Phoenix, Arizona Industrial Update
Guest: Mark Cassell
Topics: Industrial retail, retail real estate
Chris Ressa 0:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
Welcome to Retail Retold everyone, today I’m joined by Mark Cassell. Mark is a partner at LevRose Commercial Real Estate. Excited for him to be here. Welcome to the show, Mark.
Mark Cassell 0:27
Yeah, thanks for having me, Chris. Definitely excited to hop on and obviously chat.
Excellent. Mark, why don’t you tell everybody a little bit more about who you are what you do?
Yeah, so obviously, partner over at LevRose, primarily working in the industrial space here in Arizona, our office is in Old Town Scottsdale. We just had our 30 year anniversary last year. And we’re about 30 or so brokers, five or six support staff as well. But, you know, really what I’m doing on a day to day basis is working on industrial sales. Whether it’s investment sales or owner user. I did start out actually in retail, oddly enough. When I first graduated, when I graduated college in 2015.
Got my license, was an intern at Sperry Van Ness, went to Lesbos right after I graduated. And then worked on a retail team doing leasing, learning a little bit more about investment sales, really liked the underwriting side of investment sales and diving into the numbers, the leases, and really all those details. It was really fascinating. About three, four years ago, started looking at industrial in Phoenix, and really liked the growth. And that sector as well.
The owners, I felt were a little bit different. It’s there’s I’m sure you know this as well, where you’re noticing this with, there’s a different personality trait that’s associated with each asset class like retail, I feel like is more high fashion. I mean, you could see.
And that really seems to be the case for industrial, it’s obviously extremely blue collar, with the groups that you’re dealing with whether they’re manufacturers, logistics, that’s really a lot of the groups and individuals that we’re working with on a day to day basis, especially here in Arizona, which is honestly awesome.
But yeah, so let’s start there. And this is one of the reasons that I thought was interesting is, it doesn’t matter what side of commercial real estate you’re on, whether you’re a broker, whether you’re a landlord or a tenant. I think few people move from asset class to asset class. There are, you know, I think the asset management world does this a lot from the institutional asset managers or the money managers that invest in real estate they do.
But the ones that are touching and feeling real estate, whether it’s like an operator of the property, a, i.e. a landlord, a broker or tenant, they pretty much stay in their lane of asset classes. And you really young, the asset classes. So talk to us a little bit about why you made a transition because I love retail, but you move to industrial, and you Yeah, let’s start that.
Yeah, it really started, you know, there was a broker that brought me in on a listing that was an investment sale, multi tenant industrial building, down here in Chandler, one of the suburbs of Phoenix. And it was right by this airport, Chandler Municipal Airport and like, Okay, what is this? Like? Yeah, I’ll help you out. You know, I know how to underwrite buildings, no problem, and we worked it out on that sense.
That was my first contact of, I guess dipping my toes in to industrial. It was interesting, because one of the tenants in the building, it’s a flight school, ended up getting my pilot’s license through them in a really good, you know, relationship and rapport with our sellers. Really good friends, and really just kind of had this same repeat business, you know, talking to the neighbors and then kind of grew out from there.
From Chandler to Mesa, Gilbert. I don’t know if you know, the geography of Phoenix. I do. Yeah. They’re all neighboring cities and, you know, getting to know that same culture throughout. Just prospecting, seeing if these groups Want to acquire this building? You know, it wasn’t just kind of a blue moon scenario, if you will, but it was a lot more repeat kind of vibing with my personality, I think a little bit more so as well.
So when you say vibing with your personality, go, we’ll take me a little deeper there. How does industrial vibe with your personality more than retail?
I love the well, it was the from the first experience like I had with this building down in Chandler. You’ve got the airplanes flying above you, it’s just the noise around it. It’s kind of the, you know, getting down to business sense of it. I love walking through manufacturing facilities, whether it’s like a tile manufacturing building, and there’s just dust everywhere, just seeing that nitty gritty of like, how things are made.
I think, I don’t know, if you ever remember, like a show on the Discovery Channel, maybe like 1015 years ago called, like, how it’s made sure for watching that it was the same thing. You know, I’m having kind of as an astrologer, you know, walking through these buildings, seeing everything is, you know, really being made for the backbone of a lot of industries, especially here in Arizona.
Excellent. Um, I think when I think about it, I think you mentioned a point that was interesting, which is, you know, the dust the noise, I think one of the things in industrial that’s a little bit different is the physical plant, I think, is much more of a it’s the physical plan is of higher level importance, it feels then the dirt now to both sides, retailed the dirts important retail, the physical plant support, did industrial, the physical plants are boring, so is the dirt and the location.
