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No matter what happens to the market, there are timeless principles of real estate you can lean into help guide your business decisions. Today’s guest will explain all about that in this episode. Justin Smith is the Senior Vice President at Lee & Associates. With 17 years in the industry, Justin’s skills and knowledge are practically incontestable. He now uses his experience and wisdom to help various organizations through the real estate process, especially when dealing with industrial properties. He joins Shannon Robnett to give helpful advice on overcoming adversity when investing in industrial real estate and why there’s no better time than now to do so. He explains why real estate is vital in company growth and emphasizes the importance of market metrics in getting you started on your real estate journey. He also offers insights from his book, Industrial Intelligence: The Executive’s Guide for Making Informed Commercial Real Estate, to provide further tools that you can start using immediately.
 

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Justin Smith: The Timeless Principles Of Real Estate
 

Everybody, welcome to season two, episode five of the show. In this episode, Justin Smith and I sit down and talk about how to overcome adversity in an incredibly expensive project, what ideas for how to overcome these challenges, access to resources, and how they can find their answers on their own stories. These are the kinds of difficulties that we're going to talk about. We're going to talk about timeless principles and real estate, why real estate is such an important piece of company growth, why key market metrics are needed to start on your real estate journey, and which market metrics are important. With that, I'm going to introduce my guest, Justin Smith.
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Justin, thanks for being with us.

I'm excited to be here and thank you for having me.

You've got us thinking here. Our opening tagline is how to overcome adversity in incredibly expensive projects. What do you get in mind? How do you do that when you have problems and everything is already expensive like the market we're in?

It was already a challenging business. What I found was time. The further you can look out in the future, the better you can account for that. You can maneuver around it, you can adjust and then teaming and capabilities. The higher-level people you play with, the more unique abilities and capabilities you can bring to the table to overcome some challenges when it comes to costs and the complexity of projects. I've tried to think through with clients and how we can put the pieces together as soon as possible and recognizing we've got to make adjustments. We just have the plan together. That way, we can make some of the adjustments early when they're less costly.

When you're helping clients look into the future, how do you help them deal with things? I know in your handbook of How To Help Your Client, there was the pandemic tab right there, so you flip to the pandemic tab and go through the list. It was pretty simple. How do you help people deal with something like this?

The pandemic was a wild experience with rent relief. That was the first challenge that everybody dealt with. Can you pay the rent? Can you keep going on as you are? If you can't, what can you do about it? Helping clients figure out who is the client that needs that and who has to have that or else something catastrophic happens. That was very interesting to help clients and guide them but also to know who is in need and then to communicate that to landlords.

That was something that none of us had ever done. Imagine a 100,000 square foot warehouse and go into your landlord with your hat in hand and saying, “Can you help me out here for a little bit?” That's not how these conversations usually come together. That was very challenging. For landlords, they didn't have to give any relief. Those who did had to figure out, why should they? What's in it for them? How are they made whole? How does that provide meaningful relief?
The further you look out into the future, the better you can account for it.
That was something that I wish I had known all that are going in. Nobody did. That was March, April, May 2020. That was the theme of the quarter to figure that out. What I was so shocked to find out is A) Most didn't need it, B) Those who asked for it generally were denied, and C) the only ones that got it were ones that were either mom and pop or weren't industrial. They were retail properties, where if your restaurant went out, you wouldn't have a line of restaurants out the door looking to get in so maybe it's okay to let them float for a little while.

For those few that did get some relief, at what cost? Finding out that landlords look at it as a loan, they have their own fiduciary obligations. What interest rate do you attach to that? You wouldn't feel like any interest is something you should be paying if you are coming in search of relief. Six months, to the point where you could then have a balloon payment plus the interest, can you see that when you're in the depth of the hole of despair where you're coming to your landlord, looking for help? All of that was very interesting to go through. What I found is most made tough decisions between labor and with their own contracts, customers, and capital. Pretty much everybody hung in there, didn't get any relief, and found a way to make it happen.

