The Business of California Class B Industrial With Matthew Rossman, Real Finds Podcast #43 Transcript
Matthew Rossman: You don’t really have a choice. Every major company has a warehouse in LA, Orange County, or the Inland Empire. As far as the challenges, yes, it’s really hard to do business here. But if you can survive and you do well, the sky’s the limit.
Gordon Lamphere: Hi, I’m Gordon Lamphere, and welcome to the Real Finds Podcast, the podcast where we interview key entrepreneurs, activists, and researchers shaping real estate and, as a result, our world. On today’s podcast, we speak with Matthew Rossman of Bryan Industrial Properties about the unique world of California Class B industrial. We discuss multiple methods for owners to maximize their relationships with tenants and tenant reps to get more out of their assets, and the future of commercial real estate, including trends in hybridization and repurposing of commercial spaces. If you’re an industrial owner or an owner’s representative, today’s podcast is well worth a listen. Matt, thanks for hopping on the podcast today.
Matthew Rossman: Sure thing. Thanks for having me, Gordon.
Gordon Lamphere: Why real estate? There are so many things you could do.
Matthew Rossman: It’s funny. I bounced around a ton in college. I studied engineering, programming, liberal arts, and wasn’t sure what to do. Getting into real estate and doing industrial deals helps a ton, because it’s a little bit of everything. With a manufacturing tenant, we have to go through the power and understand it. Legal: God knows we have plenty of contracts to deal with. It keeps you on your toes, and it’s a new thing every day.
Gordon Lamphere: Why commercial, and why industrial in particular? Most people don’t think of big boxes or little boxes as particularly interesting.
Matthew Rossman: I started in multifamily. My godfather had a multifamily company, back in 2006 or 2007 when it was crazy, and I lasted about three months. It was the standard: go into the office, put on the headset, there’s a script on the screen, read, dial, dial, dial. That’s not me. I had an opportunity to check out some industrial in the Inland Empire, and once I hit the ground running, I never stopped.
Doing Business in California
Gordon Lamphere: What makes the Inland Empire interesting? So many people perceive California as a wasteland where nobody does business, and from my experience with firms there, that’s not the case. What’s it like doing business in California?
Matthew Rossman: Everybody does do it here. You kind of have to, and that’s what drives the demand. With the ports of LA and Long Beach and the growth of China from 2005 to now, you don’t have a choice. Every major company has a warehouse in LA, Orange County, or the Inland Empire. Is it hard to do business here? Yes. But if you can survive and do well, the sky’s the limit. The Inland Empire was the only place there was land in the last twenty years. In LA, I don’t care what project you’re doing, it’s a redevelopment deal. There’s no flat, vacant land. A three-acre parcel down the way where you put up a 20,000-square-foot building doesn’t exist. As buildings got bigger and bigger, you had to go where the land was, which was the Inland Empire, and even they’re running out.
Gordon Lamphere: For developers in Texas or the South, there’s an idea that you can always go one town further out. In California, that’s less the case. How has that played out?
Matthew Rossman: The best example is working on the tenant side with a company that’s not from California, because people don’t realize the density and how that plays into everything. Years ago I did a bunch of work with Flowers Foods setting up a distribution network. They said, we want to be within thirty miles of Orange County. Well, that’s all of Southern California. They thought thirty miles meant thirty minutes, and thirty miles can be six hours if you hit the wrong time of traffic going to LAX. You realize that an extra five miles can equate to forty-five minutes or an hour, and it focuses people back into where the density is, where the ports are, LA and Orange County, and pushes everybody westward.
Gordon Lamphere: How does that play out in last mile when land is so tight?
Matthew Rossman: Last mile here has been a lot of reuse. Not far down the street in Anaheim, Amazon repurposed an old Fry’s Electronics store into a last-mile fulfillment center. With restrictions on building and entitlements, we see this weird trend where something arrives at the port, ships to a warehouse, then ships to a fulfillment center. But I think most of our stuff gets filled directly from warehouses.
The Lay of the Land
Gordon Lamphere: Between the Port of LA, Orange County, and the Inland Empire, can you explain the lay of the land?