But in retail, sometimes it’s like, I’d want this specific end cap, I don’t want to be one space over. And, you know, they go in with a little bit more like, the physical plant today doesn’t matter, because we’ll make it what we want to make it and, and industrial like that, you know, will the ceiling heights or number of bay doors not there, we’ll move on to the next site.
Whereas that’s in retail, like, okay, those things matter, right, like the the front page or the dock, but in retail, there’s a lot like, we’ll change the configuration to make that work. Because the location and the actual dirt underneath is a lot of times of higher level importance than necessarily, you know, you know, the placement of the door and in manufacturing or something like that.
The whole it doesn’t matter if, if that ceiling height is not the right ceiling height, because we can’t get the number of shelves we can’t afford to send and then it’s over.
Yeah, yeah, like practical in that sense.
Yeah. Like you’ll, you’ll, you know, you hear an industrial like, I got this great building. And in retail, like, a great building usually is like the actual real estate and the other co tendency. It’s rarely like in there are some uses where ceiling heights matter and retail, but it’s rarely like oh my god, the ceiling heights and the number of bay doors. Correct. Right.
I mean, if you’re looking at the demographics, you’re looking at the traffic counts, exactly. You’re seeing with the CO tendency, it’s like, who’s going to help them be as successful as possible, which is super interesting with retail I think with industrial just struck a chord with me more so I’m like, this is really cool.
It’s it’s a sector that I never really like walked through, got to know and just ended up loving it. Which is kind of weird to say about brick and mortar real estate, but you know, I didn’t know we’re there.
Yeah. The Was it hard after establishing relationships and credibility in the retail space? Like, did you feel like you were starting over as you were going into industrial?
I’m 100%. And I still had, you know, a lot of carryover and I saw a few carryover deals and relationships with retail. The interesting thing is a lot of investors especially here in Phoenix, that He had a pretty good retail presence. And I’m talking about more on the private capital side, we’re looking to chase industrial deals.
So it was kind of the perfect churning the growth of that market. And I really, I cared more about working on things that I really enjoyed doing, more so than, you know, just chasing the growth of industrial, which, obviously, it’s been explosive in Phoenix. But, you know, that’s just it being a benefactor of it as well.
Got it? And what are some other like? key differences, that somebody who’s in retail, which is a lot of the people that listen to this, yeah, might not consider. On the industrial side, what’s like a key difference of working in industrial versus retail?
Yeah, the first thing right off the bat was swapping all the annual lease rates to monthly lease rates, which was, I mean, it wasn’t like a huge learning curve, it was just like, what I’m used to. Trying to think a lot of industrial leases here in Phoenix, have been switching over from industrial gross to triple net. So that was a lot easier on the transition. On the underwriting side of things, trying to think, really just how useful the building is to what you were saying earlier.
Yeah, looks really good. What can you do with this? You know, there was a pretty there’s obviously a pretty big carryover with, you know, proximity to freeways. If you do have a good amount of employees, what are your nearby amenities? So it’s not a ton on the demographic side with that comparison, but I think, access to highways and having that infrastructure setup is really key.
Yeah. You mentioned the monthly release rates, and when you say that the denomination you’re talking about is dollars per square foot.
Yeah. So it’ll be, you know, if it’s 12 bucks, but it’ll be a buck a foot.
So yeah, that reads it. It’s that so it’s just gonna say in retail, it’s like that in California. And I’ll never forget, we had a deal out there that we owned, and someone sent me, you know, an LOI and $2 a foot. I like I was ready to call the guy and go, What do you install? Are you serious? This is gonna serious. But turns out that was monthly lease rate. So that is super interesting. The I have seen a lot of like, oh, M’s that I’ve seen, you know, even nationally, the conversion of industrial from industrial gross to like triple net. Right. I’m curious. Are you seeing any fixed cam?
It’s situational. I think it depends on the age of the building. And really, what’s the ownership group? And what’s their profile? The thing is the biggest expense. I mean, I’m sure it’s the same thing with you guys is going to be property taxes. So I mean, but with common area maintenance. It’s not as management intensive as, as a retail building.
Got it? Okay. Yeah, we don’t have to, you don’t have consumers?
For sure. The other thing I would say that happens, and you touched on this in the very beginning, a key difference to me is there are a lot of owner users in industrial. And not that there’s not in retail, but it feels like much more in industrial, there’s owner users than there are in retail.
