← The Kirsh Connection
The Kirsh Connection
From Frenzy to Reality, The Industrial Market Rest Explained w/Howard Schwimmer
00:48:40
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- [00:01]
A
Hi, I'm Andrew Kirsch, co founder of Sklar Kirsch. On this podcast, I interview industry leaders. You'll hear their real time opinions on today's market, their background, unique career highlights and guidance for newcomers to the industry. This is the Kirsch Connection. Welcome to another edition of the Kirsch Connection. On this week's episode, I have Howard Schwimmer, the founder and former CEO of Rexford Industrial. We cover a lot of ground with Howard, from his early days as an industrial broker to creating a public company in Rexford Industrial, to his latest venture, the formation of S5 Industrial Realty, Inc. We cover a lot with Howard. I hope you enjoy my episode with Howard Schwimmer. Welcome to another edition of the Kirsch Connection. I'm here with Howard Schwimmer, good friend, fellow Brentwood Country Club member, Now founder of S5 Industrial Realty, Inc. Howard, how you doing?
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B
I'm doing great, Andrew. Thank you. Thanks for having me this morning.
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A
I'm used to seeing you on the golf course and now you're here at our studio. So I appreciate you coming in.
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B
I think I see more in the gym.
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A
The gym as well.
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B
Going to the golf course.
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A
Yeah, fair enough.
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B
Yeah. I'd like to see more, though, on the golf course.
- [01:30]
A
Well, hopefully now we can. And I missed the gym this morning. As I was telling you. It was, I don't know, a rough weekend of. Must have been basketball games, baseball games, dance performances, everything that you used to do a few years ago.
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B
I remember those days. Enjoy them.
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A
I know I do. I definitely do. I'm in the thick of it. So there's a lot for us to talk about. Starting a public company, starting a new company. Why don't we, for those that may not know your background, talk about where you grew up and how you got into the real estate business?
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B
Sure, sure. I'm from Southern California. I grew up in Los Angeles. My family moved to Beverly Hills when I was pretty young and went to the Beverly Hills school system, Beverly High and so forth.
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A
You know, I'm a fellow Norman as well.
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B
That's right. I remember.
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A
So we got two Normans here.
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B
Yeah, Yeah. I was a little ahead of you, though.
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A
Just a little.
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B
Yeah, just a little. Went to usc, took. They didn't have a formal real estate degree then, but had some great classes there. And that was really the foundation for me to get started in the real estate business. Went literally three weeks after graduating, got into the brokerage business, did really well. I was in the brokerage business 18 years. And I think I bought my first industrial property when I was 25 and started syndicating deals. And eventually it became a business. I had a, like a good eye for creating value in real estate. So it seemed like every deal I did when I was younger was something that I had to change a building and modernize or cure functional obsolescence. And I learned how to do everything, literally. I was the general contractor back then. I could draw my own drawings and get permits and certainly did the leasing and so on and so forth. So that was really my goal while I was in the brokerage business. It was a great way to make a lot of money that I could then put every penny of it into real estate.
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A
Wow, that's very entrepreneurial from a young age. How did you gravitating towards industrial?
- [03:48]
B
You know, I actually worked on one project at SC where they literally gave us a marketing brochure on a piece of land. I think it was in Claremont. Actually I found the book a couple weeks ago, it was in Claremont. And the assignment was figure out the highest and best use and design what you're going to put on it and give me a loan submittal package. And it was an industrial site. And so I had some familiarity with apartments. My father and his brother had dabbled and bought some apartment buildings. And I kind of listened and I heard calls coming in at odd hours and thought to myself, I like the idea that they're getting all these rent checks while they have other jobs, but I don't want to have to have people calling me at all hours of the day to tell me about a problem. And you know, in residential, you know, any little thing, people are calling you with whatever they want to tell you. So industrial was great. You know, most of the time you're signing either a net lease or, or a modified gross lease. And even on a gross lease, when the tenant calls, you're explaining to them what paragraph to read so they understand it's their obligation to take care of it and not the landlord's.
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A
Yeah, and so, I mean, talk about those days of being in the industrial real estate industry compared to today. I mean, industrial has always seemed to be a mom and pop that there's so many, especially in LA county or Southern California, I should say, so many mom and pop owners of industrial real estate.
