So it's a great place to sit mainly on the supply- demand kind of metrics overall.

Jim Pfeifer: Okay. And then what's the exit? If someone's investing with you and you're buying a new property, what's the projected exit? How long? Who are you selling to? Are you selling to the REITs? Is anyone rolling all these small properties up into bigger packages? How do you envision that going?

Grant Reaves: Yeah, so we mainly do 5-year deals. We have a fund open right now for Flex Industrial, and that's a 5-year closed-ended fund. And most of our syndications are also 5-year deals. We do look at certain markets to roll those up. So, Jackson, Mississippi, I mentioned a couple of times. We own a few buildings there already. We have a 158,000-square- foot portfolio under contract there right now to close next month. And so, we will roll up specific markets and sell those off, but we won't sell, say, the whole fund to one REIT, just because these are a little bit more fragmented properties. But usually, your exit's going to be to a more stabilized PE shop, kind of like ours. We're a value-add shop, so we won't hire IRRs, take a little bit more risk on that to be able to get those returns. There are a lot of buyers out there who want to stabilize flex-industrial properties that we can sell to. Mainly, we're buying stuff in the seven-and-a- half, eight-and-a- half cap rate kind of range. And we expect that to stay the same. It could compress a little bit, but we don't underwrite that. We always be very conservative on our exit caps for that reason.

Jim Pfeifer: Okay. And, so at Left Field Investors, you know, we're a community of limited partners. And so , the main thing we look at is we want to vet the operator and then we want to analyze the deal. So how would , an LP vet an operator like you, where you've, you, you, you're kind of new to industrial, you're in self-storage a while, so you're an established company, but you're in a newer asset class. So how do we vet you to make sure that, you know, you're capable of doing all that you say you are?

Grant Reaves: Yeah, and we own a lot more industrial than self- storage. So we own 10 deals currently about 500,000 square feet 300,000 of that is industrial. We have another 374,000 under contract. So I mean, we're well over two- thirds industrial now, but how we are set up in- house, we have a full- time asset manager, we have an in- house accounting, we have two accounts in- house, and then we have We also have our analyst myself and Jeremy and my business partners are kind of how that the management team works. And then we use local management. So we use usually a national commercial real estate firm. So, call yours or a firm like that to do the on the boots are on-the- ground management. We find that to be much. easier as well as they are located in that Memphis, Tennessee market. They know the good contractors. They know the good landscaping companies it doesn't make sense for us to be in Alabama and go out on a limb to learn how to learn landscaping companies in Memphis. And so we use local management as well as local brokers to do our leasing. That's been great as far as the acquisition side. After all, we get to see a lot of deals before they get to market because people know that we'll use them for management and then for leasing. As well as just from an operational piece, we're able to go into a single market and have five different buildings with one management company. We get to know them well and then have mainly Matt, our asset manager, who works hand in hand with the leasing agents of the property managers as well as Haley, our head accountant, who oversees the property managers' numbers as well.

Jim Pfeifer: Okay. And then as far as analyzing the, the deal, um, what specifically should investors look at when, when they're, I know what you, you have a fund, but you also have some individual deals. So how does an investor look at this and decide, okay, this is the deal that I want to get in, or this is the fund that I want to get in? What should they be looking at and evaluating aside from the, uh, the operator? Sorry about that.

Grant Reaves: Yeah, no worries. So besides the operators, I would mainly look at, If they're looking at a few different flex industrial funds and trying to compare them to each other, is that kind of what you're?

Jim Pfeifer: Yeah. Or, or if they're, if they have, you know, a limited amount of cash and they're deciding whether they want to go with this multifamily deal or this self- storage deal or your industrial deal, you can't compare them. But how would they look at it to underwrite the deal and make sure, okay, I'm comfortable with this investing in this industrial, this flex industrial deal.

Grant Reaves: Yeah, I think it mainly comes down to supply and demand metrics. I mean, that's been the biggest problem with multi or self-storage, which has kind of been the big asset classes in the past couple of years for LPs, is mainly looking at markets, looking at what the sponsor's buying. Is there room to run in that asset class as far as the supply and demand? Is it being overbuilt in the markets they're buying into? I mean, you can still find good deals even in overbuilt markets. But overall, is the asset class becoming overbuilt? Flex Industrial is not. As well as looking to see what the cash flow looks like on day one. These are value-add deals, but for the most part, these cover well over one-to-one on day one. So we're able to go in with the cash flowing asset, greatly increase it, but it's not like we're starting from zero or behind the eight ball kind of thing.

