Cold Storage, Industrial Growth & The Future Of Value-Add Real Estate With Clifford Booth – RFP 72 Transcript
Gordon Lamphere (00:06): Hi, I’m Gordon Lamphere, and welcome to The Real Finds Podcast, where we have real conversations with key entrepreneurs, activists, and researchers shaping the real estate industry and, as a result, our world. On today’s podcast, we’ll be speaking with Cliff Booth. Cliff is founder and chairman of Westmount Realty Capital, a private, Dallas-based owner-operator specializing in value-add, opportunistic, and core-plus investments. On the podcast, we discuss Westmount’s 45 million square foot industrial, office, and multifamily portfolio, their investment thesis, and the strategy driving effective site selection, and we take a deep dive into their hottest asset class, cold storage, including effective steps to grow and scale a cold storage portfolio. If you’re interested in the industrial asset class, especially cold storage, today’s podcast is well worth a listen. Cliff, thanks for hopping on the podcast today.
Clifford Booth (01:14): My pleasure, Gordon. Appreciate the opportunity.
From Antiques to Real Estate
Gordon Lamphere (01:17): So why real estate? I’m sure you could have done a lot of things. What got you into the real estate business?
Clifford Booth (01:23): At this point, it’s been in my blood for a long time. I had some exposure to real estate through my family. My father and grandfather were in the antiques and art business in Montreal, Canada, and they were modest real estate investors on the side. So I was aware of real estate when we moved from Montreal to Dallas in the late ’70s. We bought a property to house our antiques and art gallery, and that was my first real estate deal. The antique and art business did not go that great, but the real estate we acquired did pretty well. I’m not a rocket scientist, but I paid attention to that, and I’ve been doing it ever since.
A Value-Add Investment Thesis
Gordon Lamphere (02:12): Look, real estate can be an art form sometimes, and I think what you’ve done over at Westmount has been pretty artful. What was your investment thesis, and how has it evolved?
Clifford Booth (02:28): Just as a follow-up, the one thing that’s similar between antiques and real estate is that every piece is unique. There might be many similarities between two antiques or two pieces of real estate, but every one of them is unique. I don’t know how profound that is.
The thesis, in today’s vernacular, you’d call value-add, maybe opportunistic. We were always looking for opportunities where we could add value. We weren’t so much looking for buildings that had stable cash flow. We were much more looking for the ones that had potential, where we saw that we could do something somebody else wasn’t doing. I think about Warren Buffett when he talks about buying a good company at a fair price. If you buy a lousy company at a great price, that’s not such a great idea. It’s probably better to buy a better piece of real estate at a fair price. You don’t have to steal it. Once in a while you might get lucky, but the thesis was more about trying to buy real estate that had the basic attributes, the location, the bones, whatever else, and do something more with it than what was currently being done.
Finding Opportunities in a Competitive Market
Gordon Lamphere (04:07): You mentioned finding opportunities. Where do you find those opportunities, and what are the biggest opportunities you look for in a building?
Clifford Booth (04:22): I will say that we’ve been doing this for over 40 years, and it’s way, way harder to find them today than it was. It’s just the nature of the beast. There are more players, there’s more capital, and there’s more transparency. Information you had used to give you an edge in certain situations. Everybody’s got the same information now.
So it’s just a lot of elbow grease, a lot of relationship building, a lot of focus. I don’t think there’s anything magic to it. Well, maybe the magic or secret sauce for us is seeing something, or recognizing, “Hmm, maybe there’s something here.” And I mentioned relationship building a second ago. You can’t possibly focus on every deal that you see. So you focus on the ones where you know the broker, you know the seller, or you’re in that market, so you can speed up your underwriting, get more comfortable, and possibly get more aggressive. You’re trying to use what’s in front of you and what’s available to you. Those things were always true, but they’ve become more important now because of how competitive the environment is.
Getting Into Cold Storage
Gordon Lamphere (05:52): Speaking of a competitive environment, one of the spaces I think has become increasingly competitive, and also increasingly profitable, is cold storage. What got you into the cold storage space in the first place?
