Rexford Industrial Co-CEO Howard Schwimmer On The Industrial Market And What's Next
West Los Angeles-based Rexford Industrial, a publicly traded real estate investment trust that focuses on industrial products only in the infill locations in Southern California, closed 2018 with nearly half a billion dollars in acquisitions.
Rexford currently owns 21.2M SF of industrial properties from National City in San Diego to Oxnard in Ventura County. And the company is not done with acquisitions and growth, Rexford co-CEO Howard Schwimmer said.
Bisnow spoke with Schwimmer at the end of 2018 about the company's strong year, what is driving the 1.8B SF Southern California infill industrial market and what is next for the company in 2019 and beyond.
Bisnow: Recap Rexford's 2018 and discuss the company's investment strategy in the Southern California infill market.
Schwimmer: For Rexford it was a very good year. We’re not done. Year to date we’ve closed $470M in acquisitions in 26 separate transactions. Our acquisitions ranged from as small as 40K SF buildings to as large as a 700K SF building in Commerce.
The infill markets are at this point all of the industrial areas in Southern California. Infill meaning there is no land availability … Rexford’s business model is to buy existing industrial buildings and create additional value within those facilities. We’ll buy a building that [is] under-rented and undermanaged and bring our expertise into buying properties that we cure functional obsolescence and modernize and reintroduce to the market as a quality product.
Bisnow: What is driving the Southern California industrial market right now?
Schwimmer: The SoCal market from an industrial standpoint is as diverse of a market as you’ll find in the country in terms of tenant demand and uses. We have the lowest vacancy rates in the country. The infill market is 2% vacant. In essence we are at a 100% occupancy. Layering on top of the typical demand from industrial users, you have this transition to online sales whether it’s business to consumer or business to business.
E-commerce is a lot different. What’s different is now we have incremental demand [from businesses that are] seeking to locate in the infill markets related to the e-commerce business, which really means [that they want to] increase movement of their goods and shorten delivery time frames.
From their PNL [profit and loss statements] transportation costs are substantially higher than rent and transportation costs have been growing higher than rent. So there is incremental demand from users to lower their transportation costs and locate facilities closer to the population concentration. These are the infill markets.
Bisnow: You've been in the business for a long time. How has the industrial sector changed in the past 20 years?
Schwimmer: I've been in the business for more than 35 years. Well, industrial has always been the sleepy, steady asset class that had strong occupancy and very moderate rent growth. What's changed is that we've seen industrial have stronger occupancy and accelerating rent growth especially in the past five years. It's really a dramatic change. A lot of the rent growth is starting to act like what people see in the retail sector.
People are changing their supply chain and moving the sale of their product online. It's creating incremental demand.
Bisnow: What are the biggest challenges Rexford is facing right now?
Schwimmer: Labor availability ... The real estate business is fully employed. We're looking for construction managers, property managers, highly skilled acquisition people, the market is pretty tough to hire in right now. You hear that in all businesses.
Bisnow: You mentioned that you've been in the industry for more than 30 years. What are some of the lessons you've learned in your industry that you can pass on to our readers?
Schwimmer: I think the most valuable lesson is don't buy something for what it might deliver to you down the road, think more in terms of creating value and underwriting based on what the market will deliver to you today.
Some people might think the yield is so low today, [they say], "Just think in five years how much higher the rent will be." That is usually when you start getting in trouble because real estate generally cycles and resets itself.
Bisnow: Any regrets in your career?
Schwimmer: No. I think I wished I had the ability to buy 10 times what I did in the bottom of the last recession. But I think we were one of the few to raise capital and buy during the recession. It's been a good run.
Bisnow: A lot of people are saying a recession is coming. Some say in a couple of years there will be some sort of market correction. What are you seeing?
Schwimmer: The fundamentals are still very strong in the infill markets. We don't look into 2019 and see a lot of risks in terms of our ability to perform. Although there are a lot of risks out there in the world. You have the stock market bouncing all over the place, tariffs. ... The biggest risk right now in industrial real estate is really the increasing amount of tariffs if the U.S. and China aren't able to resolve that. We'll certainly feel some sort of impact if we go into a 25% tariff situation in the first quarter.
It's hard to look past 2019. We're in the 10th year of a growing economy where the economy typically cycles every seven years. We're operating with caution.
I can tell you from a corporate strategy, we continue to lower the amount of debt that we have on our assets. We ended the third quarter based on our stock price being 15% leveraged, which is extraordinarily low. Our philosophy is, "No one ever got in trouble in a downturn having too little debt on their property."