Matthew Rossman: It goes to history. Development in California started in LA in the fifties, and as land filled, you pushed east. In the fifties, sixties, and seventies, there was a big push into Orange County. Bryan Industrial started in 1955. I have aerials from when we started construction, and the original land contract for where our office is. We had to structure the land deal around the almond harvest, because it was an almond orchard and they wanted the last harvest in before we built 400,000 square feet of industrial buildings. There was a huge manufacturing boom then, so we have a lot of smaller industrial: machine shops, defense contractors, aerospace. Boeing and Kimberly-Clark had big facilities here. As the ecosystem shifted from manufacturing to distribution, people pushed out to the Inland Empire, where land was plentiful and distribution was the name of the game. It started with 200,000-square-foot buildings, then million-square-foot buildings. Skechers is in 1.8 million square feet and built another next to it. Now we’re seeing the flip side: more constraints on development. The City of Pomona just enacted legislation that you can’t build a building over 25,000 square feet, regardless of parcel size. Explain that to Prologis, which has acres of land there. So historical development trends play a lot into what we have today, and now we’re working backwards, trying to repurpose and reuse what’s already built: mall conversions, retail conversions, office to residential, across this huge geography. You specialize in your niche. For a while, mine was the Inland Empire, Corona and Ontario, the West End. Now it’s Orange County, specifically Anaheim and North Orange County, a lot of older manufacturing and a little new development.
Why Class B
Gordon Lamphere: Your portfolio is predominantly Class B industrial, unlike many of the California folks we’ve had on. Why might someone prefer Class B over Class A?
Matthew Rossman: We have a bit of an unfair advantage because we’ve been here since the fifties. You could build small buildings back then and make sense of it. With the land constraint, it’s gotten harder and harder to build small buildings. The last 20,000-square-foot-and-under development by a traditional developer in Orange County was probably 2007, maybe someone catching the tail end in 2008. Since then, none. It’s all gone to 100,000, 150,000 square feet. The biggest factor is entitlement. Before, a small owner-builder could put up 100,000 or 500,000 square feet in a bunch of small buildings. Now there’s a two-year entitlement period. I have to tie up land and play with the city for two years before I can put a shovel in the ground, and I don’t know what the market will be in two years. If anybody does, they’re Nostradamus, because who knows what interest rates or demand will be. The big institutional players, Goodman, Rexford, Prologis, have deep pockets and can play on those long horizons. The small guys can’t compete anymore, which creates a huge supply constraint. Nobody’s going to knock down a 200,000-square-foot building and build four or five 20,000- or 30,000-square-foot buildings. So from a competitive standpoint, you’re future-proof and locked in on the supply side.
Gordon Lamphere: On the demand side, Class A has mainly large corporate tenants. What does a Class B tenant look like? Probably not Amazon or Walmart.
Matthew Rossman: Not Amazon or Walmart. Our Class B tenants are, strangely enough, the same as you see across the US: a ton of contractors, HVAC, plumbing, roofers. And here, partly because we’ve been around so long, we still have a big manufacturing base with a ton of machine shops. I love machine shops as tenants. We have a guy in 7,000 square feet with twenty-five CNC machines. The cost to move that is insane. He’s never leaving. We have another tenant who’s been in a 30,000-square-foot building for twenty-five years with a 20,000-square-foot machine in it. You can’t pack that up and roll out. We stay away from the quasi-retail industrial uses. We haven’t had good experiences with gyms, churches, bounce houses, anything like that.
Picky on Tenants, Firm on Personal Guarantees
Gordon Lamphere: What’s your business strategy for the portfolio? Do you target investors, target certain tenants?
Matthew Rossman: We target tenants more than anything, and we’re patient. We price aggressively because we can be competitive, but we’re picky. We want good tenants who’ll be around a while, because we don’t want rollover costs, and we like to build relationships. We’re a small family shop with a million and a half to two million square feet in Southern California, and effectively two guys run it. We don’t have layers of property managers, so we don’t have much tolerance for problem tenants. You know how much time a tenant behind on rent, or creating issues for other tenants, sucks up. By being picky about uses and operators, and very credit sensitive, we avoid that. Credit sensitive for us is different from Class A. I don’t care much about the corporate line. I want to know if they own a home and what their personal credit looks like, because I want somebody on the other end of the phone I can talk to if there’s a problem. Sadly, we don’t see much of that anymore.
Gordon Lamphere: Are most of your leases corporate or personal guarantees? We’ve found a terrible-credit personal guarantee is ten times better than the best corporate guarantee.
Matthew Rossman: That’s a thousand percent right. Everything we do has a personal guarantee. I don’t care what the company’s making. We have some rather large companies where we still have a personal guarantee, because at the end of the day, I need to pick up the phone and talk to somebody if there’s a problem. When you deal with the corporate shell game, it doesn’t go well. Private equity has not been my friend the last several years.
Gordon Lamphere: PE credit is typically not the best credit. How do you play ball when every tenant rep is telling their client not to sign the personal guarantee?
