008 – A Model for Success and the Future of Industrial Real Estate

[MUSIC] >> Welcome and thanks for listening to Under Development with Schenel Properties, where we examine logistics and industrial real estate trends. We dig into the stories you want to hear with development executives in markets worldwide. Here's your host, Jay Tanwan. >> Thank you everyone for joining us once again on Schenel Properties monthly podcast under development. >> Really, ever since we started doing this, I was really looking forward to welcoming Bob Schenel at some point on the show. And now that day is here and I'm happy to have Bob Schenel join us this month. Bob Schenel is president and co-founder of Schenel Properties. Bob oversees all aspects of the company's investment and development projects. He founded the company in 1990 with a focus on built-to-suit lease projects for clients needing such projects on a repeat basis. His vision was to create a streamlined entrepreneurial company that could develop projects anywhere in the US using its own capital fund the developments. So in 2012, sensing industry trends and with an eye to the future, Bob added speculative projects to the company's capabilities. And in 2018, Bob expanded the company's operations to Europe. This overall vision has resulted in the company now consistently completing new development of more than 5 billion annually. And Schenel Properties has built over 300 projects in 44 states plus Canada and Europe. So with all that, I'd like to welcome Bob Schenel to under development podcast. >> Thank you, Jay. Glad to be here. >> We're excited to have you and want to just jump right into it. So back when the company, when you founded it with Doug Snyder in 1990, I've heard it and maybe you can correct me if I'm wrong here. But I've heard that you could essentially go tie up land with a landowner, get a PSA and then you go go find a tenant, sign a lease. And then you take that lease and that PSA to a bank and they'll fund the whole project. So I just wanted to kind of get into that because I thought that was maybe a pretty unique environment at the time. And when you started the company in 1990 and kind of walked down memory lane just a little bit. >> Well, I'd say that is almost accurate. We really started with the customer relationships before we went out and got the land. Although we were always looking at land, we didn't buy the land because we didn't have much money. I wasn't seeking to raise any outside capital. We really wanted to do things on our own and always maintain very close relationships with our major customers. And so, and with brokers. And that's really the way we started because the question that brokers always ask is where do you have land? So you have to solve their riddle. You have to get the user and then go find the land. But other than that, what you described was accurate. We couldn't quite go get the financing maybe as easily as it sounded when you said you could finance the entire project. We did have to come up with equity. So we scrambled to do that. And as you probably know, lending was very tight in those days. But we were able to get it done if we had a lease and then we kind of staged our land take down. So we weren't out of pocket too much at any one time as we were getting started. Right. And then so you found out the company out of Indianapolis, but is that where you started to do your first deals with Sknell? Or did you follow the tenants wherever they went? Well, the idea was to follow the tenants wherever they went. It's purely coincidental that our first build a suit was an Indianapolis. But it just worked out that way. Could have been anywhere. We did our first build a suit. We delivered it in May of 1994. I really wanted to test my theory that we could do and go anywhere and not be required to be vertically integrated to convince customers to trust us. So we that was the test. We did our first deal with a company called Home Medco. We subsequently did four more for them. And that's all they did. They did five build a suit so we did all of them. So that really got us up and running. And is that a relationship that you had with that firm or was it with brokers for a number of years prior or was it something that you were able to cultivate and grow once you started Sknell? In that instance, it was with the broker. And I had known him often on for maybe a couple of years, but it was one of my long standing relationships. It's actually kind of funny. It's funny to me. This broker came into Indianapolis. They wanted to be in a particular location. And the only sites that were available that really met their criteria was one that I controlled through an option and one that was owned by Duke where I had been the local managing part or previously. And I had bought that land. So I was very familiar with it. So that was my competition. And I was competing with my good friend Bill Linville, who's now with our company. We kind of went head to head on that. So anyway, it all worked out. And what's funny about that story is the broker who ran it as an office broker, a very accomplished office broker from Chicago at the time. And after meeting him and over, I guess, a beer or two or a cup of coffee, I said, I want to ask this question, but I want to put it delicately. You really have never done a bill to suit him. You said, no, you've never done an industrial deal. No, but you would like to really look good with your client. And he said, yes, I said, I'm going to write out a list of questions. You take that home, you look it over and next time when we meet, when your head of real estate