The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Hello and welcome
back to another episode of

the AAA storage podcast today.

Yet again, I have Paul Bennett.

Thank you so much for joining us.

We are going to be talking about
flex and office space for some

investing projects that you guys have.

And so I know we've talked a lot about.

Self storage and real estate and
investing in general, but there is

this specific segment that you guys
Do invest in and work in and so

I wanted to hear more about that.

Why why invest in this space?

Why you know, does it diversify your
portfolio or how do you think through

it from your perspective as well as
the perspective of the investors?

So Paul, I'll let you take it away, but
thanks so much for your insight as always

Paul Bennett: Yeah, Brandon,
always great to have time with you.

And, um, I promise we've got some things
planned in some future episodes where

we're going to invite some other folks
in so you don't have to everybody didn't

have to listen to me the whole time.

But, yeah, so I'm glad you brought up
the office industrial flex product.

It's it's an important part of what
we do for a variety of reasons.

first to define it for people.

you've all everybody seen it.

but you may not know the, the
term that's used to refer to it.

Office industrial flex refers
to, to commercial real estate,

typically a building that's
subdivided into multiple bays.

that has in each of the bays 1, 000 to
2, 000 square feet of office space in

the front and another 2 or 3, 000 square
feet of warehouse space in the back.

So it's the kind of real estate
where you'd see a plumbing contractor

or a general contractor or a last
mile logistics company, that has

an office function up front but
needs warehouse space in the back.

very, very popular.

type of real estate, particularly in
today's markets where you've got all of

the internet commerce, and the last mile
logistics activity that has been added

to the traditional users of this space.

Like I said, an HVAC or plumbing
contractor, a pest control company.

all those types of users are the people
that you find in this real estate.

the product that we build.

in office industrial flex looks a lot
like a storage building on steroids.

We don't build a class A product that's
tilt up concrete or brick exterior, it

is essentially a slab on grade concrete.

building or floor with a metal
building the buildings are

typically about 20, 000 square feet.

We divided into multiple bays, and
then finish out the office in the front

and the warehouse space in the back.

but it's a, it's a fantastic
product and we started building

this product about 11 years ago.

And if you think about it, it's actually
very synergistic with self storage.

First of all, these kinds of facilities
are often found in the same part

of town as you'd see a self storage
facility, sort of on the outskirts.

in areas that are often a mix of
commercial and residential, types

of real estate in the same area.

secondly, believe it or not, we
have a lot of customer synergy

between the two products.

we have, office industrial flex products.

tenants that actually need
additional storage space and so

they rent storage facilities.

in the storage world, we have a lot of
people that run their business out of

a storage facility and as that business
grows, ultimately they outgrow the

storage facility and they can move into an
office industrial flex type of situation.

So what we started to do is we found that
as we looked at markets that we really

liked and we found larger tracts of land.

we were able to buy, instead of, you
know, four to six acres for a self

storage site, we might buy 12 to, 18
acres, and divide it and do an office

industrial flex business park on one
part and self storage on the other.

that allowed us to get a
little bit better land cost.

because buying a larger track of land,
you typically pay a little bit less per

square foot than you do a smaller track.

And then secondly, there's some synergies
and cost savings in the site development

and the utility development, that, is an
initial part of the development process.

So, it sort of fit well with self storage.

11 years ago, and we've had
tremendous success over those

11 years building projects.

that generate fantastic cash
flow and ultimately have real

value in the marketplace.

Brandon Giella: Very cool.

Okay.

So what I'm understanding is
there's still storage has been

kind of the prime vehicle, but then
there's this other one that kind of

really compliments it really well.

Why, why is that helpful for an investor?

If you think like, you know, folks
listening to the show, like, okay, good.

How does that help them in their
portfolio or the funds portfolio?

Or how does that kind of work out?