- [05:22]
B
That's a very fragmented asset class. And I saw a stat not too long ago and I'm pretty sure it said there's about 60, close to 65,000 industrial buildings in Southern California, which I thought was Astounding. So in my career, we made it our business to really start cataloging and knowing everything about every building we'd want to buy. But we've never been able to catalog every building we'd want to buy. You discover every day something else that you really hadn't thought about. And so back in the day, I got in the business in the early 80s. Back then it was a bunch of cowboys running around that were the developers and they'd go out and play golf and a broker would go out and play around at golf or so with them and got a listing and they built buildings for sale. And the market was really a little tougher back then because there was land availability. So it was similar to other markets that you can keep adding product and you flash forward to now, we still have a very fragmented market. There's a lot more institutional ownership, but that's not the majority of the ownership in our markets. And so there's still a lot of opportunity in some of the older assets. And what's interesting too is if you look around, especially through this last cycle, there was a lot of development. There's still some overbuilt areas around Southern California, but predominantly those buildings are 100,000ft and larger. And if you look at the product that's say the average size is in the 10 to 50 or 60,000 foot range. Predominantly that product, when you think about it, hasn't been built in close to 30 years in many of the markets. So there's actually a shortage of those size spaces. And the reason being you can't simply combine the land and the construction costs to develop at an economically feasible basis. And that was really why I gravitated towards some of the older product is because you could buy properties that people literally thought you should tear down and I could reinvent them and I could create product. I coined a term way back when which was relative functionality, because it's really only relative to the other options in that marketplace. And so if you make a product the best it can possibly be and you're competing against all the other older buildings that nobody seems to want to invest any money in. Well, you got the best product and you're going to get a tenant first and generally you're going to get a higher rent as well.
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A
Yeah, I definitely want to go through your career and talk about the early days of Rexford, but when I'm at conferences today, the number one sub asset class that capital wants more exposure to is shallow bay or small bay industrial. Why?
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B
Well, similar to the reason I just described because you can't deliver that product for sure in Southern California. And it's, I assume, just as hard in many of the other markets. Except when you're in markets where, you know, the land is not really of cost, then it's more about demand and the rents are going to meet it because there's just demand. So, you know, I kind of, you know, years ago thought similar, you know, and especially when you have some of these incubator parks, you think, oh my God, I could buy this for $250 a foot. $275 a foot. It cost me like 450 or $500 to replicate this. I got to just buy this stuff. It's gonna be great. We're gonna drive the rents, the rents don't really move that much on some of these incubator parks just because there's an affordability aspect to it. You know, these small time tenants, there's only so much they can pay or they're going back to the garage or they're going to share a building with their buddy who had a little space in it. I always wonder, why don't we have a waiting list for every one of these small bay projects? And that's pretty much the reason. But if you really look around the market, that 10 to 50,000 square foot, or even just sub 50,000 square foot size range has performed very well through most cycles, including the last one. The rents didn't grow as fast as they did in some of the bigger buildings, but they didn't decline as much either as we're sort of floating around somewhere near the bottom right now.
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A
And so you said you spent what, about 18 years primarily as a broker, but would buy real estate as your nights and weekends, I guess. When did you transition from full time broker to, to full time owner operator?
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B
Well, I started Rexford at the end of 2000 and we formally launched in 2001 and that was probably four years later than I probably should have. But I kept thinking to myself, you know, I just want to do brokerage and buy these buildings until I don't really need to work anymore because I have enough income. And, you know, and every time you were kind of there, you'd be like, maybe I need a little more income. Let's do a couple more of those deals. And so, you know, I started Rexford with Dick Ziman, who at the time we were talking, he thought he was going to sell his public company, which is called Arden Realty, and turned out he didn't sell it but he said, hey, I want to put a bunch more money in industrial. Our family has a portfolio. And I sort of. It's like one of those aha moments, you know, where you have in your life where you're in front of someone and you say, you know what, I got a better idea. Here's what I've been doing. And I think this is a bigger business. And, you know, he liked the idea. And I put together a business plan, and I wound up using his Rolodex to raise money. And then I, you know, started with just me, and I think I had one person as a controller and, you know, brought in person here and there and just kind of bootstrapped our way into a business. And we wound up having five blind pool sort of high net worth funds. And the first fund was $15 million. And I think it probably took me six months or more to raise the $15 million. But. But back then, $15 million had a lot of buying power. I think I bought with that and, you know, probably 60, 65% leverage, I bought probably almost two and a half million square feet of industrial.
