CrowdStreet’s Darren Powderly is joined by Scott McKibben, Chief Investment Officer of the Brennan Investment Group, LLC, to discuss what factors are driving the demand for industrial real estate, how COVID has impacted the asset class, and how the firm’s portfolio is performing.
Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet
CrowdStreet
Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.
00:00:05 Hi everybody, this is Darren Powderly. Welcome back to our next edition of StreetBeats. Today I have Mr. Scott McKibben, the Chief Investment Officer of Brennan Investment Group in Chicago, Illinois. Scott and I have known each other for, oh, about four or five years. I first showed up at the Brennan Invo Investment Group's office in Chicago. They were an early, uh, adopter of online capital formation, uh, crowdfunding, and, uh, he's an expert in the industrial market. So, Scott, welcome to StreetBeats. Thanks for joining us today. Uh, want you to introduce yourself?
00:00:39 Sure, yeah. I've been in, uh, real estate pretty much my whole career. I got a finance BS at JD and, uh, MS in real estate, and so been in commercial real estate for 25 years and focused primarily in office industrial. I've done about 7 billion in transactions, and I'm a co-founder and Chief Investment Officer. I've run an investment group, which is about a 10 year old company, and we have about closing in on 50 million square feet of buildings in 30 states. And so, and really what we focus on is primarily just industrial property.
00:01:09 Yeah. And I know you and Mike Brennan, uh, and the other members of the team there at Brennan, uh, you guys are industrial experts. You were in the industrial market prior to coming together at Brennan. Why is it that industrial real estate is the asset type that you choose to focus on?
00:01:27 Well, for, for me personally, when I started, when I went out on my own, uh, I, I was looking at both office and industrial assets, and that's what I had worked on with a, a week before that. And I just made a lot of sense for me to, uh, go into that when I started doing syndications, which were with high net worth investors, the one thing that you find with industrial assets is there's much less need than other product types to have, uh, a capital call if, if you lose a tenant, you, you know, you're able to usually absorb that loss without a big capital outlay. And that really was the, the initial reason I went into it, found out it's just a product type that is, has a lot of demand, a lot of demand drivers, uh, and was really underserved, I think, by a lot of, uh, professional, uh, investors probably over, you know, more have come in over the years, but it wasn't underserved product type and it wasn't in favor as much as office, retail, hotel were more glamorous and they looked better on brochures, but down and dirty returns, I found industrial as the easiest way to make money in real estate.
00:02:33 It seems to me that industrial real estate has always been an essential part of the US economy, but there was a period of time there as globalization became more popular, say, in that 1990s and early two thousands, uh, US corporations were offshoring, uh, a lot of their investments and, and because of cheaper labor and whatnot, but now it's become hot again. You know, did e-commerce and some of the geopolitical things. It's, uh, you guys were in the right place when it wasn't quite the most attractive asset class in real estate, and it's come and, and supported you. Tell us about some of the drivers today in industrial and even office, but, but maybe particularly industrial real estate that is driving demand for the asset type.
00:03:14 Sure, yeah. So in industrial real estate, especially the manufacturing sector in, you know, in the eighties and into the early nineties, a lot of manufacturing moved out of the Midwest into like the south of the United States, the Southeast. And, and what has since happened, uh, especially more so over the last, I'd say five years, and it's accelerated a little bit because of as well, but what, what has happened is that the labor advantages, you know, the, the, the wages in, uh, China have increased and then robotics have come, you know, have have been another factor that have made the labor advantages that was once prevalent is no longer there. And so moving a lot of this manufacturing and there was an onshoring, a net onshoring of manufacturing back into the United States in 2018 and in 2019, and we expect that to continue. And so I think a lot of companies are rethinking how they want to go about delivering their products.
00:04:15 And then on, on top of that, we have, you know, about 150 manufacturing buildings throughout our portfolio and those buildings, what we've seen is a lot of, you know, where there's maybe a, a building with 800 parking spots and it had a lot of labor there. They're using a hundred and it's, it's a higher, you know, more engineers and that type of labor and robotics, and they're not needing as much labor. And so that is a big reason. That was a big driver for coming back. And I think that will continue to accelerate in addition to e-commerce, which has also been a big growth. You know, the, the disintermediation of, you know, retail, there was already a trend of a lot of absorption of retail space with e-commerce, but it was accelerated over the last few months by people necessitating purchases online.