So and what I mean by that everybody is people who they own. They’re the tenant, they’re not a tenant, they’re buying the building, not as necessarily a real estate investment, but as their business investment, and they own the building. And they’re using the building. They’re not leasing now.
Yeah, that’s, that’s spot on. And it’s interesting, you know, that transition. You know, it’s weird, because it’s their business is home, essentially. And it’s funny, like, sometimes if you’ve got a business that’s been there for 20 years, it’s still a successful business.
And you’ve seen the appreciation of the real estate, sometimes that real estate is going to be worth more than the business. I feel like it’s more rare that the business is worth more than the real estate, unless you’ve got you know, 100,000 square foot plus facilities, but for the 50,000 and under that seems to be more so the case where the real estate is gonna be worth more than the business.
Interesting. It depends on the business but yeah, depends on the business
but sure, just my observation.
Understood. Oh, Ah, so let’s talk about so, you know, I think Phoenix, Arizona is one of these, like, hot markets, you’ve had, you know, migration to the state. And I think, you know, we’ve heard a lot about like, chip manufacturers and my, I have a, I have a four year old son, his is a boxing coach. So my forte, yes, everybody, my four year old son is in boxing.
And his boxing coach is a was in the, in the union in New York, and in construction, and calls me one day and he goes, you know, got postponed lessons or find your new coach, what the heck? Did I do something? What did I do? Did I did I offend you somehow or something? You think it’d be too hard on my son? What’s going on? He’s like, No, in my, you know, we had we had a huge job come up and had to take the opportunity. And they’re shipping me to Arizona to build a chip manufacturing facility.
Oh, no way. Why?
I said, I said, Whoa, he’s like, I’ll be back, like, once a month on the weekends. And I’m like, I’m trying to do a little bit more than that. But anyway. Yeah, I think, you know, that’s just you know, and that’s like, that was a, you know, a personal story for me that of what’s going on in Arizona. So tell me, what is the industrial market? Like in Arizona?
What are you seeing out there? You know, because no matter what, you’ve you hear we still, you know, I think there’s still interesting things going on in Arizona, notwithstanding, we have this interest rate world we’re living in, you know, and headline news around the dirty word of recession. So give us some color of what’s going on in Arizona from industrial real estate perspective.
Yeah, for industrial just kind of a high level, I’ll touch on TSMC in a minute, just because it is super fascinating. But that’s a cool story, too. But with Arizona vacancy rates are extremely low, definitely, much lower than retail is mainly because there are so many buildings, especially in a small shop space size, where there just isn’t enough inventory out there. I want to say, depending on the sub market, it’s, you know, anywhere from maybe one to 5%.
At the highest. I mean, it’s pretty tight for Arizona. Deer Valley, which is not too far from TSM C’s facility is probably the tightest sub market for industrial here, metro Phoenix. There’s not a lot of turnover, price per square foot has really been skyrocketing from you know, at 150 A few years ago, inching towards 300 bucks a foot, which is pretty insane for industrial.
For the other sub markets, I mean, there’s just a lot of growth, if you go towards the southeast valley, towards Mesa and the Mesa gateway airport. What’s interesting about that part of the southeast valley with skybridge, is there’s a lot of 100,000 square foot plus facilities that are getting developed. And they’re mainly logistics based. And obviously, the airport’s seeing a ton of growth with additional hangars, as well.
There’s so many airports in Phoenix, mainly because it was a lot of training facilities for World War Two, oddly enough, which is something that’s, you know, interesting as well. But it seems like there’s still no slowing down. I think with our sale leasebacks for the owner users that want to capitalize on just the high prices. You know, we’re starting to see that bridge that gap a little bit as well, just because of the interest rate environment that we just, you know, you just touched on.
So, a couple questions. One, are you seeing new development? How about spec development?
Yes, definitely a good amount of spec development, it’s easily the most expensive. There’s a lot of development mainly for the logistics space from what I’m seeing, not a ton of yard space, which is, I would say probably more in demand based on the groups that I’m talking to.
Where you’re seeing those higher price per square foot, it’s at like 252, sometimes even 300 bucks a square foot for these brand new tilt up buildings which is not. That’s, I think, just to get some of these out of the ground, it’s like 180 a foot. But the question is, you know, how are these tenants going to be able to pay it? And what’s going to happen the next six to 12 months? I think for those larger projects, it’ll be a little bit more interesting to figure that out.
So what are you seeing from? So when we’re talking 250 $300 A foot you’re talking the cost of purchase it? What are you seeing, like, you see the OEMs? What’s like a lease rate on those buildings?
