Updated JAG deal criteria

Industrial properties and new markets

If you know or me or know the story behind our company, you know we’ve been focused on value-add multifamily in the Jacksonville MSA. We’ve acquired 75 units with JAG which we currently own and operate. Prior to JAG but as a GP we also acquired 3 other properties totaling around 100 units or so. While I was at Toro we acquired 4,000 units across 6-7 states over 4.5 years and I oversaw Jacksonville which was 1,000 of those 4,000.

When I started JAG the thought process was focus on small to mid sized multifamily in Jacksonville to have a niche and competitive edge. We would self manage and oversee renovations and eventually scale into larger properties and other MSA’s close by.

Plans are great until they’re not.

We’ve spent the last 18 months not buying anything or really even coming close due to rising interest rates and insurance costs. Any deals we see are negative leverage day 1 and barely positive leverage with untrended yield on cost. I’m not that smart, but borrowing money to make less than what we’re paying in debt isn’t attractive to me. So our plans to need change, otherwise who knows how long we’ll wait.

The amount of transactions happening right now is way down from what it used to be. If I used to see 100 deals a year, now it’s probably 20 and most of those are a 5 minute analysis and a quick No. So we’re not going to stop looking at every multifamily deal in Jacksonville, but with the extra time, we’re going to be expanding our search so we see more opportunities.

So here’s what we’re adding on and why:

First, we’re expanding our multifamily search from Charleston, SC down the coast through to Daytona beach (I-95 corridor), over past Orlando to Lakeland, FL (I-4 corridor). We’re primarily looking in the major MSA’s but would potentially consider a smaller market for the right deal. So our search looks like this:

Primary JAG Market: Jacksonville, FL

Secondary JAG Market: Charleston, SC; Orlando, FL; Lakeland, FL

Tertiary JAG Market: Savannah, GA; Daytona, FL; other smaller cities in-between

Without going into too much detail on any of these in particular, they are all growing markets in terms of jobs and populations, they have strong market fundamentals, and they all have adequate potential supply of properties we would be interested in. Also, the markets in GA and SC have not been impacted as much by the insurance increases, so the thought it hopefully we find a smaller gap between buyer and seller expectations on pricing.

Second, we are going to be looking into industrial properties in the Jacksonville, MSA. I will be very blunt and say I have zero experience with industrial assets, so why am I looking at it?

A couple reasons, the main one being the yields on industrial are far more attractive than multifamily right now. From the several properties I’ve looked at the going in cap rate is the same as the interest rate or above that, so we have positive leverage. Many of the deals we’re looking at have an untrended YOC in the 8-10% range. Combine that with 6-7% moderate debt levels and your cash flow can be 10%+ year 1, or on average 10%+ throughout the hold period.

Next reason, is industrial is in high demand from tenants right now, and doesn’t seem to be slowing. Organic rent growth has been double digits YOY, but we’re only assuming 2-3%, so if it keeps up that would be icing on top. Vacancy is extremely low, less than 5%, and spaces are leasing up very quickly. From my conversations with leasing brokers, they often see less than 60 days if not only a couple of months. When you sign a lease for 5-10 years, a couple of months averages to extremely low vacancy over the ownership of the asset.

Credit: NAI Hallmark

Additionally, industrial is less management intensive. This is obviously good for me personally, however it’s also good for LPs. Less time and resources towards property management is more time and resources to asset management, sourcing new deals, communicating with investors, and also a lot less moving parts, which could lead to more opportunities for things to go wrong.

And a final point, most of these lease are triple net, which means the tenant takes on the burden of the variable costs of taxes, insurance, and more. So if Florida continues to have insurance problems in the short term, those costs get directly passed onto the tenant. Unlike in Multifamily where you can have expenses grow at a faster rate than income. Obviously, if the burden became too big for the tenants it could negatively impact NOI, but the impact should be less than multifamily where none of the burden gets passed on.

There’s tons to like about industrial assets, but there’s obviously risks too, just like anything else. You have 1 or only a few tenants, so you’re vacancy can swing a lot more. There’s environmental risks, there’s new supply risks, economic risks, and ultimately people need a place to live no matter what. Businesses can cease to exist, downsize, work from home, move to new cities, and more.

Another risk, is experience and track record, of which I have none. Which is why I got introduced to a partner who owns a few assets in NJ and one here in Jacksonville.

We are looking to partner together because they would like to expand more into Jacksonville, and don’t have as much time to dedicate, and we have the local market knowledge, local connections, boots on the ground, and more. And honestly, while there are nuances to everything, and time will help me more than anything get the experience, I don’t think it will take much longer for us to have the knowledge to be able to fully analyze these properties on our own. Not that we would abandon or stop any partnerships, but it’s important for us to know these things ourselves regardless.

For industrial we will primarily be looking for single tenant triple net industrial space with low to moderate coverage so that there is additional outside storage and parking space. New construction industrial is usually very high coverage of the land with buildings, so these older properties with additional land command a premium on rent per SF and also are less at risk to new supply. We are looking for properties in the $1-10m range, UYOC at 8.5%+, less than 50% coverage, and close to major highways. Additionally we’re also looking for multi-tenant contractor garages which are more infill urban which have the ability to increase rents as leases turn. We’re targeting for UYOC 9%+, close to major highways, units 1000-5000 SF per tenant, with roll up garages, small air conditioned office spaces, and a half bath.

For returns for industrial we’re looking for 5-10 year holds, 10%+ average cash flow, and a 15-20% IRR, utilizing long term debt no more than 75% LTV, but probably more like 65-70% LTV.

As an investor, first and foremost, I have to look at the risk and reward. And as much as I like multifamily and know it very well, especially in Jacksonville, the risk reward is not attractive right now when compared to other options. At least this is true on the vast majority of deals we see, and who knows maybe I see a deal tomorrow that does work and you all laugh at me, I will be laughing at the irony along with you.

So, we are adapting our plans to the reality we are in and we are going to be looking for other opportunities than we have in the past. It is my hope that we will have an opportunity for all interested parties to review in the next 6-12 months, but we will never force any deal because we haven’t bought anything in awhile. We are able to cover our living expenses on our own without the need for fees or anything else to survive.

So we will continue to be patient until the right opportunities present themselves.

If you have are looking to invest in the next year please reach out and I’m happy to discuss more at length our thought process and what we’ve been seeing in the market.

If you never filled out a form to be alerted for new opportunities, please click the link below:

Fill out our investor questionnaire

All the best,

Chris Grenzig

JAG Capital

Chris@jag-communities.com