Clifford Booth (06:09): I kind of got into it by accident a long time ago, probably in the ’80s. We owned a small building in Dallas, an 11,000 square foot building. The tenant moved out, and the new tenant coming in wanted to convert it to refrigerated. It was not freezer at that time. Of course I knew that cold storage existed, but I had no exposure to it.
This guy put in refrigeration, and he did one thing. Just indulge me here for a second. He had cabbage, lettuce, carrots, and onions, I think, as the four products coming into the docks. He had these massive shredding machines, and at the other end of those shredding machines were big bags. The produce would go in, he’d load up these bags, and they would ship them to hospital cafeterias, school and university cafeterias, corporate cafeterias, restaurants, hotels, and so on. And I was like, what? That’s what you do? That’s all he did. He had two or three shifts a day, just pumping this stuff out. It was a bit of an eye-opener for me.
Then over time, we started doing others, and I started to realize what an interesting and ever-expanding space it is, and how specialized it’s become. There’s everything you can imagine: ripening rooms, chocolates, flowers, food prep of various kinds, freezer and cooler, frozen proteins, frozen vegetables, Lunchables, barbecue sauce, juice boxes. It just goes on and on and on. I think it was always pretty vibrant and active, and COVID really made it more so.
Why Cold Storage Supply Lags Demand
Gordon Lamphere (08:21): You mentioned it’s a vibrant and active space, and I think there’s a tremendous amount of demand for it in most markets, particularly markets like Chicagoland, where we have a lot of food users and a lot of cold storage users. One of the things that hasn’t kept up with demand is supply. Why do you think it’s been particularly hard to build and scale cold storage?
Clifford Booth (08:58): There are a couple of things there. First, most of the cold storage space in the US is owned by users. They occupy it or build it for their own account. That’s number one. Number two, I think the figure is that seventy-seven percent of the space in the US was built before the year 2000, and much of it way before then. Add to that the fact that it’s a fair bit more expensive to build cold storage than regular dry warehouses. So because it’s not as well known, because it’s more expensive, and because most of it is occupied by users, a lot of developers shy away from it, understandably.
So there’s a market for build-to-suits, but what we’re doing is building speculatively. We’ll do build-to-suits as well. But I think people in some cases are nervous: what if it doesn’t lease? How do you convert it back to dry space? In my personal opinion, that’s kind of the wrong question. You’re probably not going to do that. We’re building fifty-foot clear buildings. Food tenants are in the cubic foot business, not the square foot business, so by going higher, the space is a lot more efficient for them.
The difference, and it’s different in different areas of the country, but in Dallas, is maybe the difference between building at $200 a foot or $300 a foot, plus or minus. It’s quite different. So if you’re looking at it in terms of your risk profile, you can get higher rents, but there’s some expertise required and there’s some risk. Some people look at it and say it’s not worth the risk, which is a fair comment. It’s not the road we’re choosing, but I understand it.
Infill Site Selection
Gordon Lamphere (11:07): Speaking of risk and value-add, one of the biggest things we hear about and talk about on this podcast is site selection. How are you choosing sites for speculative development, and what are the factors at play?
Clifford Booth (11:28): Yeah, it’s a very important question and a very important issue to us. Not necessarily to everybody who’s building, but it is for us. In the decades we’ve been owning industrial, and not just cold storage, we have focused on infill, close-in product. If you look at our portfolio, most of it is properties near airports, near or on freeways, without a lot of land around them. That’s been a successful strategy for us in industrial in general, and we’ve taken that same strategy to cold storage.
We believe there’s a market for, call it, last-mile cold storage, especially post-COVID, as I was saying. People want more food choices, quicker, and closer to them. Think about your own grocery store over the last five to ten years. It may or may not have had a salad bar five or ten years ago, but it definitely has more prepared food now, perhaps a salad bar. At the price of that real estate and labor and everything else, most grocery stores don’t prepare all that food on site. They might prepare some of it, but not all of it. So there’s a market for cold storage to do a lot of that food prep and send it to all kinds of grocery stores. Our belief is in catering to tenants who want to be closer in, not just for food prep but for many other things as well, but that gives you a flavor. Infill locations are the primary tenet of our cold storage strategy.