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A
Wow. And so we're talking about what, early 2000s now.
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B
Early 2000s, yeah. So, you know, deals were still in the 30s and 40s. A dollar, you know, a dollar a square foot range.
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A
Yeah. How did you meet Dick?
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B
I've known him for years.
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A
Okay.
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B
Yeah. Yeah. I think my father knew his father. And so we sort of would cross paths and we'd have our real estate conversations. And as a broker, I wound up handling a few things for his family.
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A
Sure. So Rexford, I would assume, named after, I think, one of. Was it a house or that he had on Rexford or you or Obviously Rexford is a true.
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B
Just put it this way. Real estate people are great at finding opportunities and creatively executing them, but we're really bad at naming things. Yeah. And I remember sitting around saying, hey, what about this name? And what about that? And finally I just looked at it one day and I said, look, you started Arden when you lived in Arden. You live on Rexford now. Why don't we just call this thing Rexford?
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A
My closest friend, even to today, grew up on Rexford, the 900 block of Rexford. So they may have been neighbors.
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B
Who knows?
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A
Yeah. So talk about those early days of raising capital. You said one fund. It took six months. What was investor appetite for industrial real estate in the early to mid 2000s?
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B
Well, I'd already been raising money from a small circle of people and doing my own transactions.
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A
Sure.
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B
And so that's how I knew I could raise more money. And so it was really just about connecting with different circles of people, because every time I wanted to do one of my own deals, someone new would come in and go, hey, can I just. Would you mind if I brought these two friends of mine in? Right. And so, you know, when you're. When you know. 15 million. Yeah, that was at the time, a decent amount of money, but not a lot. I think our last fund we did, we raised well over 100 million. And, you know, that became a lot of work. We had to have some people inside the company that literally were devoting time to cultivating and raising and raising capital. And I mean, our second fund, I think, was $50 million. And it felt like it took almost a year to raise the money. When we went public, we had 500 unique investors that we actually had to roll up and bring into the public vehicle. So that was the breadth of the individuals. I think we maybe had a couple institutions in there, but mostly individuals and family offices. And so it's a lot different when you work with that capital, then you go onto the institutional side.
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A
So before you went, by the way, what year did you guys go public?
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B
In 2013.
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A
Okay, so before you went public, you raised a series of funds, friends and family. Did you have institutional joint venture partners? Did you have different types of capital structures besides either syndications or, or a fund model?
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B
No, we had one joint venture. I was never really a fan of working for someone else. Yeah, you know what I'm saying? Like when you do a joint venture, you sort of beholden to the reporting and what they typically want to do. And so that was always challenge, a little more challenging for me. And we had that one asset and rolled our interest in when we went public and then eventually bought out that partner. And it was a very profitable deal for all of us. So that worked out. There's instances where JVs make sense today. You think about the capital side of Rexford and, you know, Southern. The bloom has, you know, certainly fallen off Southern California because of the market and how it's performing. And so the cost of records capital because of the stock pricing has increased significantly. So times like this would actually make sense for the record company to do a joint venture to use some other equity. In terms of myself, when I go forward, as I'm going forward now, I'm open to it. You know, I'll raise some private capital. I'd like to work with people, maybe do some co invest with them. So I'm A little more flexible right now in that I'm not at the moment focused on growing another large behemoth of an industrial company. I just want to do the right deals and just have. Have fun, to be honest with you.
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A
We'll definitely get into S5 and how you named it and what S5 is going to do. I have an idea of how you came up with the name. When you started Rexford in the early 2000s, did you ever think that you would be the CEO of a. That it would turn public, that it would be a public company?
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B
Of course not.
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A
And so what?
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B
Never thought that.
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A
Okay, well, you know, people dream. People have lofty ideas. So when you are going along buying real estate, raising capital, what was the inflection point where you and Dick sat around and said, you know what? This could be much bigger than we ever thought it would have been?
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B
Yeah. Well, first of all, a few years into Rexford, my co CEO Michael Frankel joined the company. And he joined as someone who is phenomenal raising capital. And we wound up running the business together for, you know, I guess, what, 20. Some odd year. Some odd years at this point. And so we had a unique relationship and partnership.