I remember having the conversations when you talk about April and May of 2020 with some realtors that had been involved with a lot of credit tenants. Even the credit tenants were coming to the landlord saying, “We need some help.” The reality was, “Didn't we negotiate a better rate for you because you're a credit tenant and now you're saying that you need some relief? Where do we go with this?”

I remember everybody wrestling with that because it was such an unknown. I don't even think now that we have a real grasp on what the effects have been. What we do know is the economy is stabilized. We understand that people are back to making cabinets, making light bulbs and processing frozen food, all of those kinds of uses that go into these places, but we still don't know exactly if we are going into another lockdown. Are we seeing this?
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Principles Of Real Estate: Industrial buildings are only as good as they provide a utility for the company that’s using them.
Those are some pretty big things that landlords have to process. What do you think your landlord's mindset is at this point when you talk about having them deal with overcoming adversity? How do you think their mindset is going into this second lockdown after having seen everybody pulled together and just do it? What do you think their mindset is now?

In industrial, we've seen so much demand since that moment. We had that moment of despair, then we had a pause where we were all waiting to listen for signs of life. There was a rocket ship of demand. If you are a landlord and you see this tidal wave of demand, that's primarily eCommerce and third-party logistics-related, but not exclusive. You're finding that building buildings is still taking a while and getting through cities isn't getting any easier.

I have found that the majority of them are very bullish and 2020 becomes even more bullish. I don't think they look at it as an opportunity to trade up to a better tenant per se of a tenant that can't make it happen in 2020 and try and replace them. I have found when tenants go out or when they say, “I'd like to get out of my space early because I'm moving to Texas or because I'm doing something different,” rather than having those. “Sorry, that's on you. You go set up sit. When you find the right match, let us know. We'll see if we can approve that.”

Those conversations have changed where it's, “We'll help you. We’ll market the space for you. When we find someone, we'll let you know when you get out.” That's not to say it's without a cost like a termination fee for the time, effort, legal and resources to market the space and contract for a new tenant but because they're so bullish and the demand is there, that's the mindset of the landlord right now. If you've got to go, “We're not happy to see you go, but there's opportunity there.” If that's what you want, we can access an opportunity that can take thin margins. That can be, all of a sudden, a boost where you were trying to underwrite a boost in rents in year three and you get it in month three. You're a happy camper for that.

We've talked about the adversity that always comes. There's always something. We've always dealt with that, but you talk about the timeless principles of real estate. What are some of the principles that you find are timeless in real estate and always work regardless of the market?

I generally think of the fit. When you think of industrial, industrial buildings are only as good as they provide a utility for the company that's using them. If you can drill down into how do we make the most of the fit that we have, sometimes that's efficiency, but sometimes that's new investments, focusing on fit and operations, it's timeless but it's great.
Before you delve into any market metric, start with time. That gives you the lens to then look at the market.
The timelessness of it is you can always go back to it and it can always yield more improvements even if the market is more expensive or you wish you had more space, you can always think through, “How do I make better use of this space?” Generally, we'll focus on that and internal teams. If you got the CEO with their CFO, COO, operations manager, facilities managers, and general managers, try and mesh them with the best talent for people that specialize in operations.

Usually, for industrial, that's material handling and warehouse automation. Focusing there is always a part of any assignment we work on because if you can go higher, rack closer, have machines, make people's jobs easier, faster or less risky and increase the throughput of the building or the way in which you manufacture and the speed with which you manufacture, it's so awesome when you're able to help clients there. For us, we're real estate guys. Usually, we're focused on low cost. Everybody always wants a deal, be in the best area, location or building with the best features. I've found that so much can be done with the operations. That's usually a great place that we can focus on when you're in a very challenging environment.

Haven't you seen that everybody, several years ago, was focused on the right deal, but now, they're focused what have you got available right now because there's so much demand? What are some of the key market metrics that you need to have so that you know that somewhere between right now and the right fit can still be in what you're doing?

It's interesting to think about what's most important. Usually, before I even delve into the market, I start with time. What time do you have left on your contract? What time do you have left on the building that you think you want until it's built? How much time do you have to put the next building together for your business? I always start with time, especially with construction, permits, delays, lumber, material, and labor, all of that. Time goes by the wayside so fast. That gives me the lens to then look at the market. I've found their positive net absorption, absorption figures and amount of inventory. We'll use Southern California as an example. You may be in a city, so you think a positive absorption is off the charts.