comes and you ask me these questions. And I'll give you some good answers. And my job is to make you look really good. And so that all worked out. Well, great. Yeah. And you mentioned as well, the lending environment was particularly difficult. And for those of us that weren't in the business in 1990, there was a recession going on. You know, the theme was stay alive till '95. So what was it like for you really starting the company during a recession? Or did that have an impact on your decision to start it at that particular time? Or was it just the timing worked out the way it did? Yeah, the timing just happened to work out that way. It wasn't part of a plan. In fact, that would have been a very bad time to leave. As you said, survived till '95 was the mantra. Banks just weren't doing loans. But my former partners and I just had a different vision of the way we wanted to go. And it was on some fundamental things. So we all liked each other. They're good people. They're confident they feel the same about me. But we just decided to part ways. And I can pursue my ideas, which were to try to build off customer relationships, build anywhere, not have our own construction company, really not worry about property management at least in the early days. And I was just looking for opportunities. And one of them at that time actually was to try to raise funds and buy property. Those were the days, again, most of the listeners won't remember this. But resolution trust court, RTC, they were bundling buildings up. You had to buy them as a portfolio and an auction type of structure. And I thought long and hard about raising capital to do that. But I've always had kind of an aversion to raising other people's money. I wanted to do it on our own. So we decided not to go that route. Right. Right. Some of the audience probably before their time and the 1990s when the company was founded. I mean, what would vice which you give to those in the audience that maybe this is their first kind of downturn that they're going to experience here? You've seen your fair share ups and downs throughout this business. Just curious if there's anything you'd like to share with those folks. Sure. I guess one is you're right. I have seen some ups and downs. The first build to suit I personally did was in February of 1982. When I joined Duke and I remember running the pro forma and using 18% is the interest cost. It works as long as you're spread between your return on a cost and your estimated cap rate is a reasonable amount. All the other numbers are kind of relative. That first build to suit I just mentioned that it's going to help properties did. I can still remember it was the return on cost was 13.6. Now the people would line up to tell me you can't do a deal with that. It all passed It all changes. And basically the way it's been for the last 12 years was simply unsustainable. And I won't work to go on at length about that. But the message to anybody with us or would like to know, "One, don't listen to the naysayers." That's a general comment. But I just find so many people now want to go through the whole litany of what's wrong with capital markets, what's bad. These interest rates are really not high by historical standards. And we'll get through this. What we're lacking is clarity. We're waiting for it, clarity in terms of financial markets. And then we're fine. Dealing with whatever cards were dealt with a long history of doing that. So always be looking for that competitive advantage. It's out there. Sometimes it's harder than others. But our strength has never been bidding at auction and following the herd. We have no desire to be asset managers. We're entrepreneurial. We couldn't be asset managers. A lot, I mean, as a business model, because it doesn't support the kind of returns we like to get, which are really above market. And we've done it for a long time. Just try, keep trying to think creatively. Pretty similar to clarity in capital markets. And times will be good again. Yeah, and this period now, and just curious, if you can look back and see if there's been any time in history where you can say, what's happening now reminds me of what was the 1980s or early 90s. Or is each kind of downturn unique in its own right? I think it is unique. I just mentioned that starting in '82, well, that was the days of Paul Voker and the extraordinarily high interest rates and everything being kind of frozen. But we still got through it. I guess today's market reminds me most of the late '80s and early '90s. When it was just frozen, people weren't doing loans. And sure the great financial crisis was very difficult for us in the industry as a whole, but the dynamics were different. I think more severe. So I really think that things will settle at some point. That's easy to say. I don't think it'll be too long. 20 and 23 were tough years. I have not seen values decrease so quickly as they have during that period. Our values are down 30, 35 percent in the period of 18 months. That's shy. Fed funds rate went up 5.25 percent in the period of 18 months. It's hard to anticipate that. Yeah. Now I just want to kind of go back when you co-founded Schenel Properties. You were one of the first to structure the real estate development firm without it and own construction company. I remember you mentioned before that there are a lot of naysayers that say, "Oh, that's never going to work." Why did you have so much conviction that this model would be successful and that you would be able to prove everyone wrong almost? Now it's like a lot of firms do it without their own construction firm. I don't want to