Matthew Rossman: This sounds horrible, but we don’t. If you don’t want to sign a personal guarantee, that’s totally fine. There are a lot of other buildings, and you can lease one of them. We try to be workable, and we can customize things to a really high degree, but it’s important to have that relationship, and if you don’t, everything falls apart quickly. People talk about getting in without a guarantee because of the value they bring, but if you look at the people we do have personal guarantees with, I’d guarantee they have a higher net worth than virtually anybody who’s ever argued with me about not signing one. Not even close on some of them. People understand at a certain level that it’s a personal business. You have to have that person on the other line.
Gordon Lamphere: A personal guarantee is a form of long-term trust where both sides say, we’re in this together. We found in our portfolio that with that trust, you’re willing to work with folks. Plenty of our tenants lost business during the pandemic and we set up payment plans, and we’re proud we had just one eviction during the entire pandemic, in a town heavily reliant on logistics and conferences. How do you market to Class B tenants? The corporate game for Class A is very different.
Matthew Rossman: In the size range we’re talking about, five to twenty thousand square feet, those guys have existing real estate relationships. So I market to other brokers. That’s easily my number one source of deals. We treat other brokers really well. I’m super free with information. If we have something coming up, any of the brokers around here can call me, even if it’s not listed, and I’ll go out six months with them: okay, we might have this. We can get creative on structure or timing. It’s trust. We’ve worked a long time to build a reputation that whatever we say, we’ll do. And we pay super fast. If somebody brings me a lease, I’ll give them a check on the spot.
Gordon Lamphere: We’ve found the same. About half my business is tenant rep and half landlord side, which is rare, and I care about my tenants and don’t need to be paid in a month or two. But a lot of brokers behave differently; that next check is everything. By paying the day the lease is signed, you have brokers beating down your door. You’ve done both Class A and B. What are the biggest differences in your role as a landlord broker and in how the classes behave?
Matthew Rossman: It goes back to the personal side, which is honestly why I do what I do now. With Class B, I’m probably talking to the guy who owns the business. If he makes an extra five thousand dollars a month, it goes into his pocket or his kid’s college fund. It’s a different level of care. On the corporate side, you’re numbers on a spreadsheet, and whatever the spreadsheet says at the top of corporate is what we work off, which takes the personal side out and creates other issues. If you came to me tomorrow and said, I want to lease a space, we could probably get it done and I could get you keys a week from Friday. Reasonable terms, our lease document is super fair, done. On the corporate side, if you’ve come to me, your boss told you to find space, their boss told them, and maybe a board said so too. When they find it, they report up and down the chain, and since it’s their job, they fluff it up, so now we’ve taken a month of paperwork and haven’t reached the attorneys. Then corporate counsel gets paid by the hour, so whatever lease you send, they come back with comments, and I have to work through that with our attorney. The same lease is now a two-to-three-month process with a lot of wait-and-see, and at the end of the day, they probably got less than the guy who said, let’s knock this out, and did it in a week.
Turning Space, and Red Walls
Gordon Lamphere: How do you reduce costs transitioning a space between tenants? Full customization, or standardized paint and carpet?
Matthew Rossman: Your timing’s perfect. Normally we have a general standard. We’re a long-term hold, with buildings fifty or sixty years old, and we put a ton of money into maintaining them at a high level. I have a Class B product, but I can compete against a new building all day, because all our buildings have LVT flooring, LED lighting, and all the other three-letter abbreviations. But it goes back to the personal touch. We just leased a space, and this morning my property manager and I walked the tenant through: here’s where we’re doing carpet and paint. He said, I don’t need the flooring, just do carpet. Fine. Then we get into the warehouse, a smaller building, 6,000 square feet, and he says, I know you’re painting in here, and I’d really like red walls. That sounds like just a different color, but red is a very light-based paint, so you have to prime the heck out of it and put down three or four coats to get it to look decent, and it’s eighteen-foot clear, so it’s a decent amount of coverage. We called our painter, got a change order, talked to the tenant, he’ll cover half, and he’ll have red walls in a week and a half. We can do that because we’re nimble, and it’s a five-year lease, so we rationalize how we’ll cover it later. That customization is part of what separates us, but as a general rule, it’s standardized.
Getting Into the California Market
Gordon Lamphere: California is a very difficult market to get into. How did your investors amass the portfolio?
