How Small-Bay Industrial Delivers Higher Returns Per Square Foot

Jonathan Orr (00:00)

I would say absolutely. think that they are from a development standpoint, they’re underwriting, you know, to, brag a little bit better than a lot of ground up multifamily is nowadays being involved on the consulting side. see a lot of multifamily development working with other developers, you know, trying to find them financing. the, the point that I’ve seen them struggle with is they have to build to scale to get these things to pencil.

Dylan Silver (01:58)

Hey folks, welcome back to the show. Today’s guest, Jonathan Orr out of Boise, Idaho is a developer and consultant with experience in multifamily and industrial. He’s focused on developing affordable flex spaces designed specifically for small business owners and entrepreneurs. As a consultant, his team specializes in securing financing and also financial feasibility analysis. You can find him at 365advisors.com. Jonathan, thanks for taking the time today.

Jonathan Orr (02:26)

Yeah, Dylan, I appreciate it.

Dylan Silver (02:29)

When we talk specifically about flex spaces, I think some people may not know immediately what that entails. What is considered a flex space?

Jonathan Orr (02:40)

Flexbase can be a very broad term. You have Flexbase Light Industrial, as a lot of people refer to it, that was built mostly in the 70s, maybe in the 80s, that was really tailored towards industrial users or non-retail users that were not doing any sort of heavy manufacturing. Obviously you have power plants and coal mines and…

⁓ sugar operations and heavy manufacturing where light industrial was a space that was developed for those that may be storing materials. They may be doing some light sales. ⁓ Back then was via catalog or direct business to business. So the light industrial space is essentially those that aren’t manufacturing petroleum and doing anything outside of that.

Dylan Silver (03:35)

So it really could encompass a wide number of services, right? When you’re looking at tenants specifically, is this something that comes into play? Are you almost like underwriting the tenants, if you will? is it less, I guess, stringent on that front when it comes to, I guess, vetting the tenants for these spaces?

Jonathan Orr (04:00)

Definitely looking at the tenant makeup is important because not from a leasing standpoint, but more from a regulation standpoint. When you are developing such as I do where we’re identifying a piece of dirt essentially and going from there, going through approvals ⁓ of site plans and building specs and, know, and hopefully making it to vertical construction.

The cities typically have requirements and specifications of what constitutes light industrial use. Again, they don’t want to have someone come in and be as the joke that we always say is, someone making plutonium in a light industrial space, just because it’s close to their house. ⁓ they’re looking for those that are not going to have any heavy contaminations there. ⁓ you know, there’s a lot of restrictions you’ll see with.

things such as welding, for

and that’s mostly because of the venting and pollution aspects of

So I don’t want to say that we’re underwriting the tenants for the light industrial. other difference is it’s much different than what you’ll see driving down the freeway maybe. And you’ll see the 150,000 square foot Amazon distribution center. We’re looking at multi-tenant spaces. ⁓

For example, our project in the Phoenix, Arizona market that we’re actively working on and, and now in the equity raising phase, that has a total of upwards of 95 different

for tenants. So we’re going to have a heavy mix of those that are entrepreneurs. We call it as they’ve outgrown their kitchen table business. ⁓ those that are selling online retail subcontractors that, you know, their wife is sick of them.

having the, uh, the work truck in the driveway, um, you know, seven days a week. So it, it’s yes, taking a look at the tenants is important, but it’s not the end all be all, you know, we’re just focusing on those that need a smaller space that maybe they don’t need 10,000 square feet. need, you know, 2,500 square feet.

Dylan Silver (07:01)

I would like to ask you specifically about underwriting these deals. I’ve heard from multifamily developers that it’s tough to get a multifamily ground up construction to pencil. But I’ve also heard that things may be different, very different potentially, in the industrial space. Are you seeing that as well, that maybe these industrial deals are underwriting for ground up construction more so than multifamily?