00:04:59 Well, a lot of people are asking, you know, is commercial real estate, uh, values, are they being impacted negatively? And, and generally speaking, yes, that they are because of rent payments and, you know, just demand drivers. Uh, but on, on industrial real estate is actually increased in some of the metrics that we're viewing around the nation because of, uh, the factors that you mentioned there. So I wanted to ask you a couple of questions. What's going on in the portfolio? Tell us about your portfolio of office and industrial, uh, buildings around the United States, and then give us a snapshot of how it's performing. I mentioned that, you know, even pre middle of the pandemic right now, a lot of, uh, companies are experiencing a decrease in tenants paying rent because they've been shut. Uh, but what's going on in your portfolio? Uh, give us a quick snapshot, please.
00:05:49 Yeah, it was interesting. I was on a, a call today. We were talking with the brokerage group about a large, uh, national portfolio that was going on. We had had a portfolio that we had pulled off the market, and they said that that group had made a, a conscious decision to work with tenants on that had asked for relief because at the beginning of covid, a lot of our tenants came to us and asked for relief. We have 900 tenants in our portfolio, and it's really pretty much all industrial. That's what we, we have. And so those tenants, you know, came to us and they asked for relief, and some people were opportunistic and some people were other. And we made a policy decision not to do any relief at all and say, when is due on the first, it's late on the second, and we're gonna issue a default letter the next day.
00:06:31 And we, we really, that's what what our policy was. This group, this national group that, that was out there doing that, they had decided to work with their tenants and, and they ended up about 10 to 12% either workouts or not collections. So fairly high industrial market, the, the operators and what, what this, this national group said, this national brokerage group said, says, the operators that really focused on collections and didn't necessarily cave into every tenant request or demand had high much higher collection rates, 95% plus. We personally have experienced 99% in April, 99% in May, and 98 going to 99% in June. So we really collected all of our rents and we didn't work it out. We had to issue some default letters. Almost all of our tenants were operating were able to operate throughout covid because their businesses in some fashion were essential.
00:07:24 Right, right. And what about, uh, vacancies or on the other hand, occupancies? Uh, so if you've had 99% rent collections, uh, throughout your occupied space, how have occupancies been impacted over the last, uh, 90 days?
00:07:41 What I would say is the beginning of covid, uh, leasing velocity went down, but over the last 30 days, we've actually signed quite a few leases. We have a couple new developments, uh, that we're, we have several active developments throughout the United States, and we've been getting leasing done, and it's been at the rates at or above rates that we were pre covid. So we're, we haven't seen a, a disruption in the rates and really a disruption in the lease. We got a lot of renewals done throughout covid, uh, and we continue to get renewals done. So we're our portfolio's 95% plus LE lease, and it, it was pre covid, it is post covid. And if anything, I I, I would venture to guess that we might even be slightly up from where we were.
00:08:24 Wow. Yeah, I'll bet You're, uh, quite, uh, happy that you guys are in industrial, you know, those are, uh, outstanding.
00:08:31 We're, we're
00:08:32 Outstanding metrics and that points to the future. Scott, where do you and, uh, your team at Brennan see opportunities, uh, has, has your investment thesis altered? Is it the same or is it dramatically it changed at all?
00:08:48 What, what I would say is, you know, w we, we've been, you know, we might be in a recessionary environment now. I think technically we are mm-hmm. <affirmative>, so, so we were net acquirers of certain types of product. Uh, we were still working on development deals. We were working on single tenant net lease, and we've really focused a lot on corporate real estate over the last few months. And we've actually had a corporate real estate initiative that we've
00:09:12 Announced. I agree with you. I think there's a major opportunity there. Good luck with that new, uh, initiative. I know it's, it's not new to you guys in terms of your expertise, but a very formal, uh, initiative there. So that's exciting. Well, Scott, thank you so much for joining us on StreetBeats today. A lot of the points that you have made are, are educational and really helpful and understand what's going on in the industrial market today, uh, and where some of the opportunities lie. Are there any closing points you'd like to make for the audience today?
00:09:42 So, so yes, Darren, uh, you know, one of the things that I would definitely wanna mention, make sure everyone knows is that we've been talking with CrowdStreet over the last few months about finding some opportunities to put in front of you and your investors. And so we expect to have hopefully something soon that we can work on. And, and we, we have a lot of different opportunities. We're, we're trying to beef up our pipeline and, and try to find something that CrowdStreet and Burn Investment Group can put out to investors that they would, uh, be very happy with.