Gordon Lamphere (13:31): One of the difficulties we’ve found with infill locations, and I’m sure you can educate us on how it plays into your strategy, is finding adequate power. Some investors listening who are less familiar might not understand that it’s not always as easy as putting a little additional transformer on the block. It can be more difficult than that, and even if you are putting in a transformer, it can be incredibly expensive. How do you factor power into site selection?
Clifford Booth (14:10): It’s definitely something you have to be cognizant of. Decades ago, if there was power in the area, you were fine. I will say that cold storage is not a consumer of power the way data centers are, for example, so it’s not as much of an issue. We have not had to pass on a site because of a lack of power, but it’s certainly on the checklist of things you get to pretty quickly. It’s an important factor.
Gordon Lamphere (14:52): It’s just money, right? It’s just money.
Clifford Booth (14:56): But I will say that, back to the competitive environment, it’s very, very difficult to find a good infill site. It’s very competitive, prices have gone high in any major city, and it is what it is.
Designing and Delivering Cold Storage
Gordon Lamphere (15:13): It’s a complex process, right? Besides power, what are the ultimate keys to designing and delivering a cold storage space?
Clifford Booth (15:28): Ingress and egress, because you’ve got the velocity of trucking and delivery. You have to design your site so it makes economic sense, but in terms of how big the building is versus how much extra parking and trailer storage you’ll have, that’s become an increasingly important issue. Visibility. I would also say the ability to get employees to your site. Employee issues across the country have become more and more prominent, so you don’t want a site in an area where employees have to drive too far or can’t get to it.
We prefer to have sites on freeways. If you’re going to be off the freeway, you want to be not too far from it, and the roads that get you from the freeway to your site have to be paved and wide enough. Trucks can waste a lot of time. If it takes twenty minutes to get from the freeway to your site, twenty minutes each way is forty minutes per trip, and that becomes a pretty significant expense. Those are the kinds of things.
Protecting Against Cost Overruns
Gordon Lamphere (16:56): Speaking of expenses, one of the big things folks worry about is cost overruns, and that can be particularly true for an expensive product, be it a data center or cold storage. How do you protect against cost overruns and mitigate that risk?
Clifford Booth (17:17): The way we’re doing it is that we interview general contractors, choose one, and negotiate an arrangement for the general contractor’s fee. After that, we lock arms with the contractor, and everything else is open book. He knows what he’s going to make. We see all the bids from the subs, and we negotiate them with the general contractor. Then we have a sharing agreement with the general contractor on cost savings. So we actually hope it goes the other way, under rather than over, because he’s got those incentives to make sure that happens. And we make sure it’s a generous agreement, to motivate the end result we want to see.
How Cold Storage Has Evolved
Gordon Lamphere (18:14): It’s always a good thing when you can align incentives. In terms of aligning incentives, I’d love to dive into investment strategy and your long-term viewpoint on creating great spaces that work for the consumer, and how the consumer is changing.
Clifford Booth (18:18): Okay.
Gordon Lamphere (18:43): How has your strategy changed over the last five or so years with cold storage? Have you seen a big shift, or is the consumer very similar to the consumer five or even ten years ago?
Clifford Booth (19:00): A couple of things on that. First of all, the buildings have gotten a lot more sophisticated. Like I said, people used to build maybe thirty or forty feet, and now it’s fifty feet. I’ve heard of buildings even seventy or a hundred feet in specialized situations. We’re generally okay with fifty feet now. And when I say fifty-foot clear, the building is actually seventy feet, but it’s fifty-foot clear to allow for the equipment in the last twenty feet.
There’s also been a great expansion of the types of tenants that go in these buildings, with robotics, sophisticated racking systems, and how much freezer versus how much cooler. Now that the buildings are better built and able to accommodate more, people can freeze more products. We didn’t used to freeze vegetables, for example. We used to just freeze meat and fish and all the proteins. Now we’re actually freezing vegetables.