There's no way you'll be able to negotiate terms and work a tenant-friendly deal. In certain size ranges like flex space. I'm in Irvine. We've got a ton of R&D in flex space. That's a totally different market. If you can drill down into what's the absorption in flex space, then you can know how much inventory you got. Sometimes that can be a great way to take a measuring stick to figure out how much of a landlord's market is it.

I feel like being a broker in the market on a daily, it's something that I rely on slightly less because I feel like this is all we do all day long. We feel the sentiment everywhere and we see as it shifts, but that's usually the first thing I'll look at. Let's look at how supply and demand are balancing out and then look at that quarter-by-quarter, go back a couple of different quarters, look at deliveries and go back a couple of quarters. Usually, you get a handle on the market pretty quick after that.

Why do you focus on industrial? Specifically, why warehouses? That seems to be your bread and butter, but why is it sounds so uninteresting?
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Principles Of Real Estate: Be very sensitive, perceptive, and aware of the team that you’re working with and how you can complement them and make the most of what they have.
 
Industrial was boring until 2020 when it magically became sexy and interesting for everybody, their mothers and Wall Street. In real estate, most people get in because their family sucked them in somehow. Whoever sucks you in, whatever they're doing is usually how you start. For me, it was my sister and the team here that was doing industrial. Not that it was pre-destined but that was the cards I was dealt and that I played.

Over the years, I still appreciate learning more asset classes that are close to. With flex and R&D is one. You'll find a lot of brokers that are in industrial. They'll know office very well because any company you work with will have a headquarters office and we'll have a manufacturing building and a distribution building, so it's common to work on some office assignments.

Over the years, I've been fortunate enough to take that and roll it into medical office and start to learn that world a bit. Those are off-shoots or little paths that different opportunities have taken me to that I've learned over the years, but I found it most fun to stick with your asset class in your specialty. I've been fortunate enough to have a couple of clients where I do their tenant rep work across the country, so I've worked in twelve different states.

It's amazing when you drop into Charlotte and you drill into what's Charlotte all about or Tampa, San Antonio, Columbus, Chicago or Phoenix. To start to see the different dynamics, constraints, or players in each market, I feel like that makes you more able to help your client and a more well-rounded player in the space. I've appreciated going deep into industrial. Locally, that's even going from Orange County into LA County, Inland Empire or having the assignments in San Diego that I'll work with our friends down there. That part has been wonderful, so now I feel like I've invested so heavily in industrial. This is our business and what we know.

Are you still working with your sister?

I'm not, but not because she and I aren't working together in a sense, but she was a 1031 exchange accommodator before she became a stay-at-home mom of four boys.
So much can be done with operations. That’s a great place that you can focus on when you’re in a very challenging environment.
She probably wishes those easy days of 1031 exchange were back for her.

If you are an accommodator, who are your clients? Primarily brokers and principals. She knew every broker in the world as her little brother was getting out of undergrad. She gave me so many contacts and connections. It was a pretty cool way to get started.

Why do you feel that real estate is such an important piece of a company's growth?

It's huge. On one hand, you got the upside and the downside. The upside is potential. Where do you have room to grow? I think of it as first of the people and the space you go to work to every day. You got to be excited about who you're working with and where you're going. When you are out of space, how fun is that? When you think of two people in an office, a tenth person in the bullpen in the warehouse, it's taking pallets that are in between you, where you're trying to take inventory, moving them out to the yard and generally show up things back and forth needlessly.

When you have a lack of it or a scarcity of it and what you experience, as a result, makes for a bad working environment. I sure love when people have a client contract they've won, they've got a good team, a great culture where everybody is excited, they're doing great things and then we can envision what we can do with that. How can we capitalize on this? Where is the opportunity for us if we expand that? I feel like that's the fun stuff. To be able to play a role in that, help execute on that and then to watch it happen for years at a time, that's always super exciting.