say I was prescient in any way. I was just being, I thought, logical. I remember going to the head of our in-house construction company. I thought I was a friend, a very good guy and some we shared our thoughts about what to do in the company. But I challenged him. I said, "Can you tell me that when I go to you and I'm buying basically a construction service from you that I can be assured I'm getting the best quality, I'm getting the best schedule and the best cost?" And I'd listen carefully to his answer and I didn't hear a solid yes. Basically I was being told, "Do it this way because we've always done it that way and there's so much that we earn in fees." I thought chasing those fees was chasing pennies on the dollar. The real money was created or lost on the value side. You know, it's an end customer centric that's always been that way. That's the part of the business I love. I don't get to do it anymore, but I'd love to get in front of a user and make it to you. I missed that. Nobody will let me. So, yeah. And then the thing I wanted to make sure I touched on was because last month I had the pleasure of speaking with Umarie who heads up Schnell, Europe. So I heard from his perspective on how everything got started but would be really interesting to hear your perspective on why Europe and why 2018, five years ago and really what's next for Schnell, Europe now that you've been there for five years and been very successful. Well, the dynamics are not all that different from the US. Some capital constraints are very similar, changes in value are similar. Some common practices are very different. You have to get used to that. The way commissions work with brokers in Germany is compared to anywhere else is completely unique. So you have to learn about that. I mean, if a broker bumps into you and says, I'm working with so and so, I think that means they're entitled to a commission. So you have to be careful about. Oh, yeah. A couple things I read a lot about what's going on in the business and every time I would see a trade article, it would be about so and so signing a lease and many of them were our customers. So once again, customer driven, our first deal in Europe was with FedEx. We've done a lot of business with them. And we luckily happen to have a relationship with somebody who had recently moved from the US to Europe within FedEx. And somebody I knew well. So that got us off to a head start. Well, that was just our first deal. And I really spent a lot of time in the market without a hurry trying to figure out which markets to pursue. I guess it's okay on this podcast dimension, a competitor by name, but I saw a YouTube video in which Carl Panatoni was given an award. And he announced that Poland was his second best market next to the Inland Empire. And I got, I better get over here. So yeah. And I just owned in to Carl wanted industry event and mentioned that to him. We had a good laugh. Yeah. But anyway, some of our competitors were there. Oh, and another thing was the adoption of e-commerce was at least a couple years behind where it was in the US. So you know, they have different shopping habits through most of Europe, especially southern Europe. So they'd like to go to the market, so forth. But more and more people were buying using e-commerce. And that was somewhat nascent still in the US, but certainly in Europe. And so we decided to go at that time and be poised to take advantage of that. I also found the competitors were different. They're very big or very small. And that played to our strength. Again, using our own capital, being nimble, not making our own construction services a priority. Just being able to go to the best source and get all that we needed. And then we started building our team and build a great team over there. So it just seemed like a natural next step for us. I'm not sure if you can share, but are there any other areas in the world that you have your eye on or that seem intriguing to you, similar to what you did in Europe to really expand out there? Not really, but if somebody made a case to me, I'd be open to listening. And I'd say that I have talked to people about Asia. And the primary at CBRE was head of Europe, Middle East, and Africa for CBRE for quite some time. So he has knowledge of those markets. But given our experience, since let's call it early 22, an interest rate really started to rise and cap rate started to increase, we're pretty much keeping our head down and taking care of the markets we're in now, rather than looking at a big expansion. Right. And now kind of focusing in terms of Skinal and the US, what do you see as kind of the next steps as the company continues to evolve? Well, I think in the very near future we'll be doing more joint ventures than we've ever done. And I'm a proponent of using our own capital for a variety of reasons. And one is that you can make decisions much more quickly. And I think that's been a competitive advantage for us. The benefit of doing more JVs is that your return on equity goes way up with most deal structures. Your total profit goes down. But if you don't use JVs right now to compete in the marketplace, you're going to have to use at least 50% of the capital. center your own capital for every project and that just limits the volume you do. We're not going to do those JVs on a wholesale schedule basis, but we'd like to have a handful of good reliable partners. And we do right now. We have probably five or six that we really enjoy working with. And we're close to trait closing a major preferred equity kind of transaction right now, but we're still I think two or three