We’ve also had tenants who are, in the proverbial sense, speculating on pork bellies. We’ve seen some people buy beef or pork or whatever in the summer, when the price may be better, and deep freeze it for the Thanksgiving and Christmas season. Like anything, as it evolves, there are more iterations, more ingenuity, and a greater variety of products. I don’t think I mentioned ripening rooms: avocado ripening rooms, banana ripening rooms. Flowers are a big part. You should see these places around Valentine’s Day and Mother’s Day, and chocolates too. It’s fascinating to watch. Pretty quiet the rest of the year. I don’t know if I fully answered your question there, but
The State of the Industrial Market
Gordon Lamphere (21:13): I think you did. I know we could dive into that more, but I’d love to get away from cold storage for a bit and talk about what you’re seeing in the industrial market as a whole. Cold storage is a very promising market, but industrial has generally been pretty promising as well. What do you see as the state of the industrial market right now, nationally and maybe in some of the submarkets where you’re highly active?
Clifford Booth (21:41): We’ve been in industrial since the inception of the company, so over forty years, and other products as well, especially multifamily. Our portfolio is about two-thirds industrial and one-third multifamily, by design. Over the last few years, when interest rates crept up rather precipitously, we fortunately did not see much distress in our industrial portfolio. We’ve bought a bit and sold a bit, not in the volumes we traditionally did in the years before that. Operationally, we’re in the high nineties occupied across the country, and our peer group is the same. Rent growth has been very strong: less strong in markets where it’s traditionally less strong, stronger in the ones you’d probably expect, but pretty great everywhere.
So the industrial space has really heated up. It used to be the poor stepchild of the real estate business. If you look at the major food groups over the years, it was the Rodney Dangerfield, the one with no respect. But for at least the last five-plus years, it’s definitely gotten the respect, and deservedly so, in my opinion. A lot of capital has come to it, hence the competitive nature of it.
Most of the money that’s come into the space is still for bulk distribution space. I have these conversations almost weekly with some new foreign investor who’s interested in industrial, and you can see the thought bubble above their head: an Amazon building. We don’t own Amazon buildings. Not that there’s anything wrong with them. It’s just, back to my earlier comment, there aren’t really levers to pull. If you buy an Amazon building, you have a single tenant with many years left on the lease,
Clifford Booth (24:07): and you’re just waiting to see what happens at the end of that lease. That’s not really our play. Our play is more multi-tenant buildings, where there are more levers to pull to create value. I think there’s a misconception that industrial is a space where you just go to the mailbox and get the rent check every month. There’s a little bit of truth to that, but it’s not the whole truth.
The good news about industrial versus, let’s say, office or even retail or multifamily is that the rents are triple net. You need to be a good landlord and keep your costs down, otherwise you’re not going to be competitive, and people will know that: tenants, leasing brokers, and tenant rep brokers. So you need to be really on your game and be a good steward of your investment, for all the right reasons. But at the same time, if those costs go up, the way we’ve seen insurance costs go up the last few years, they’re primarily shouldered by the tenant, because the rents are triple net. That’s not the same in multifamily. When insurance costs go up there, there’s only so much you can pass along. I think investors have become aware of that, and it’s given industrial a lot more reason to shine and attract people.
Even things like during COVID, when the government said you can’t evict someone who doesn’t pay. As landlords, we were all patient, and speaking on the industrial side, we didn’t have that many tenants come to us for forbearance. We had a few, but it was a very small minority. In multifamily, it was quite disruptive. So all those things come into it. I’m not beating up on multifamily. We’re still in that business and will continue to be. I’m just highlighting what I think
Clifford Booth (26:16): has occurred in the last few years. On the industrial side, the biggest CapEx issue is roofs, and that’s a significant cost. You need to be really aware of the condition of the roof when you buy the property. One of the things we’ve learned is that you can extend the life of a roof through good maintenance. Sometimes we see landlords who don’t do that, whether it’s fixing blisters before they get worse, or even just gutters, making sure the runoff is good. What we charge our team to do is, when we buy a property, we ask, “How long do you think this roof will last?” Whatever they say, three years or five years, once we own the property, we ask, “Can you beat it?” That’s what we endeavor to do.