00:10:12 Well, that would be most welcome. Uh, we've always admire you and the team at Brennan and have seen you execute on a number of, uh, transactions, quite a few transactions over the last five plus years. And, uh, welcome that opportunity, Scott. So thanks again for joining us. Uh, uh, Liz Gentlemen again, uh, Scott and Gibbon, uh, CIO at Brennan Investment Group in Chicago, Illinois. Scott, look forward to talking to you again soon. Thank
00:10:40 You.
00:00:39 Sure, yeah. I've been in, uh, real estate pretty much my whole career. I got a finance BS at JD and, uh, MS in real estate, and so been in commercial real estate for 25 years and focused primarily in office industrial. I've done about 7 billion in transactions, and I'm a co-founder and Chief Investment Officer. I've run an investment group, which is about a 10 year old company, and we have about closing in on 50 million square feet of buildings in 30 states. And so, and really what we focus on is primarily just industrial property.
00:01:09 Yeah. And I know you and Mike Brennan, uh, and the other members of the team there at Brennan, uh, you guys are industrial experts. You were in the industrial market prior to coming together at Brennan. Why is it that industrial real estate is the asset type that you choose to focus on?
00:01:27 Well, for, for me personally, when I started, when I went out on my own, uh, I, I was looking at both office and industrial assets, and that's what I had worked on with a, a week before that. And I just made a lot of sense for me to, uh, go into that when I started doing syndications, which were with high net worth investors, the one thing that you find with industrial assets is there's much less need than other product types to have, uh, a capital call if, if you lose a tenant, you, you know, you're able to usually absorb that loss without a big capital outlay. And that really was the, the initial reason I went into it, found out it's just a product type that is, has a lot of demand, a lot of demand drivers, uh, and was really underserved, I think, by a lot of, uh, professional, uh, investors probably over, you know, more have come in over the years, but it wasn't underserved product type and it wasn't in favor as much as office, retail, hotel were more glamorous and they looked better on brochures, but down and dirty returns, I found industrial as the easiest way to make money in real estate.
00:02:33 It seems to me that industrial real estate has always been an essential part of the US economy, but there was a period of time there as globalization became more popular, say, in that 1990s and early two thousands, uh, US corporations were offshoring, uh, a lot of their investments and, and because of cheaper labor and whatnot, but now it's become hot again. You know, did e-commerce and some of the geopolitical things. It's, uh, you guys were in the right place when it wasn't quite the most attractive asset class in real estate, and it's come and, and supported you. Tell us about some of the drivers today in industrial and even office, but, but maybe particularly industrial real estate that is driving demand for the asset type.
00:03:14 Sure, yeah. So in industrial real estate, especially the manufacturing sector in, you know, in the eighties and into the early nineties, a lot of manufacturing moved out of the Midwest into like the south of the United States, the Southeast. And, and what has since happened, uh, especially more so over the last, I'd say five years, and it's accelerated a little bit because of as well, but what, what has happened is that the labor advantages, you know, the, the, the wages in, uh, China have increased and then robotics have come, you know, have have been another factor that have made the labor advantages that was once prevalent is no longer there. And so moving a lot of this manufacturing and there was an onshoring, a net onshoring of manufacturing back into the United States in 2018 and in 2019, and we expect that to continue. And so I think a lot of companies are rethinking how they want to go about delivering their products.
00:04:15 And then on, on top of that, we have, you know, about 150 manufacturing buildings throughout our portfolio and those buildings, what we've seen is a lot of, you know, where there's maybe a, a building with 800 parking spots and it had a lot of labor there. They're using a hundred and it's, it's a higher, you know, more engineers and that type of labor and robotics, and they're not needing as much labor. And so that is a big reason. That was a big driver for coming back. And I think that will continue to accelerate in addition to e-commerce, which has also been a big growth. You know, the, the disintermediation of, you know, retail, there was already a trend of a lot of absorption of retail space with e-commerce, but it was accelerated over the last few months by people necessitating purchases online.
00:04:59 Well, a lot of people are asking, you know, is commercial real estate, uh, values, are they being impacted negatively? And, and generally speaking, yes, that they are because of rent payments and, you know, just demand drivers. Uh, but on, on industrial real estate is actually increased in some of the metrics that we're viewing around the nation because of, uh, the factors that you mentioned there. So I wanted to ask you a couple of questions. What's going on in the portfolio? Tell us about your portfolio of office and industrial, uh, buildings around the United States, and then give us a snapshot of how it's performing. I mentioned that, you know, even pre middle of the pandemic right now, a lot of, uh, companies are experiencing a decrease in tenants paying rent because they've been shut. Uh, but what's going on in your portfolio? Uh, give us a quick snapshot, please.