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A
How did you know Michael?
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B
Well, another Beverly High alumni. Gosh, he was. He was a year behind me. He was actually friends with my sister and someone. We had a mutual friend that introduced us when I was out looking for someone like him. And so it was just kind of, you know, it's funny sometimes in life how things come together. Yeah. And so, you know, Michael and I were running the business. Dick, actually, when, when we first started the company, it was Dick and a couple of other people that he worked with because he, he was worried he was going to get a lot of pushback from his shareholders, so he.
- [18:43]
A
That there would be a conflict.
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B
So he thought he'd bring some other people in to, you know, enjoy that pushback with him. But Michael and I ran the business. You know, Dick and these other people, they were kind of on the sidelines and frankly, you know, all the capital raising and so forth, we did it ourself. You know, it's, you know, if you work with someone who had a reputation and a Rolodex, that's what you're really working, you know, and taking advantage of. And, and so he, you know, he maybe went to a couple meetings, but it was really Michael and I that would generally raise all our capital and ran the entirety of the business in terms of, from the public company formation and strategy and so on and so forth. Yeah.
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A
And so was there a point where you and Michael were sitting around saying, you know, this. This could. Could go public. This could be a, you know, multi billion dollar company?
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B
Yeah. I mean, at the time, I think we started thinking we wanted larger capital sources. Really, that's what initiated the process. And so we were talking about doing a 144A, which is a transaction where you bring in a partner that provides a lot of money that would help you grow to a place that you might then be of size to go public. So we'd been sort of talking to people in New York. We met the bank of America team. You know, good, good friend is Jeff Horowitz, who's today, I think, the global head of boa, their real estate. I think he's. I forgot he might have changed his title recently. But anyway, Jeff was a great guy, and he took us around and we sort of tested the waters here and there. And he came to us, he says, you know what? I think you guys could take this thing public. You can't just take a company public as you want to take a company public. You have to have a unique story and product that investors want to have access to. And Southern California has always generally been a place that is very hard to access the market in any scale or size. And so the business we started was not one which is more typical, where you sit around and you wait for brokers to give you a call and tell you either a deal they have or you just look at the listings as they come out and you go compete with everyone else. When we started Rexford, it was very different. We decided that we were going to find our own opportunities. And so we created a database that we tracked a lot of different data points on owners, properties, tenants. And we're looking for catalysts that would indicate a probability of somebody may want to transact because of this happening. And so we used brokers on every deal we did. But what we found is that it was easier to do that than call an owner and say, hey, we discovered your tenants leaving and your building needs, you know, many millions of dollars of work. Here's an offer. We'd like to buy your building.
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A
So you were cold calling owners?
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B
Well, we were talking to them because we wanted to get the information. So we always had a team of people that was doing this research, but we were also researching the owner and whose broker relationship was so we would find the opportunity. We knew who the brokers were, they had the relationship, and we'd put everything together where we'd say, hey, we're going to write an offer. Why don't you bring it in for us? That person was the trusted advisor to the owner who could then help them work through the thought process on how to value it and why the transaction might have made sense. We were never trying to undercut the market or anything like that. We were just trying to access it a little differently. And by the way, this is like many, many, many hours of work to do this research. And as a private company, we were making money, but we were plowing all the money back into the business to pay people to do all this work.
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A
Do you think today AI can do a lot of what your employees were doing where you could save operating expenses?
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B
I think it's hard. I think possibly you could find out when loans expire, maybe some of the lease expirations, although a lot of that information is not accurate. But it was the nuance. It was between the lines where you were talking to somebody and you'd find out that they had three partners and one of them or all of them were getting older and they're thinking, you know what, at this point, maybe it'll be time. You don't learn that through AI and you don't just learn all that nuance, by the way. What I found was that you could have two people call the same person, and one of them would come away and say, there's nothing here. I don't need to call this guy for five years. The other one come back and say, you know what? I think we got a seller here. That's how nuanced this really is. And that's why it's so hard to do.