weeks away from that. I keep hearing we're two or three weeks away, but you know, confident we'll get it wrapped up very soon. It's a good deal. I think for both parties, so we're excited about it. Yeah. And over the years that, you know, the company has grown so much. And how have you really been able to maintain the culture and keep the entrepreneurial spirit going? You know, one of the quotes I think that you like that I've heard Amari actually mentioned it. I think it's a Ross Frupe quote is like it says, if you see a snake just kill it, don't appoint a committee on snakes, right? So, you know, I think that really speaks to the you know, just the overall culture that you've been able to build over the years. And if you can really expand on that and how you've been able to continue to maintain that as the company has grown. Yeah. That is in fact a real challenge. I mean, and it's one of the reasons I like to use our own capital. I think as we do more JVs, though, there will be a tendency that is hard to fight or even a bait to slow things down. And we like to have a blend of entrepreneurial spirit. A lot of people say that, but we see it all the time. We joke our committee meetings take about 10 minutes, you know, we make decisions quickly. We've got a top execution team. So I really think that keeping this culture is critical and it's a challenge. And it's more than just using our own money. It's quick decision making. You have to be a hunter. You have to be out there finding opportunities that other people don't see. And they're just they're hard to find, but they're not impossible to find. And when we find them, we'll move quickly on them. And as you do more, you know, we did a little over $5 billion of new development last year. As you do more, there's just a, oh, you might say a reversion to the mean way of expressing it. The force is pulling you to the middle, especially if you've come from the asset management side of the business. And we don't have many, but we have a few component side. As you move out on the risk spectrum, there are people, even within a group who will like to prove that you should not be too aggressive. And I know I sound when most cavalier here, but I'm always going to side with the people who will be more aggressive. And I like to push the decision making down to the lowest level possible. If you're a development associate in our company, which is a role where you go out and find sites and you figure them out, handle entitlements, if you see a deal and you feel it's a good deal, I don't want anybody to be shy about bringing that up. That's where success lies, I think. It really is. You know, I talked about Naysayers. There's a comfort in telling people what's going to go wrong because you never can be proven wrong because you ended up not doing anything. Just be the person that goes out there and takes that chance. And if you make mistakes, fine, but don't make too many of them and don't cost us too much. You know, don't keep making the same ones over and over. But take chances. What about over your career? Is there anything that you can say that you wish you had a do over or wish you could handle it a different way? Because I know that as you do things, you learn from those certain aspects so you don't want to ever really say that you don't want to have those maybe a negative experience or anything like that. But just curious if there's anything that you wish you said, maybe I wish I could have that back or anything like that. Well, I can only think of two occasions where let's say we came to a fork in the road and who knows what would have happened. And one I mentioned earlier, not the resolution Trust Corps days, it was tempting to try to raise a lot of capital by buildings in bulk, split them off and make a lot of money doing it, improve them, you know, sell them quickly, keep the best. I chose not to do that. I also didn't quite know how to go about it from a standing start. That was one. And then the second one was very early on after we'd done, I think our first build suit. We did two or three speculative buildings in Indianapolis. And they were successful. Investment broker friend of mine introduced me to people at Nomura securities, which back then was really active in the CMBS business. Pluton New York, I didn't know exactly what we're going to talk about that they wanted to meet with me. And they offered us a lot of money, right? But that day during the meeting, more than I thought it, multiple of 10 really. And said the only problem is I'd have to staff up. We'd have to increase our volumes. And that sounded like great news to me. And we really tempting. But I went away and thought about it overnight, talked to it with dog and came back and told them thanks but no thanks. Because the problem that I could see and I don't know how it would have turned out, we not have been huge. A lot of people in our business measure success or one ingredient by AUM, you know, that's never been a driver for me. We sure could have gotten it. And we could have gotten in a hurry with the amount of capital they would have given us. And looking back on it and that was in the early 90s, I think we made exactly the right decision for our culture and for maximizing our profit. And I don't know if this sounds believable, but one of the things I looked at as my legacy that the company is all the good people we have. And we're not a huge company in terms of people. I love our ratios. You know, $5 billion of new development with roughly 120 people. That's pretty outstanding. It plays because we outsource so much. But, you know, I like to