When you talk about a good team and a good culture, why is that so necessary when you're in real estate? Isn't real estate transactional? I can get a warehouse from anybody. Explain the teamwork and comradery that you feel you need in industrial?

I generally look at it as you are entering into someone's organization. They've got all their key players, have their own company culture, own challenges and trying to execute on something. As a broker, the music stops, you enter the room, and you've got to assess, “Who is everybody? What are everyone's strong suits? What are people concerned about?” I feel like that's the biggest part.

Obviously, we want to have a great culture within our own internal team, but I generally find being sensitive, perceptive and aware of the team that you're working with, how you can complement them, and how you can make the most of what they have. It is interesting to go into different companies and recognize different working environments in different cultures, and then saying, “I got it. I see this is what we're working with here. Here's how I can help.”

I have one client where it's such a breath of fresh air. Every one you work within their team, you get a little bit of hospitality, humbleness, and can-do attitude. It’s what I found with them in their culture. Literally, everyone in the firm is their firm. It made it into the best working relationship where you know they're going to follow through. You've built up enough trust along the way where it allows you an opportunity to then invest everything you got to try, make sure they have a great outcome and do the best. You feel even more responsibility to perform and help do everything that's within your power to make for it to be a success. Recognizing that and being able to mesh with it is probably the most powerful part.

Justin, obviously, in the last several years, real estate has made a resurgence back to being sexy again. Everybody wants multifamily. Why should someone look at industrial over multifamily being the golden child right now?

On one hand, It’s working within firms, brokerage and investors that invest there. Secondly, let's say Shannon and I had $10 million or $100 million, why would we invest it in industrial? There's a bunch of different subcategories within industrial. It depends on where you can find an attractive part of the market. One of my favorites is the multitenant or small base space.

That's probably what's most similar to multifamily. What I appreciate about that is in terms of renovations, amenities, dealing with families and the things that happen with personal relationships like death, divorce, with the kids and with schools, with multifamily, I feel like there are a lot more amenity wars where that was like, “Who's got the pool and how big is the pool? My windows are 10-foot tall. Yours are 9-foot tall.”

It’s trying to over-amenitize the projects. In industrial, that's not a concern and not how that asset class works. What I appreciate about multitenant industrial is you're dealing with small and medium-sized businesses. A lot of them are service-based businesses and they're local. If they work in a territory, think like your Servpro. Your house floods, you call the flood guy to come in and help you out. They have a certain territory. They're going to be there for a long period of time. They don't need all of these expensive amenities and they don't go through reasons why they have to terminate, move out-of-state or move for a job. I've found that it makes for very sticky tenants.
 
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Principles Of Real Estate: Get out of dealing with people’s personal situations and get into dealing with businesses. They make different decisions for different reasons.
A lot of it is about having space that is a great environment for people to go to work and making sure that it's very functional. I don't mean to poo-poo on multifamily because it's great in its own regards, but when you compare the two and contrast them a little bit, what I had found was I'm starting to get out of dealing with people's personal situations and getting into dealing with businesses. They make different decisions for different reasons and I appreciated that the deeper I got into it. So far, I have invested in a couple of multitenant industrial properties. The trajectory going forward would be to continue to replicate that and look for people like yourself to partner up with to explore.

That's what we saw in 2008 and 2009. We had people all over the nation losing their homes. In our multitenant industrial space, we had one vacancy for 27 days. We did not have a vacancy because people understood that, “I might lose my house. I can rent this place across the street, but I can't lose my business. I've got a janitorial company, cabinet shop, machine shop, transmission repair company, or whatever it is, I need to stay in business.”

We saw very often where the choice was to keep the business going and let the person in real estate go. Justin, you have talked about quite a few things here and there's a lot of gems in what we've been talking about, but I got a feeling that there's more. In fact, you wrote a book about industrial. Tell us what prompted you to dive in and spell all this out in a book.

How many real estate guys and industrial are writing books these days? Not so many. Maybe one. Maybe there's number two out there somewhere. For me, I have been blessed by a strategic coach and participating in their group for several years. That's an entrepreneurial coaching program. Through there, I'm able to connect with a lot of people like you that have been in the game for a long time, have had success, have systems and have talented teams.