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A
You know, when I was at Latham and Watkins and we represented McGuire, we helped take them public. But even before they went public, there was a large portfolio acquisition of Commonwealth's portfolio in downtown. I want to say it was 10, 12 buildings, well north of billion, maybe $2 billion. And you could scale quickly in the office market when you were planning on going public or when you were public because industrial is such a fragmented asset class. With mom and pops owning so much of Southern California industrial, did you just still continue buying one at a time, or were you able to scale up and buy a large portfolio to increase your assets under management at some point?
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B
Yeah, we always were buying one offs here and there. There was a two or a three pack. It wasn't until later, when we were a public company, that we could really compete in the arena where we could buy a portfolio. Because, look, when we started Rexford and we raised These blind pool funds. We did something a little different. We wanted to make sure we had cash where we could go to an owner and say, here's what we're going to pay you for your property. We can do our due diligence and throw three weeks, 30 days, whatever the heck they needed. We would make it happen. And we said, and then we're going to write you a check. We have the money, we can close. And then what would happen is they say, well, I have a higher offer. And we'd say, well, are they getting financing or they have to go raise the money because that's unreliable. And so we sort of trained the market that you had to have the money in your hand or why look at you as a buyer, right? And so that is, you know, in the old days you could syndicate and you could have nothing. You'd find some deal and you'd go out and figure out where to get your equity and then test a few lenders and then, you know, all the time in the world. So we sort of changed all that. I remember in the early days I had some friends that were buying industrial and you know, it was more than one of them. They'd say to me, you know, I can't compete, you know, I don't have checks, I could just write like this. And so that was sort of the beginning of institutionalizing the industrial market.
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A
So you had a lot of friends mad at you?
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B
I did actually, probably even more mad because they probably all went into office and creative office and that didn't work out as well as the industrial part would have for them. But no, so what I'm saying is, so yeah, we had changed sort of how we all did business and today maybe there's a little more flexibility if you want to pay top dollar. And it's more than the guy who can write the check because the market's soft and pricing is not what it used to be. But in the height of acquiring in SoCal, when there was a tremendous amount of competition in the market, it just became a frenzy and you just had to have the cash in your hand.
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A
So for multiple decades, you were really getting your hands dirty in terms of being close to the real estate. Buying, underwriting, asset managing, leasing, industrial real estate. And then you've grown this large public company. What was it like being a co CEO of a public company? How did your day to day function change?
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B
Well, any public company, you have to have succession planning. In any business you really need to be thinking about that. And so for what we were doing I was so close to the real estate, you know, I would literally lay the projects out or come up with the ideas on how to reinvent them and help them with some of the bidding. And I mean, you name it, I was like involved in every tentacle of what we were doing. And so, you know, we realized that I had to slowly let go and train people and get ready for the next generation to be able to do this work. And so I think we were successful at doing that. I remember bringing in, we decided we needed to compete in the development world. And so in the development world. And by the way, everything we did, we wanted to do better than anyone else so we could out compete. So on the development side, we said, oh, you know what? We really need to have a team that could lay these buildings out in house and come up with a lot of these creative ideas for new construction. And so I remember hiring a woman away from a firm in Orange county who's a great architect. And I never forget the day she came to me. She said, do you realize the architectural firm we've created in Wrecksheart is bigger than the shop you took me out of? When we had the talent and the people, you could step back more. And so then things became a lot higher level in how we reviewed a lot of the work and just sort of guided people along. And so it became more of that on the real estate side, at the same time helping people in their growth within the business in terms of where they were going and how we were going to help them mature. And what we were learning about our business was that we didn't really want to silo people, that you could only do one thing and just keep blinders on. We found out that people that were really good at kind of everything sort of had this ability to sort of keep rising in their own careers in whatever they were doing, because they just intuitively understood what made the business work and how we were successful. And so there was a tremendous amount of mentoring and so forth that I was doing. Our current CEO that has succeeded Michael and I, she came in, I guess, plus or minus five years ago, and we spent a tremendous amount of time with her, helping her understand she came from the retail world and to understand the industrial world. And so she's quite knowledgeable now. And then there's another gentleman that is the COO of the company, and him and I spent a tremendous amount of time just imparting knowledge and helping him. He was also from. From the retail world. And the hardest thing is hiring people that have an excellence in what your particular business is. Because every business is nuanced. The Rexter business was very nuanced in terms of this value creation strategy. And it was really hard to just bring people in from other companies. It never seemed to go perfectly well. And so we found that growing people within the organization where they had that strong foundation really enabled them to succeed significantly more than some of the outside talented people.