Jonathan Orr (07:27)

I would say absolutely. think that they are from a development standpoint, they’re underwriting, you know, to, brag a little bit better than a lot of ground up multifamily is nowadays being involved on the consulting side. see a lot of multifamily development working with other developers, you know, trying to find them financing. the, the point that I’ve seen them struggle with is they have to build to scale to get these things to pencil.

You know, it’s with just construction costs nowadays, it’s hard to build a 25 unit apartment complex. They need to build a 400 unit apartment complex. Whereas we on the industrial side, obviously, you know, it’s not multi-story. I don’t know of anyone that has been able to, to break the multi-story industrial space yet. So we’re looking at, you know, one level, much simpler construction. But with that, what.

we’re looking at is having the smaller spaces is we’re able to constitute a higher price per square foot. ⁓ Very similar to, and I don’t know if you or your ⁓ audience is familiar, a lot of multifamily developers are looking at developing more studios in new developments because it’s the same principle. You can charge roughly the same amount of rent ⁓ for a studio comparable to like a one bedroom.

but it’s a higher price per square foot for that unit. So we’re finding that our underwriting is very comfortable. We’re also looking at it for more long-term holds is our goal. Not to say that we want to adjust with what the capital markets are doing, but we find that it’s much easier, of course, with the right land price, because it all starts with the right price for the land, to be able to get these things to pencil correctly and be attractive investments.

Dylan Silver (09:20)

Is it easier to get it zoned and permitted for industrial versus multifamily? Is that going to be location specific?

Jonathan Orr (09:31)

It is, I would say in a general use easier, ⁓ because most of the time, like what we’re targeting when we’re looking at identifying potential project spaces is most of the time it’s already zoned under a light industrial or some sort of commercial zoning that allows the building type that we use. And that’s part of our due diligence, things like myself and maybe a partner of mine that we look at even

you know, making an offer on the

so, you know, it’s much easier to go from there if not having to necessarily do zone changes. And because we’re also looking at doing anywhere from two to four acres is our targeted land size. We’re not looking at doing a 25 acre, multifamily, space. So, you know, it’s the low hanging fruit that we’re looking for, ⁓ you could say, but with that being said, if there is a, maybe a

a variance that’s needed or even a potential zone change. The one thing that we’re finding is, you know, look, obviously multifamilies are very popular asset class to build and buy and invest in, but cities are very interested in business growth. They want to see businesses start in their communities, you know, not just for the tax revenue, but for the, you know, I guess the bragging rights of, hey, you know, we’re a very business healthy

city and municipality. So when we come in, we’re saying we don’t, we’re not looking for, you know, a storage unit space, you know, which is kind of comparable in a point to what we do, but we’re looking at small businesses. want people that are taking their wood turning business or maybe their hobby and they’re saying, Hey, maybe I can turn this into a business, you know, selling on Etsy or eBay or, you know, their own website or even to their local community.

Dylan Silver (12:02)

I don’t know how much ⁓ rents will drive ⁓ these deals in industrial, but I’m imagining, similar to multifamily, that you have projected rents in an area. But also, is there an element of this which is maybe harder to nail because there’s less data in industrial than say multifamily? Or is there enough data out there that you really have a really good eye on, hey, this is exactly what this will rent for?

Jonathan Orr (12:32)

No, that’s a great question. It is much more difficult than multifamily. ⁓ You’re looking at, and again, I want to separate what I’m doing versus the 150,000 square foot distribution center. ⁓ We’re looking at a product that where I’m based in Boise, Idaho and kind of the Western United States is not prevalent to the degree that other assets are. So we’re having to do a lot of research and

And speak with a lot of people in the industry, whether it be sales brokers, debt brokers, other owners, maybe throughout the country and seeing what they’re leasing for and renting for, trying to do a comparative analysis of, okay, this person is in St. Louis, Missouri, that has a similar product that they own. What are they charging and how is that the same or different than maybe a location we’re looking at? And one of the things that

we really do is we bring in third party feasibility groups to run basically rent analysis, demand analysis, to justify our numbers. Because we come in and we know what we need it to rent for, you know, looking at the market, but bringing in the third party to solidify that is very important.