Gordon Lamphere (27:11): Speaking of roof maintenance, is that an aspect of the business you would charge your team with rather than holding the tenant accountable? For us, we’ve long held the position with our management team that we always do the HVAC. We don’t let the tenant get near it. We’ll just charge them for it. We’ve found that by doing that, we can extend the useful life of units, sometimes by a decade. Is that a similar philosophy for you with roofs?
Clifford Booth (27:48): Yeah, it is. But generally it depends, because you’re inheriting a bunch of leases and writing new leases for tenants, and the leases you inherit might say different things. I would say the general industry standard has been that maintenance is a tenant expense and replacement is a landlord expense.
Managing Rising Insurance Costs
Gordon Lamphere (28:15): In terms of expenses, you also mentioned insurance. We’ve all seen insurance go up in the industry. It’s been crazy in the last five years. Are there ways we can lower that cost as landlords in the industrial space, or are we just going to have to weather the storm?
Clifford Booth (28:44): Yes, there are things we can do, and yes, we’re going to have to weather the storm. It’s both. The things I’d say we can do are, one, we’ve gotten a lot closer not just to our insurance agents but to the actual markets that are writing the checks for our insurance. We’ve been doing this for a while. We have a group of people internally, and I’m part of it, and sometimes we go to London, New York, or the Bahamas, where those groups are. We talk to them, find out what their needs are, and tell them what we do to maintain our buildings and mitigate risk. So that’s the relationship part of it.
Two, I’d say the insurance companies understand what they call cat, catastrophic events. Those are in none of our control. They build that into their numbers, and they don’t like it, but it is what it is. They have to pay when there’s a catastrophe. What they don’t like is what they call death by a thousand cuts. They don’t like it when landlords like you and us turn in every little small claim because, well, we have insurance. So we’re cognizant of trying to manage that, to be a better partner with our insurance companies.
The third is the nuts and bolts of the business: actually do what you say you’re going to do, be a really good landlord, and maintain and watch your buildings. And the fourth is the balancing of your portfolio. Insurance companies don’t like concentration risk. They might say they don’t like Florida because of the hurricanes, or maybe they don’t want you to have too much in Houston, or California, whatever the issues of the day are. So when we’re deciding where our growth is going to be, we try to think through how it balances our portfolio. In our case, that includes balancing with our multifamily portfolio as well, which is a whole other
Clifford Booth (31:12): beast on the insurance side.
The Final Four
Gordon Lamphere (31:14): I know we could get into that whole other beast, but we’re going to get into our Final Four. It’s always a great way to wrap up the podcast, learn a little bit more about you, and hear where you see the market going in general. This is one of my favorite questions: where do you think cold storage and the industrial space will be ten years from now?
Clifford Booth (31:42): I think it’s going to continue to grow. I think speculative building will be more accepted and understood. For us, that’s good news and bad news. I don’t want it to be too accepted. I’d like it to remain not as competitive. But a little more understanding would probably be helpful.
I didn’t mention this much, but we’re also building our buildings so they can be multi-tenant and not just single tenant. A lot of cold storage buildings have been built around the idea that they’ll be occupied by one tenant. Ours can be two, but we’re also designing them so they can be multi-tenant. I don’t want to get too far afield, but we think there’s a pretty robust market for smaller tenants within cold storage space.
Gordon Lamphere (32:43): I’d love to get into that. Several investors we’ve worked with through our management company and our brokerage company have made that a prime part of their thesis. They’ve tried to avoid large single-tenant buildings. And I’ll say this definitively, as a fourth-generation broker: you see the markets go up and down, and on the way up, big single-tenant buildings are great, but on the downswing, they can sometimes be absolutely catastrophic for a portfolio. How have you applied that multi-tenant thesis to the cold storage world, and what do you look for in a building?
Clifford Booth (33:20): Well, the first thing is that we’re now developing the buildings. Most of the time we were buying existing buildings, and they were all multi-tenant buildings, or we converted dry spaces. A couple of times we bought very large properties, a million-plus square feet, that were multi-tenant, some cold and some dry, and then we converted some of the dry to cold. We raised ceilings and things like that, so it was pretty hands-on, heavy-duty repositioning.