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A
Obviously. Positives and negatives with respect to public company positives, you were able to raise so much money in a short amount of time. And negatives, you are in the public sphere and public reporting quarterly annual talk about just things that you maybe didn't expect in terms of running a public company versus when you had had a private company that you. For those that may think they want to go public, things that they should be more cognizant of.
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B
Sure, sure. Well, look, it's always hard to raise capital certainly when you're private, right? Because you're either raising capital from individuals and that's a lot of conversations and a lot of hand holding, or you're doing JVs where you're still having a lot of work to get someone over the threshold. And then once you're there, you know, there's the maintenance of that relationship, the maintenance of really the reporting. And you know, it's a lot of work. And so, you know, I always enjoyed working with high net worth people. I have, you know, when I was younger, I did a lot of really interesting deals and I had a really good track record in creating value and really making people a lot of money. And that's, I think, really foundationally what helped me really grow is, you know, everything I was doing, I was doing the right deals and I was succeeding. Right. It's really hard if you don't have that track record and you don't start with something. And so sometimes you have to start small. Like I did. My first deal was, geez, I don't even know. It was probably like $600,000 or something, if even that. And that's an interesting story. I'll just tell you briefly. I was a broker and this guy I had a listing with, he wouldn't spend any money on his building. It was awful and no one wanted to run it. And finally I said to him, do you care about this building? You don't seem to really want have any interest. He goes, not really. It's sort of a thorn in my side. And I said, well, maybe you should sell it. And he said, yeah, I might do that. I said, well, I'll buy it from you. He says. He asked me, do you have any money? And I told him I had a 6% commission available for the down payment and he sold me the building. For that type of any financing.
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A
Yeah, so seller financing. And that's great. I love that.
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B
Yeah. So you know, public, Private. Yeah, look, the public side was great, you know, and again, when your stock is performing at the right level, the raising capital, you're raising capital and it's accretive to growing the business and there's no greater access to capital than the public markets. You know, we, you know, I think the largest capital raise we did, we raised, I think it was like almost, almost a billion dollars of equity and similar in debt. And literally, I mean, the equity there was a little bit longer of a conversation. The debt was probably within a day and a half. So, you know, it's, you're raising $2 billion in a few days. Whereas, you know, the private side there I was struggling, you know, raising $50 million and taking a year. Yeah. So it's, you know, it's quite a contrast. But it's a different kind of business. Right. The public company, you know, I'm an employee, you know, it's not my company. We've got a bunch of shareholders. When I own my own real estate, it's mine. And so it's, you know, it's a different approach and the nuances are different too. You know, when you, when you're an employee of a public company, you're not thinking tax efficiently, you're just paying, you know, you're a W2 guy, you're paying taxes, there's some tax efficiencies you can work in there. But when you're a private investor, which now I'm another private investor, I'm thinking only about my after tax impacts.
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A
Yep.
- [34:49]
B
And you know, I'm thinking about my accelerated depreciation and lowering my own tax bill and so forth. So it's a different mindset. And I used to always think to myself, it's not about how much money I put into a deal, it's how much return I get on the dollars I put in that deal and how tax efficient it is. So you don't have to grow a huge company if you find some very efficient cash flowing and tax efficient assets. Because at the end of the day, it's what you put in your pocket. Yeah, of course not the gross and how much you give away to the government in a bunch of taxes, you're
- [35:26]
A
talking to an ordinary income taxpayer. So I'm very cognizant of, of what I can and can't do. Want to get into S5 before. One last question. Just sort of on the industrial asset class as a whole coming out of COVID and in the last few years, headwinds that have faced the industrial real estate market, whether it was tariffs, Some pressure, downward pressure on rents, et cetera. Can you talk about your observations of the industrial market in Southern California over the last couple of years, of why there has been a pullback?
- [36:11]
B
Sure. Well, I think really the problems really came about because of how tight the market got. You know, if you look from that 2019 to peak rent, which was in that, you know, probably 22ish range, rents in on average went up about 80% in the markets. Inland Empire rents went up over 160%. So it was pretty insane what was happening. And to be honest with you, like, the landlords weren't really driving it. It was just a lack of products. So we would put product on the market unpriced, and you'd get, you know, we're talking about leases now, not for sale. You get a 40,000 foot space you put on the market, you get like five to 10 offers and you'd say, I'm sorry, another guy offered me, you know, 10 cents more than you for the space. And the guy said, I have to have the space. I'll give you 15 cents more.