Jim Pfeifer: Okay. And what is the debt like on these deals? You know, we've all, we all know that interest rates have gone up and everything's become more complicated. How, how are you finding debt? What kind of terms are you getting and, and is it fixed debt? Is it adjustable? Can you just kind of talk , about that part of the deal?

Grant Reaves: Yeah. Um, fortunately, we've always done flex or I'm sorry, we've always done fixed- rate debt. So we haven't had any problems there. Uh, we proceed to continue to do that. It's just a lot safer and not worth the risk. especially with how the yield curve is, you're not even getting any benefit to float stuff these days. But most of our debt comes from either life insurance companies, CNBS or bank loans, primarily bank loans for the heavier value kind of stuff. And those are also smaller assets and say the three to $10 million range bank is going to be your best bet. We will go ahead and go in and have a construction component to be able to do the tenant improvements, do the leasing commissions, do the renovations that we want to do to the exteriors on the front end and wrap that into the loan. But on bank loans, we're seeing 70% loan to cost, 25-year AMs, five-year terms, and then rates right now anywhere from 7.5% to 8.5%. CNBS, we don't have any in origination right now, so I won't speak to that. But on LifeCo, life insurance companies like Flex Industrial a lot. We have that portfolio in Jackson under contract, and we have a life insurance company doing the debt on it. rate is 5.95, which we were really happy to get. 25-year AM, five-year term, three years of interest only, and it's about a 65% LTC loan, so a little bit lower leverage, but we're happy to get it. Lending is open. Banks seem to get the asset class, and a lot of times we find that they know it because the bank, especially local bankers will bank, say HVAC contractors or GCs and those kinds of tenants that we usually use. And so if they talk to their HVAC contractor, their HVAC contractor is usually complaining about not being able to find space. So it's pretty easy sell on our side to be like, well, you can see the proof right there that there's good demand for this asset.

Jim Pfeifer: And you, you talked about value add. So you, you do some rehab and you fix up these, these properties, but you also said that there's, you know, roughly 70%, um, maybe occupancy when you buy it. So are you, and, and three to five- year rent or lease terms. So how do you push the value in the rents? If you have long-term tenants already in there, but you're spending money to make it better for new tenants and the old tenants, how does that, how does that all work together?

Grant Reaves: Yeah, so usually while they are 3 to 5- year leases, the weighted average lease term will be about 1 to 2 years. So you'll have some tenants that will buy a deal sometimes and just know that even when we sell this asset, it's going to be a below- market rent because they have a 10- year lease or something crazy like that at really low rents. But Usually on the renovation piece, what we were doing on that I can't speak to, we redo the exteriors, we paint the buildings, we redo the landscaping, replace roofs, redo the parking lots if needed, freshen up the asset. Then on the interiors, a lot of what we do is root out office space. For instance, a couple of deals we've bought are in the 70s, even 80 per cent occupied. The main reason is that they've taken these office warehouse suites, how they were constructed in the 80s or 90s and then over the past 40 years built them out to be maybe 80% office, 20% warehouse, which is not what people are looking for anymore. So, we can go in there, rip out the office, turn it back into a 50-50 office warehouse flex kind of piece or suite and drive up occupancy by doing that. Um, but then by that point, like you're saying, you're signing three or five- year leases, which have the new rate. So it's going to be blended by the time you sell it. Um, which does leave a little bit more meat on the bone for the buyer and, um, helps you be able , to sell that story too.

Jim Pfeifer: Excellent. Excellent. Well, this has been a fascinating conversation. We appreciate you coming to the show. If listeners are interested in learning more about what you do, what's the best way for them to connect with you?

Grant Reaves: Yeah, so I am on Twitter a little bit. It's Reeves underscore Grant, and that's R-E-E-S underscore Grant, G-R-A-N-T, as well as our website, stoicep.com. And then my email is greeves, so G-R-E-E-S at stoicep.com. So either of those avenues. Love to talk to anybody that wants to talk about Flex Industrial. That's all we do. So that's what we enjoy talking about.

Jim Pfeifer: Perfect. We'll put that all in the show notes. And again, thank you for being on the show. Yeah. Thank you for having me. Great to talk to you. Thank you for listening to the real estate syndication show. It has been a pleasure to be the guest host today. If you'd like more information about Left Field investors and how we educate limited partners, provide a network and give access to deal flow, please visit leftfieldinvestors.com or reach out to me directly at Jim at leftfieldinvestors.com. I hope you learned a lot from the show today. Please don't forget to like subscribe and share The Real Estate Syndication Show with your friends so they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.