00:05:49 Yeah, it was interesting. I was on a, a call today. We were talking with the brokerage group about a large, uh, national portfolio that was going on. We had had a portfolio that we had pulled off the market, and they said that that group had made a, a conscious decision to work with tenants on that had asked for relief because at the beginning of covid, a lot of our tenants came to us and asked for relief. We have 900 tenants in our portfolio, and it's really pretty much all industrial. That's what we, we have. And so those tenants, you know, came to us and they asked for relief, and some people were opportunistic and some people were other. And we made a policy decision not to do any relief at all and say, when is due on the first, it's late on the second, and we're gonna issue a default letter the next day.
00:06:31 And we, we really, that's what what our policy was. This group, this national group that, that was out there doing that, they had decided to work with their tenants and, and they ended up about 10 to 12% either workouts or not collections. So fairly high industrial market, the, the operators and what, what this, this national group said, this national brokerage group said, says, the operators that really focused on collections and didn't necessarily cave into every tenant request or demand had high much higher collection rates, 95% plus. We personally have experienced 99% in April, 99% in May, and 98 going to 99% in June. So we really collected all of our rents and we didn't work it out. We had to issue some default letters. Almost all of our tenants were operating were able to operate throughout covid because their businesses in some fashion were essential.
00:07:24 Right, right. And what about, uh, vacancies or on the other hand, occupancies? Uh, so if you've had 99% rent collections, uh, throughout your occupied space, how have occupancies been impacted over the last, uh, 90 days?
00:07:41 What I would say is the beginning of covid, uh, leasing velocity went down, but over the last 30 days, we've actually signed quite a few leases. We have a couple new developments, uh, that we're, we have several active developments throughout the United States, and we've been getting leasing done, and it's been at the rates at or above rates that we were pre covid. So we're, we haven't seen a, a disruption in the rates and really a disruption in the lease. We got a lot of renewals done throughout covid, uh, and we continue to get renewals done. So we're our portfolio's 95% plus LE lease, and it, it was pre covid, it is post covid. And if anything, I I, I would venture to guess that we might even be slightly up from where we were.
00:08:24 Wow. Yeah, I'll bet You're, uh, quite, uh, happy that you guys are in industrial, you know, those are, uh, outstanding.
00:08:31 We're, we're
00:08:32 Outstanding metrics and that points to the future. Scott, where do you and, uh, your team at Brennan see opportunities, uh, has, has your investment thesis altered? Is it the same or is it dramatically it changed at all?
00:08:48 What, what I would say is, you know, w we, we've been, you know, we might be in a recessionary environment now. I think technically we are mm-hmm. <affirmative>, so, so we were net acquirers of certain types of product. Uh, we were still working on development deals. We were working on single tenant net lease, and we've really focused a lot on corporate real estate over the last few months. And we've actually had a corporate real estate initiative that we've
00:09:12 Announced. I agree with you. I think there's a major opportunity there. Good luck with that new, uh, initiative. I know it's, it's not new to you guys in terms of your expertise, but a very formal, uh, initiative there. So that's exciting. Well, Scott, thank you so much for joining us on StreetBeats today. A lot of the points that you have made are, are educational and really helpful and understand what's going on in the industrial market today, uh, and where some of the opportunities lie. Are there any closing points you'd like to make for the audience today?
00:09:42 So, so yes, Darren, uh, you know, one of the things that I would definitely wanna mention, make sure everyone knows is that we've been talking with CrowdStreet over the last few months about finding some opportunities to put in front of you and your investors. And so we expect to have hopefully something soon that we can work on. And, and we, we have a lot of different opportunities. We're, we're trying to beef up our pipeline and, and try to find something that CrowdStreet and Burn Investment Group can put out to investors that they would, uh, be very happy with.
00:10:12 Well, that would be most welcome. Uh, we've always admire you and the team at Brennan and have seen you execute on a number of, uh, transactions, quite a few transactions over the last five plus years. And, uh, welcome that opportunity, Scott. So thanks again for joining us. Uh, uh, Liz Gentlemen again, uh, Scott and Gibbon, uh, CIO at Brennan Investment Group in Chicago, Illinois. Scott, look forward to talking to you again soon. Thank
00:10:40 You.