- [37:09]
A
Had you ever seen that?
- [37:10]
B
I've never seen in my life.
- [37:11]
A
Yeah.
- [37:11]
B
And I'm sure we never will again. It was nuts.
- [37:14]
A
Did something cause that?
- [37:17]
B
What caused it was we were all sitting at home clicking away and ordering everything we wanted because we were miserable, stuck with, you know, with the COVID situation. So. And, you know, and you had E Commerce, the proliferation of that. And so, you know, that alone already started something new that was, you know, using a lot of industrial space. And then Covid accelerated everything. And so rents just grew so much in Southern California and values obviously followed. You know, cap rates came down, were compressed. You know, you'd see deals selling at fours or, you know, three and a half with these high rents. And, you know, it was just utter insanity, to be honest with you, looking back on it. And so, you know, people during that period of time didn't say, you know, I need 100,000 foot building. They'd say, I need whatever I can get my hands on. And they might have taken 150,000 foot building or they took 200 because they just assumed, you know, their business was growing like this. It's just going to keep going, right? And then you wake up post Covid and you're thinking like, oh, my business pulled back. It's a little better than what it used to be, but what am I doing with all the space? And so there's a tremendous amount of space put on the market for sublease. There's still a lot of space out there that's for sublease. And we've sort of been going through this reset in the marketplace where people are trying to right size what they really need. People are trying to right size the cost of what they're paying. You know, a great example of that is the three PL business, right? So these three PLs were taking massive amounts of space. They might have been taking buildings at close to $2 a foot. I'll call it net or gross, whatever it is today that building might be leasing for a dollar. That 3 PL is out of business or they need to reset their rent. So this has all been going on for the past, what, 18 months? Almost probably closer to two years now. And I think we're, we're getting close. You know, we're floating around the bottom in terms of rents stabilizing that, you know, just at this point, it just depends on is there too much supply still in this market or is a little tighter. It's not just market driven. It's now size driven in those markets. But we're getting, we're getting a lot closer. And then obviously we have disruption in the world. We've got this, you know, war going on in the Middle East. We've had tariffs which have been challenging those. On top of this shifting in more of the need for equilibrium have really caused a lot more pain here in Southern California than they have in other markets. Other markets have had a lot of population growth. We had a bit of decline. I think we're stable at this point. But the immigration policies are very impactful in Southern California in terms of growth and population. And you know, look, we, we've got plenty of people and we have an unbelievable amount of demand here. But you, you see other states growing and so their industrial is still leasing, even though some of, some of them, you know, I was thinking about Arizona. I couldn't believe how much product was in the market when, when the, when the market started changing. But they still been absorbing it and there's still been rent growth in most all these other markets where Southern California rents today are probably getting closer to almost 30% in terms of decline that's happened from peak. And so That's a lot different story. And so you add all that together and you can just kind of get a better feel for what we've been going through here. But at the end of the day, is Southern California done? No, we still have millions and millions of people here. We have one of the largest concentrations of population, which are consumption. All these people are consuming, and that's what drives industrial real estate.
- [41:18]
A
So talk. That's a good segue for S5. So talk about the company, how you name the company, and what is the business plan for the company going forward.
- [41:28]
B
Well, as I think mentioned earlier, real estate people are not so great at naming companies. You know, usually you buy a property and it's either the street or you name a company and it's the township you're in or the street you live on. And so I don't know. I didn't know what to call the company. And my daughter says, hey, dad, there's five schwarmers. Just call it S5. I'm like, we're done.
- [41:50]
A
There you go. It's a great name.