Dylan Silver (13:54)

Now for folks who, let’s say themselves, are entrepreneurs, they’re small business owners, and they’re thinking, okay, I need some type of space. Currently, and this is again from my like thousand foot view outside looking in, they’ve got a number of options. They can go to some type of like.

co-working, can go you know buy an office you know maybe in some type of office park type of situation or they can do these these flex spaces. Is there like one avatar of a person who would go to a flex space versus you know some other type of small office space?

Jonathan Orr (14:33)

Yeah, I, I would say no, there’s really not. And I’ll give you an example, a, ⁓ you know, good partner of mine that is active and part of my general partnership for our Phoenix project right now did this exact model that we’re talking about in Las Vegas. His company still owns it to this day. And he, his tenant mix up. you look at the, his project is a little bit bigger. I believe it’s.

close to a hundred different tenants at any given time.

His tenant makeup is extremely fascinating where he has the people that are, I would say what you would normally think of those that are trying to have, you know, kind of small distribution areas, you know, because they need maybe a roll-up door with easy truck access, the subcontractors that, you know, can’t.

be hauling lumber or tools up, you maybe two or three flights of stairs in an office building. But at the same time, he has an accounting firm that was tired of renting the office space, paying for, you know, the, general facilities that you’ll come with an office, you know, the, lobby, the stuff like that. And they moved into a space that was habitable because, you know, we’re providing, you know, amenities that can.

Um, allow that that’s one of the differences that we’re doing. And he has, you know, as I said, an accounting firm, you know, a small guy that just wanted more, a more private space. Um, we also see that, um, really being impactful ever since actually 2020, you know, people were kind of afraid to go back into the five story office building. They wanted something that was their own private door, not having to walk down communal hallways or something. So.

Our flex space, you know, again, I’m not going to say that someone’s going to open a, um, you know, a retail shop because we don’t have drive by traffic. That’s not our, our main motivation, but we see anything from photographers, hobbyists, um, you know, people that have small, you know, kind of distribution sales, business to business, um, companies out there. So it’s a wide range of people that again, are just looking for a private space that is usable.

And I think that’s the main impact again is most light industrial that’s been built. If you go look at what is out there, light industrial typically means five or 10,000 square feet or more, know, for mid-size, you know, or, or growing companies, we target smaller spaces that even if you cut the rents in half for 10,000 square feet, if you rent 2000 square feet, that is maybe

two or three times the price per square foot, it’s still cheaper overall. And they’re able to utilize that space and

have, you know, 80 % just empty warehouse, let’s say.

Dylan Silver (18:11)

We are coming up on time here, Jonathan. Any new projects that you’re working on, and then as well, what’s the best way for folks to get in contact with your team?

Jonathan Orr (18:20)

Sure. Yeah, as I mentioned, we have an active project in the Phoenix, Arizona market that we’re entitled. We’re through our first round of construction drawings on, and we’re kind of looking for the remaining equity for that, either LP, common, co-GP type equity for that. We’re also identifying some early stage projects in Salt Lake City, Boise, where I live. So those are, we’re looking to keep the pipeline full and

be programmatic in our approach for development. The best way to reach out to me, you know, I’m on LinkedIn. It’s a heavy one that I use and have connections, Jonathan Orr, that’s O-R-R. You can look at ⁓ my website, which is 356advisors.com. That explains, you know, kind of the background. I’ve done retail development, multifamily, a lot of acquisition stuff. So kind of, you know, gives my varied background, but those are the two main

⁓ I think avenues and you can email me J or J O R R @356advisors.com.

Dylan Silver (19:31)

Jonathan, thanks for taking the time today. Thanks for coming on the show.