Yeah, it’ll be anywhere from hitting on the sub market, probably, I’m gonna go back to annual so like 12 to be 18 bucks a square foot. And I remember talking one of my buddies who developed an Amazon building, and it was unheard of to hear like 14 bucks a square foot triple net for like a 200,000 square foot building. Great. That was a few years ago. But that’s just kind of paving the way for the madness. That was ahead, if you will.
Got it. And what, what are these investors who were buying? In? What size buildings? Are they looking for? What’s like hot and why?
Yeah, if you’re looking for more logistics, you’re going to be out towards Mesa gateway. And that’s mainly due to having the access to that airport. It’s grown a lot down there. And there’s a lot of incentives from the city of Mesa, the west side of town, Glendale, Peoria. Along the loop through a three corridor, it’s a lot of logistics as well, mainly because it’s cheaper to store the goods here and then ship it to California, as opposed to having it in Inland Empire.
For your actual like manufacturing, there’s gonna be like in the older parts of the city, south of Sky Harbor Airport, in Phoenix. And it’s interesting with Gilbert, Chandler and Mesa, there’s still a lot of industries that are focused on aerospace. Northrop Grumman, is a really big presence out here. Data.
And so is there like, as a broker is there like a sweet spot size range where like, Oh, my God, this size range, this is going to fly off the handle,
I would say five to 40,000 square feet. It’s extremely hard.
And have, as you know, we’ve obviously seen this extreme interest rate movement, has it slowed down investor demand?
I would say, with interest rates creeping up, you know, the thing that we’ve got to do, on our end, as brokers is helped bridge that gap with pricing, you know, on some of our deals where we had out there, that were a little bit too aggressive, obviously, trying to get that nice 1031 Exchange buyer, but a few days left on their ID, period. And now we’re starting to see the rates creep up, we’ve got to get a little bit more realistic.
Now we’re finally seeing that gap, get bridge where sellers are, you know, coming to terms with what’s going on on the interest rate environment, the demand is still there. There’s a lot of activity, like it’s been, I was talking with a lender the other day, about just how busy we’ve been up until Christmas up until New Year’s and even going into this year with just new deals and how to put things together as well.
So if I’m reading the tea leaves, the answer is investor demand is there. It’s pricing exercise, and you feel like you’re, you know, Phoenix is turning the corner where sellers are coming around to the new market conditions and what interest rates are doing the processing? Correct. Got it. Mark, what else haven’t we talked about that we should be talking about? About what’s going on over there?
Yeah, so we got to talk about TSMC obviously, they took your, your kids boxing coach, so. So with TSMC, it’s Taiwan Semiconductor. It was an initial, like $12 billion investment, it’s going to be the biggest building in the state of Arizona. And now they just increased it to like 40 billion. It’s gonna bring about 12,000 jobs. And I believe that includes or it actually doesn’t include all the additional employees, they’re gonna be servicing TSMC and those businesses that are supporting them, too.
so. Got it. Yeah. And so where is that?
Yeah, so that’s actually gonna be in North Phoenix. If you’re, let’s say you land at Sky Harbor. Are you going to take the i 17? Go directly north, probably about 4045 minutes past the deer valley airport. And it’s right. Well, directly south of like anthem on the west side of the freeway. If you’re trying to go up north on a ski trip, it’s going to be to your left, so you can’t.
And how big is the building?
What is it a million square feet?
Yeah, it’s something like that. And they said, it’s going to take a long time to build this thing, right.
2024 is estimated completion.
Got it? Well, fascinating. Fascinating stuff. I couldn’t believe that. This is what was going on. But yeah, this is the word. This is how I found out about the chip the chip plant. My son’s boxing coach. Well, listen, I want to take us to the last part of the show. I got three questions for you. Are you ready?
Yeah, far away.
All right. Question one. What extinct retailer Do you wish would come back from the dead?
Alright, question two. What is the last item over $20 You bought in a store?
Does it include restaurants or no?
I’ll let you answer how you want to answer.
Okay, so I went to Kai up for lunch today. And I was like 21 and change whatever it is. It’s fancy Tula. Yeah.
Let last question. If you and I were shopping at Target, and I lost you would I would I find you.
It is too easy. The Lego aisle, Lego aisle is okay. Yeah. All right. No life, it would be in the home section. But yeah, if I’m escaping off, I’m looking at that stuff.
Fantastic. Mark. This has been great. Thanks so much for talking to us about your transition from retail and industrial what’s going on in Phoenix. Really appreciate the time. Good luck to you, man.
Thank you. Appreciate it. Thanks for having me on. Thank you.
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