Through there, every quarter, we get together and we brainstorm new ideas. Here was one of my strategic coach sessions where they were starting to collaborate more with Scribe Media, which is Tucker Max's book writing company. It meshed when I had hit a maturity level in the business or a confidence level where I felt like I knew this at the back of my hand, I have enough here where I can collect for knowledge and gems and the most useful information.

I'm thankful that the strategic coach put me in touch with Scribe that it was at the right place and the right time. With Scribe, they help you mentally figure out how you are going to do this. It's in the how where you or I ordinarily would never think, “How am I going to write a book? What's that going to look like?” They lay it out so that if you want it written for you, but all coming from you, your knowledge and your interviews, you can. If you want to write the whole thing and you want them to get it on Amazon, you can do that, too. What I went for was they help you with your framing out. Everything is you and putting it together an hour a day for 90 days in a row.
Industrial real estate was boring until 2020, when it magically became sexy for everybody and their mothers and Wall Street.
You and the editor are starting to churn through what's gold and what's silver. I'm thankful for them to help. I needed a framework, so they had it all laid out. I love it because it's opened up so many doors, not in just helping clients and friends of friends, but people that have come out and said, “I read your stuff. You didn't know me but here's what I'm working on that's exciting. Let's see if there's opportunity there.” It's pretty cool to be able to put your value out there and not feel like you have to guard it, protect it and keep it from the world but to get it all out there and see who it resonates with.

What's the name of your book?

It's Industrial Intelligence. It came out in April 2021 and then also in Audible and audiobook for those that like to listen to it. I had to choose, do you narrate it on your own or do you hire? It's not like Liam Neeson is going to be the voice for my book. I had to decide like, “Who's that going to be?” I love when people narrate their own. It's an opportunity. When I read books to my kids at night, you could read the words on the page or you're acting this book out and you're living every word. I chose to do that. I'd recommend any of them to people but that's such a great medium and I am appreciative of having the opportunity to put that out there.
 
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Where can people find the book? You mentioned Audible but where can we buy it? I'm a hard copy kind of guy. Where can I get a book?

You will get one in the mail from me, I would imagine in 24 hours, but Amazon and anywhere books are sold. You may not find it on the shelf at Barnes & Noble.

I don't know where a Barnes & Noble is anymore, so we gave that up. Everybody orders online anymore, but that's phenomenal. Where else can we find you, find the information you're putting out, find the content, be able to follow you? How can my readers connect with you?

SmithCRE.com is my website for my team. You can get a great handle on what services do we offer and how does it help people. I've found that most want to connect on LinkedIn, @JustinSmith and @LeeAndAssociates. I'm a contributing author at LoopNet, where we'll put out articles all over the place on how to invest in industrial and what tenants need to know. All that ends up on LinkedIn. That's a great place to connect and then start to see some more lessons, content, battle stories, and done deals, availabilities and see all that comes out.

Thanks for being with us, Justin. Thank you, everyone, for tuning into the show. Don't forget to like, share, and subscribe on Spotify, iTunes, or wherever you get your podcasts to get your automatic updates. You'll also find us on Instagram, YouTube and LinkedIn with Justin. I'd love to hear your feedback, so drop us a line. Justin, thank you so much again for stopping by the show.

Thank you for having me.
 

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About Justin Smith

Justin smith
Justin Smith is a sixteen-year veteran in commercial real estate brokerage with Lee & Associates. He holds an MBA, as well as a master’s of Real Estate Development from USC, and is a member of the global Society of Industrial and Office Realtors (SIOR), an association of top producers within the industry.

He has completed over 500 assignments across the US and has negotiated leases with some of the largest, most sophisticated landlords in the world, including Prologis, Blackstone, GLP, Rexford Industrial, and The Irvine Company. He has represented executives in e-commerce, logistics, food and beverage, cold storage, automotive, aerospace, life sciences, and many other industries. Learn more about Justin at smithcre.com.