Paul Bennett: we've talked about it
in some of our earlier conversations,

but diversification as a risk
mitigation strategy is always

important in any investment, right?

what this gives us is that the storage
projects that we build, particularly in

the fund environment where a fund owns
multiple projects, properties, gives you

diversification across different markets,
and that's a very important aspect.

Secondly, when we add a second property
type to the fund, it gives you diversity

across property types and markets.

So it really is adding an
element of diversity, the

office industrial flex tenants.

It's a B to B environment.

So we're renting to businesses
in the storage industry.

Most of the time we're renting
to individuals, consumers.

So it's a B to C environment.

and they're disconnected, which gives
you some diversity in terms of that

customer base and type of customer
base and what might influence levels

of activity in one versus the other.

So it just adds some diversity.

and it's very similar to the storage
product, the same crews that erect

our self storage facilities, do the
construction on the office industrial

flex product because it's essentially,
like I said, it's slab on grade.

as a foundation and then a metal building,
the Office Industrial Flex product simply

has a 30 foot clear span ceiling inside,
which obviously storage facilities don't.

and so it's a very
similar product to build.

We were able to leverage all the
knowledge and experience we have

building that type of product into
the Office Industrial Flex product.

So it's been a really efficient.

and great add to what we do.

The current fund is about 60
percent of the equity is allocated,

to the self storage space.

And the other 40 percent is allocated
into the office industrial flex

product that we're talking about now.

Brandon Giella: Yeah.

Okay.

Is there any kind of, extra due diligence
or anything else in the process that's

helpful for investors to know, like
if they are wanting to invest in this

space or invest in this space with
you guys, that there's a little bit

different nuance as far as, you know,

Paul Bennett: what?

It's a different end customer.

So the due diligence process that we've
talked about the fact that in storage we

look at square feet, that are available
of self storage in one, three, and

five mile circles around the site.

Because storage is a hyper local product.

and you're generally going to
get a customer that lives within

five miles of your facility.

the Office Industrial Flex
product is a different tenant.

it is not quite as hyper local, but you
have to look at the supply and demand for

that type of real estate in the market.

as part of the due diligence when we're
looking at a particular site to make sure

the demand is there for that product.

so it's not, it is different due
diligence simply because it's a different

customer base in a different market.

But in terms of, anything else, I don't
know that it's tremendously different.

Brandon Giella: What kind of,
future outlook do you guys have

on this product or in this market?

So is there any kind of trends or
maybe opportunities that you're

seeing in the next 12 months, five
years, 10 years, anything like that,

that you guys are paying attention
to that investors should know?

Paul Bennett: what got us intrigued
with the project with the product?

10 years ago, more than 10 years
ago, was the level of demand.

if you look at the data across the country
today, office industrial flex shows about

a 4 percent vacancy rate, so 96 percent
occupied and If you talk to just about

anybody, in fact, I've had people that
really aren't in the real estate business,

but just sort of pay attention to what's
going on business wise in their community.

In a lot of communities today,
you can't go find Office

Industrial Flex space to lease.

And it is that, traditional tenant
base that we've talked about, and in

addition to that, now all the last
mile logistics and internet based

businesses it's been really funny lately.

We have a project in Texas,
just outside Austin right now.

And all of a sudden, I don't think
we'd ever rented to this type of tenant

before, but we have, we leased out
a whole 20,000 square foot building

to a pickleball club or facility.

another 15,000 square foot building
to a batting cage operator.

A franchise.

so we've got this weird
mix in that project.

We've got this weird mix of people
that are providing consumer sort of

oriented services and then businesses
that are just using as their base

of operations and their hub to
support their field operations.

it's a very diverse tenant base.

occupancy rates across the
country are extraordinarily low.

And the other dynamic that's very
similar to self storage, and is

again what sort of attracted us to
this product originally, is that,

we talked about the yield on cost.

In self storage being at around nine
and a half percent, our yield on

cost in our office industrial flex
product is typically 100 basis points

higher than that, somewhere around
10 and a half, 10 and three quarters.

and so the economic efficiency and value
creation that you get is very similar.