But now that we’re building from scratch, ground up, we’re designing the buildings, and there are specific things you have to do with the flooring and otherwise to make sure you can divide them, because we’re profiling those types of tenants. I just believe there’s a significant market. There are a lot of reasons why those tenants want to control their own spaces. As I was saying earlier, a lot of the spaces they’re in right now are quite old and inefficient, with older energy management systems. And right now most of them are in the public warehouse systems. They have a financial incentive to pull out, because they have to pay the public warehouse every time it touches their pallet, for all the various line items, and the public warehouse has a markup on it. That’s their business, to make a profit. If they lease their own space, not only do they control their own destiny, but they can perform all those services for themselves at cost instead of paying a profit to someone else.
Gordon Lamphere (34:54): Sometimes that someone else is our previous self. If you could step back in time, look at a young Cliff coming out of school, and give him one little bit of advice, what would it be?
Clifford Booth (35:14): Be a sponge, and specialize. For a long, long time, I would call us a deal shop. We were not as committed. We were probably always strongest in industrial, but if we saw a great retail center, we did it. We did a lot of retail. We were buying office buildings. We’re probably not that interested in office buildings today, although, just as a footnote, in San Francisco, where the market’s down, and some other markets, we are actually looking at office.
But specialize in whatever it is. If you’re a broker, or you want to be on the equity side, the debt side, appraisal, whatever, pick a specialty and become great at it. I believe we’re in the world of specialization. The more you can specialize, the more value you can add to whoever you’re doing business with, to yourself, and to your company. I think that’s the name of the game now. If you’re a generalist right now, I think those days are largely gone.
Gordon Lamphere (36:30): One of the ways we like to add value on this podcast is by finding books our listeners might be interested in. Do you have a book recommendation?
Clifford Booth (36:43): I’d have to think. It’s probably not going to be a real estate book. Boy.
Gordon Lamphere (36:47): That’s fine.
Clifford Booth (36:55): I don’t know why this is coming to my head. It’s completely off topic and has nothing to do with anything we’re talking about. I’m reading a book by a historian. What’s her name? I just can’t remember her name. She’s full of surprises. I’ll think of it, and you can mention it at the end of the podcast.
Gordon Lamphere (37:19): We’ll put it in the comments. But there’s one thing we won’t let you get away with. The whole reason for the podcast is that we firmly believe the men and women in the arena tend to know the next person we should be speaking to. So I’m curious, who’s the next voice we should have on the podcast?
Clifford Booth (37:37): Hmm. On any real estate topic?
Gordon Lamphere (37:41): Any real estate topic.
Clifford Booth (37:44): Geez. I should have prepared for these questions, Gordon. There are so many interesting people. What would be timely today? There are a lot of smart people out there. Do you know a guy named Craig Hall? Craig Hall is a very interesting person.
Gordon Lamphere (38:09): I’ve heard the name.
Clifford Booth (38:14): He’s had his ups and his downs, a lot more ups than downs. He’s a major developer in the Dallas area and also owns wineries and all kinds of other things. I think he could be a very interesting person for your audience. Not an industrial guy at all.
Gordon Lamphere (38:37): Look, I’d love to reach out nonetheless. I find on the podcast that we sometimes get the best advice from areas outside the asset classes of our traditional listeners, or outside the asset classes I specialize in. I think cross-pollination is a real advantage sometimes. In terms of that, if somebody wants to reach out and get some cross-pollination, or they’re in the world of commercial real estate that’s maybe more near and dear to your portfolio, what’s the best way to get in contact?
Clifford Booth (39:11): Go on our website. My email address is there, and I’m happy to connect.
Gordon Lamphere (39:18): Cliff, thank you so much, and we’ll have to have you on in the future.
Clifford Booth (39:21): Thanks, Gordon. Really appreciate it.
Gordon Lamphere (39:23): Thanks again to Cliff. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, and a review. Your comments, interactions, and subscriptions truly matter and help us continue to bring on quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with The Real Finds Podcast. Thank you for listening.
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