In this episode of The Distribution by Juniper Square, Managing Director Brandon Sedloff sat down with Jeff Toporek, co-founder and principal at FD Stonewater. The two discussed how the real estate industry is adopting technology, using data to make better decisions, and what the next 18 months might look like.
Here is a portion of that interview edited for clarity. Watch an on-demand recording of the entire back-and-forth here or listen to this episode on Spotify, Apple Podcasts, or wherever you get your podcasts.
Brandon Sedloff: Who is a typical tenant in that single-tenant deal? What do the economics look like? Walk us through some of the basics that we should know about the type of real estate investing.
Jeff Toporek: A single-tenant building is basically a building that's occupied by one user. It's typically viewed as a passive asset class where you can buy it, clip a coupon, and put it on the shelf.
Our view is to apply a value-add approach to a passive asset class. How do you roll up your sleeves and solve problems for a tenant and help them grow their business? It could be amenities that they're looking for. It could be capital improvement replacements. It could be expansion facilities. We’re in the customer service business, not a landlord-tenant adversarial relationship. At the end of the day, it's a simple equation—if they win, we win.
One of the seed assets in our fund is a good example. It’s an asset in Huntsville, Alabama, leased to a defense contractor near the Redstone Arsenal. It's an R&D facility with software engineers, mechanical engineers, and structural engineers. They have a project they're working on that they think will go into production in the next two to three years, and at that point, they'll likely need an expansion. So from day one, we're having active conversations with them about what the design might be, what the cost might be. The property came with another 17 acres where we could build another two buildings for them.
Now that's a five to 10-year business plan, but you need to be having those conversations from day one. We're playing a long game—but you've got to start from the moment you buy the building. And I just don't know that many people have the patience, wherewithal, and the interest level to be that active in what's considered a “passive deal.” Our cash flow is fine, but we're trying to create more value as quickly as possible and take the risk of a lease expiration ten years away off the table as soon as possible.
Brandon Sedloff: Let's switch over to talking about macroeconomics for a moment. This is being recorded in April 2023, and the feds increased interest rates twice. Coming out of a global pandemic, the office market has been hit extremely hard. We've had a recent run on the banks with Silicon Valley Bank failing. We're clearly living in unprecedented times. What is your outlook, and what are you trying to keep your finger on the pulse of?
Jeff Toporek: There's been a lot of noise, but I have been optimistic that the U.S. economy has fundamental growth opportunities. They will be longer-term—50-year type investments—that will be unbelievably beneficial. There is a true shift in the global economy toward regionalization, and the U.S. will benefit. We could be a net exporter of goods in the next five to 10 years. That really doesn't get a lot of news.
When you look at unemployment, it’s still in the mid-threes. That's a very low number. And people from the Great Financial Crisis that were about to retire then suddenly couldn't; they had to work for another 10 years. Then COVID hits, and their IRAs are looking pretty good. They're 10 years older now. They wanted to retire 10 years prior. They're saying I'm out. That is tens of millions of people that have left the workforce. Labor is a real issue where we need to figure out how to increase productivity or just increase the size of the labor pool.
The choppy waters will be longer now than I would have said a few weeks ago, but we are seeing sellers getting more motivated to sell. They're facing different pressures, whether debt maturities or investor pressure to sell assets, and I don't think those opportunities will last within 18 months. We're telling investors that we will be able to achieve outsized returns if we can buy assets between now and the next 18 months.
If you can figure out how to raise capital and get transactions done, I think you'll be pretty happy with what you bought. When you’re assessing sentiment, stress, and anxiety at the same time, there is opportunity.
Brandon Sedloff: Can you talk to us briefly about how you've embraced technology?
Jeff Toporek: I've always had a passion for technology. We've always approached it that we are looking for a solution to a problem. We are looking for better transparency; we're looking for efficiency. What could we do from a technology standpoint to ensure our employees have higher job satisfaction? We're constantly looking for solutions that help them do their jobs better.
We invested and adopted a technology called Profi that does lease abstracting, and it's real-time. There are data and dashboards where you can look at things on an individual asset basis through your whole portfolio and get notifications when things are happening. Those used to be static documents that never got updated properly. We can share that information with people outside the firm that need access to it, so things like that really help productivity, and that's ultimately what we're looking for. We're always looking for new technology solutions. We want to be hearing, we want to be testing, and we want to be constantly figuring out how we can make the experience better for our employees, our investors, and anyone who's interacting with us.
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