The one difference with office
industrial flex is that cap rates

for that product are about 100
basis points higher than they are.

in self storage.

but you wind up with the
same development spread.

The difference between the yield on
cost and the market cap rates for that

product both represent about a three,
three and a half percent spread, which

again, if you've listened to any of the
earlier episodes, that's where the value

gets created in the development process.

So it has a financial dynamics
that are similar to storage.

It has locations that make it
very synergistic with storage.

There's actually some customer synergy.

and it's a very efficient, effective
way to create value in the marketplace.

So that's sort of how we
wound up in that business.

Brandon Giella: Amazing.

Well, you're talking about it.

It's like, man, maybe it doesn't need
to be 60 40 is to be 30, you know,

of getting more of the flex space.

It sounds amazing.

Paul Bennett: Yeah, the current
fund we have a total of five sites.

Three of the sites are a combination of
self storage and office industrial flex.

Two of them are self storage only.

So we have a total of five self storage
projects and three office industrial

flex projects in the current fund.

And I think for now, we'll probably keep
that, that sort of mix that 60 40 split.

the way the market feels right
now and the data is telling

us that that's a good balance.

And I think fund two will
probably stay in that same range.

Brandon Giella: I like that.

Amazing.

So, okay.

Tell me anything else.

That folks should know about this is
just sort of a blanket statement I know

you've been thinking about it for a
while and have been doing this for a long

Paul Bennett: I'm kind of comparing
the two product types because we've

talked so much about self storage
in the last several episodes.

I think the other thing to know
about the difference in the

product projects and product.

that we're building in office industrial
flex is that, we are leases with

tenants in the office industrial flex
space are generally somewhere in the

neighborhood of three to five years.

And typically have a 2 percent escalator,
maybe a 3 percent escalator year over

year in terms of the rental rates.

They are also triple net leases,
which means the tenants pay all

taxes, insurance, and utilities,
and common area maintenance.

the dynamic of a longer term lease
and a triple net lease makes the cash

flows from the Office Industrial Flex
product more stable and more predictable

than you typically would get in self
storage simply because you basically

have a month to month lease with a self
storage customer and, you know, the

expenses in storage aren't great, but
they're all absorbed, by the operator,

not the tenants don't pay any portion
of the operating costs of the property.

It just balances really well, the
two products together, and we do

separate them when we build both
on the same site because we know

ultimately one buyer is not going to
probably want both property types.

They're either focused on self storage
or they're focused on industrial flex,

so we set the property up from day one
so that we can sell those two, projects

separately even though they were
originally on the same track of land.

Brandon Giella: I live
here in Fort Worth, Texas.

And so when I'm driving around DFW, I
feel like I see a lot of these kinds

of properties, especially in some
of those logistics hubs that you're

talking about, kind of this, like
you see the offices up front and then

these huge giant warehouses afterwards.

I've always wondered, you know, where
those are, I guess, where they come

from, who's in that kind of spaces.

Paul Bennett: Yeah.

And those may be logistics oriented
just because they're near the airport.

Always hard to know.

But you know, if you wonder
if you've probably have it,

it would be a weird thought.

But if you've ever stopped and wondered
when that When that pest control guy

left your house, where did he go?

Um, or when the plumber that you called
because you had a leaky toilet, where

did, when he left you and went back
to the office, where was the office?

Nine out of ten times, it's a small
business park somewhere within

ten or twelve miles of your house,
that is office industrial flex.

Brandon Giella: Interesting.

Fascinating.

So my brother owns a, Christmas
decorating business and they have a big

truck and, they have a space like that.

They don't have an office, but they've got
a big, you know, it's kind of like a self

storage space, but it's in one of those
business parks like that you're talking

Paul Bennett: It's I mean, any of these
businesses that we've talked about

have to send out invoices, they have
to pay vendors, they have to schedule

things, they have to do all that.