Matthew Rossman: As far as how we got in, the best way possible: we started a long time ago. Time is your enemy, especially here. Everything we own, we built, from 1955 to 1975. The gentleman who founded the company, Mr. Hoyt, transitioned from home building into industrial. To give you an idea of the way things were, most of the buildings in this park are about 7,000 square feet. A tenant would come and need a space, he didn’t have one, and he’d say, come back in thirty days, and thirty days later there’d be a 7,000-square-foot building for them. That’s not happening now. You’d be lucky to get into City Hall in thirty days. Having that history and the ability to grow in a business-friendly climate, which I think is a lot of the draw for Texas and Florida now, helped a ton. As for getting into the market today, first there’s price. I look at deals across the country, and if you want to buy a 10,000-square-foot building in California, it’s four million dollars all day, four hundred dollars a square foot. And if you’re an investor, you’re buying at maybe a five or five-and-a-half cap. Whatever the cap rate is in your market, divide it in half, and that’s California. Then you deal with regulations: ADA lawsuits you defend or just write a check for, permit violations, business licenses, a whole litany. It’s incredibly difficult, but it pays off twenty or thirty years later. They’re not making any more of it, and barring total financial collapse, prices aren’t going down. They can’t.
The Final Four
Gordon Lamphere: We have a constrained supply on time, so let’s go to the Final Four. First: where do you see commercial real estate ten years out?
Matthew Rossman: This goes back to the changes in California. You’re going to see more and more hybridization. We’re seeing retail repurposed into fulfillment and last mile, office into residential, residential density pushed up, malls converted to residential. I don’t think we’ll become Houston with no zoning and the Wild West, but over the long term you’ll see a continued push to have more than one type of building or service mashed together.
Gordon Lamphere: Are you seeing that in practice yet? I sit on planning boards looking at long-term strategic plans, and we’re starting to see the model, but I haven’t seen it deployed.
Matthew Rossman: Case by case. The mall thing is definitely here. The mall in the City of Orange is residential now, the mall in Laguna Hills is residential now, the mall in Santa Ana is residential now, big residential components totally revitalizing what was there. That residential-retail blend fits well. What we’re seeing now is the retail-industrial blend, where big-box stores, Best Buy for example, put up a wall in the middle of the store and the back half is last-mile fulfillment, so you can pick up or they’ll deliver. Office to residential is talked about, but I don’t know where it comes out; that’s a big hurdle. Long term, though, that’s the trend as people figure out what to do with these spaces as shopping habits and consumer behavior change.
Gordon Lamphere: Office-to-residential is difficult, and we have folks coming on soon to talk about it. Let’s take a step back. You started at Lee & Associates in Class A industrial and before that in residential. What advice would you give yourself at the start of your career?
Matthew Rossman: I started in the summer of 2007 and worked that market through about 2010 or 2011, and it was really rough. It got me in the habit, as most brokers do, of just focusing on the next deal. The current deal is done, now find the next one. Until recently, I never took time to celebrate the wins when they came, especially when it’s hard going. I could have done better at that. A developer at a dinner said that when he was a broker, he always took a little piece of every commission, even a hundred-dollar one, and bought himself something, a lighter, whatever, to remember why we’re doing this. It can be a slog, but it’s fun. Especially in the hard times, celebrate the wins a little more.
Gordon Lamphere: Fantastic advice. We’ve been through good and bad times in brokerage, and we don’t often stop to smell the roses. Is there a book every young broker, developer, or investor should read?
Matthew Rossman: The book that got passed around here in California is an older one, so you have to hunt for it: Alpha Dog: The Battle of Commerce. It was written by the former managing director of what would have been the CB office in Commerce. It’s allegedly a fiction book. Allegedly. Anybody active around here between 1980 and 2000 can probably guess where some of the inspiration came from. It’s an interesting insight into the glamorous and not-so-glamorous behind-the-scenes of commercial real estate, and we tell every young person to read it.
Gordon Lamphere: One final question, and the whole reason for the podcast: the men and women in the arena know who to reach out to. Who should we have on next?
Matthew Rossman: For more on Class B industrial, there’s a local developer, Rob Guthrie at Guthrie Development. He has a slightly different take. He’s into the condo conversion process, which makes a lot of sense with the constraints here, but it’s a very different deal from traditional buy-and-hold. He’s been around a while.
Gordon Lamphere: One last question: what’s the best way for a listener to get in touch?
Matthew Rossman: You can find me on Twitter or LinkedIn, but honestly, pick up the phone and call. It’s Bryan Industrial Properties in Southern California. Happy to chat any time. The best way is to actually sit down and talk to somebody.
Gordon Lamphere: Thanks again to Matt for coming on the podcast. If you enjoyed the podcast, please give us a like, a share, a follow, and especially a review. Reviews and listener metrics truly matter and help us continue to get quality guests. You can follow us on YouTube, Apple Podcasts, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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