- [41:51]
B
Yeah. So, you know, whatever. A name's a name. But in terms of the business, I've had my greatest success, and frankly, Rexford's had their greatest success owning an operating property that has barriers to entry in terms of any competition. And so as I go forward, I also don't want to compete with a lot of the institutional capital that's coming back to our market here. And so that market doesn't have the time or energy other than a rex for that has a business design for value creation. The overall typical investment of institutional capital, sure, they'll allocate some money to somebody who's working hard in the trenches, but in terms of building a business, it's hard to build a business that's about value creation unless you have an edge like, you know, we built out into the Rexford system. So for me, you know, that's what I do. Right. So, you know, there's a. I think half of our market. You know, the market in Southern California is about 2. 2 billion. A little over 2 billion square feet, and about a billion of it was built before 1980. So a lot of inefficiencies, a lot. A lot of functional obsolescence, and a lot of buildings that people just haven't invested in. And forever, they'd rather lower the rent than invest any money to modernize a building. That's, for some reason, the typical behavior of owners. And so, you know, the opportunity for me is to go after you know, property that's 25,000ft to probably 75,000ft, that's the product as I was describing earlier, really hasn't had a lot of development in many decades. You know, will I buy something that's, you know, a class A building, you know, maybe on the smaller side, you know, I'll buy, I'll buy it because it's good to put into our, you know, our family, our family's holdings. But, you know, I don't want to compete, you know, on the larger side where, you know, in the near future you're going to see some cap rate compression and it's pretty hard to make money. But you know, again, my expertise is seeing an opportunity and understanding the different ways that I can unlock value in assets and then executing on that. And so that's, you know, so I plan to do that in sort of the 25,000 to 75,000 foot range. Although I do have an extraordinary affinity for smaller Bay Dock High. Dock High. I'm making a distinction and I'll figure out how to buy any size project like that.
- [44:32]
A
Wow.
- [44:32]
B
And I'll raise whatever capital I need because I just have an extreme love of that type of asset class and I've created a lot of that. First of all, it's very hard to build it still.
- [44:45]
A
So what is a small Bay Dock High building?
- [44:47]
B
What is that? That's like a 10,000 to 40,000 square foot space. And you know, that's sort of in that category that you've seen not a lot delivered in. And so I think I have a unique ability to figure where I can go in. And I see dysfunctional buildings and I figure out how to demise them and create the Dock High loading and deliver into the markets that have a shortage of that type space, that product. And I've done it a lot. That's what I really miss about not being close to the real estate is being able to find those and figure it out. It's kind of the same thing I was talking about earlier. When you call an owner and somebody finds something, another person hears nothing. Like I can go into the market and figure that stuff out. And through this last cycle, if you were to really break out the vacancy that's happened, you know, we went from a half percent vacant to 6 or 7% vacant, depending on which market you're in. But the predominance of the vacancy is in the older buildings that have functional issues. And guess what? That's my world. So that's sort of feeding into the start of the next Cycle where I can go out and find those type of buildings. And believe me, not every one of them is an opportunity to create value. There's plenty of them that you need to just tear down. But where I can find some of them that I can go in and execute some of the creative plans that I've done in the past, that's what I plan to do.
- [46:27]
A
Well, with all that expertise, maybe even partner up with some younger groups out there that have been formed and looking to do the same thing that you did while you were still a broker or when you created Rexford.
- [46:45]
B
Yeah, yeah. At this point, you know, I think back to when, you know, I started Wrecksheart and I had a guy with some cachet to his name, you know, maybe I'm that guy all of a sudden, you know, in the industrial world. And I can bring that to some, you know, a partnership, you know, on a one off, maybe deal with some of the younger guys out there. I can help them figure out how to turn it into, turn an opportunity into something that works or convince them not to do a deal like that. That's actually helpful too, is sometimes you shouldn't do a deal. Yeah, I'd be interested in doing some co invest work with some people. I think that's fun. I've spent a lot of time just meeting people and talking to younger people. I enjoy mentoring them and kind of at this point sort of giving back.
- [47:36]
A
I appreciate that. Well, look, I'm very thankful for you coming into the studio. I wish you nothing but success and good fortune with S5. Love your family. Other than this one golf match that I had with your sons where we were on the 19th hole in the playoff and I had Maybe I was 15 yards from the green. All I needed to do was chip on and two putt and get five for four and I would have taken down the champs. And I scolded Chip out of bounds and I just, I felt that pressure of almost being able to beat the Schwimmer boys and I couldn't get it done.
- [48:14]
B
Yeah, they're tough. You're not the first one that's happened.
- [48:18]
A
Well, thank you again for coming on. Yeah, thank you.
- [48:20]
B
I enjoyed it.
- [48:21]
A
Truly appreciate it. And that's another edition of the Kirsch Connection.