And that all goes on
in the office portion.

And then any inventory.

supplies, stuff that they need
to execute what they do for

customers is back in the warehouse.

And in some instances, they'll pull
trucks into that warehouse space at the

end of the day so they can lock them
up, close the doors and lock them up.

Other times they park them in the back.

But, it's a great product type.

We've had tremendous success for.

In fact, I won't get the numbers
exactly right, but I think probably

from a pure our standpoint, The highest
return we ever delivered to investors

was an Office Industrial Flex project,
that we sold before we could even get

it leased up, and I think the IRR was
somewhere north of a thousand percent.

Brandon Giella: when you have
another one of those, give me a

Paul Bennett: call That doesn't,
yeah, that's not a common occurrence,

Brandon Giella: Yeah, of course.

Paul Bennett: it is, it's a
product type that does super well

and once you get them leased up.

the value is, the value that the market
we have, it's been really interesting.

I'm getting off topic here, but, with
rates where they've been and what's

been going on across the economy and
geopolitically over the last 18 months

or so, We've not seen as much activity
on the transaction side as we had in

the two or three years prior to that.

In the last three months, I'll bet
we have gotten no fewer than 15 or 18

inquiries from either people in the self
storage industry or looking for office

industrial flex properties to acquire.

So all of a sudden, the amount
of, activity from buyers has

increased significantly over
the last three or four months.

Brandon Giella: Interesting.

Okay, we are getting off topic and we have
two minutes, but I'm curious is, maybe

reshoring a part of that equation where
people are wanting to have more inventory

or more, space manufacturing space
maybe, or whatever it might be logistic

space here in the U S and not overseas.

Or is there anything like that
that might be playing a part or

what do you see as the cause?

Paul Bennett: I don't know that
it's related to reshoring, as much

as rates have sort of stabilized.

the direction of the United States from
a political standpoint, whether you

like it or not, is a little more clear.

and some of the geopolitical
issues outside the United States

have begun to settle down.

I think it really is more buyers are
just seeing a little more predictability

and certainty in the future.

And so they're being a
little bit more aggressive.

They were on the sidelines for
a while because of uncertainty.

Uncertainty is The biggest headwind,
you know, to investment activity.

And I think that uncertainty is sort
of beginning to clear, is probably

driving it more than anything else.

I will tell you that the
industrial category in general

has gotten a little bit overbuilt.

There was a tremendous amount of
activity and development activity in

the general industrial and data site
category over the last five years.

While it's seen occupancy rates
decline because of that new supply,

the office industrial flex market
has held steady at about 96 percent

occupancy across the country and their
markets there is tighter than that.

So it's actually outperformed.

This is really it's referred to a
small bay industrial and the small bay

industrial segment is outperforming the
general industrial segment at this point.

And we think that will continue all
the projections show that really

that demand is not backing off.

And so we think the future is bright
for the office industrial flex product.

Brandon Giella: I love hearing that.

Well, Paul, thank you so much
for taking some time today to

kind of walk us through that.

I know the first couple of episodes
of this podcast, we're talking through

some of the mechanics of, investing
in different products, like you say,

but, yeah, definitely excited to get
some more people on the show and more

insights into real estate in general.

And so I'm, encouraging listeners to
look forward to future episodes cause I

think they're going to be a lot of fun.

And so I'm glad to talk to you.

And I'm glad to keep
talking to you next episode.

Paul Bennett: Yeah, I look forward to it.

I think we're gonna have David Lutz,
who's our head of property management

on the storage side on the show here.

I think it'd be fun for people to get
a little bit of glimpse behind the

scenes and understand what the whole
process of leasing up a self storage

facility and managing it looks like.

So that's one of the things we're
definitely gonna do in the near future.

Brandon Giella: Okay.

Well, looking forward to that.

Paul, we'll see you next time.

Paul Bennett: great.