think it's a place where people love to come to work and we try to get the best and the brightest. And if somebody leaves and they leave for good reasons, I say more power to them, I'm never bitter about anybody pursuing another opportunity. But I don't look at that almost up there with the dollars. You know, it's how you measure success. And would you say that is your biggest accomplishment with the firm? You know, just in terms of the people or is there maybe a specific project that you had in mind or some other specific accomplishment or milestone that you achieved that it would you say is the thing that is most memorable and special to you in terms of what you've accomplished since you founded the firm in 1990. Well, I think it's just growing the business. I like to say brick by brick and that's by project by project by individual. You know, I've always believed in hiring for talent not for a role in our company. I preach that to people all the time. And if I look around and think we've got some real producers, I take a lot of pride in in that. And then we've had close calls. I mean, 2008, 2009, we didn't default on any loans. We had a lot of pressure from banks. And I just think we've done a great job at building repeat customers and finding good land positions. I'm reminded of the former head of real estate at FedEx who became a good friend of mine. I did a lot of projects and he used to call me and tease me. So how much of our business do you want? I mean, why aren't you? And I but I always say to him, I just want the next one. That's all. We're doing an excellent. So, you know, it's been fun. That's a big part of it. It's been fun. Sure, a lot of sleepless nights, a lot of hard work. But overall, you look back and say, it's fun and I've improved the lives of some people. You know, I like to think so. That's a good measurement. Yeah. No, I think that I think that's really great. And you've seen, you know, industrial over the years just really evolve quite a bit because you know, it's always been kind of the slow and steady asset class that's always been reliable. And then really the past decade plus it started to take its place as the prominent and most sought after product type for commercial real estate. So, with e-commerce expected to continue to get market share over traditional brick and mortar and that requires more industrial real estate space, what do you see as the future for industrial real estate in the US? Well, I think the fundamentals are very good. I think it will go back to looking a bit more like it did. Pre-pandemic. The pandemic drove, I guess, maybe infatuation is the good word. Ralph Shiley in our company, our CIO, likes to say, Bob liked logistics before logistics was clear. And that's real guy. I mean, we have a multifamily group that's run by a really good person with the great group of people and we've done very well at it. So, I like that too. But there's something about industrial that's just always appealed to me. And I've done a fair amount of office in my career too. I just never was attracted to it. I think I have a pretty good understanding of what drives our customers decisions, you know, operating efficiencies, various distribution models, things of that sort. I think that it will stabilize whether it be pre-pandemic. I'm not quite sure. I think that I say it was unsustainable the way it was for a while. But if you just look at where interest rates have been from say 2010 till a year and a half ago, if you look at availability of debt, but then back to logistics with the pandemic, of course, we had exogenous reasons for it to me and to grow. Disruption of supply chain, more of a focus on port markets, primary markets, all that sort of thing. Then that was followed by three rounds of stimulus checks, which really added to consumer spending, which indirectly added to demand for the logistics phase. Much to my amazement, many of the capital groups, I think, at least looking at their underwriting and the constant decrease in cap rates, thought that was the new normal. Whereas I thought it was an anomaly. It just couldn't last. I mean, especially on that demand side. So I look forward to return to normal interest rates are higher than I would like them to be. That's for certain. A more important variable if I get the pick would be more generous loan underwriting amounts that sounds more problems for us than the actual debt rate. But I just think those things will normalize over time. I mean, zero to 2% rates, just where were they going to go rather than up? Yeah, although we worked in Europe and they were negative and you're a four eight or nine months, you know, but pay the bank. Well, we're running. If the feds fund rate were to get in the three to four range, I don't think it's going to hurt our business as long as there's clarity about what's going to happen in the future. In terms of industrial, what do you think, you know, the impact will be, you know, with near-shoring to Mexico or on-shoring? Have you given much thought in terms of what impact that'll have in our business moving forward? Well, I'm kind of looking for you to figure that out and tell me since where you are geographically. You know, it will have effect. I mean, that's for sure. There's so many people going to Mexico. We looked hard at Mexico a long time ago, so it's really almost irrelevant at this point. We've been busy doing other things, but I think we'll make a big difference there. I mean, I think I'd wait and see. I think that's as much a geopolitical question as a real state question. There's so many dynamics right now in the world. I always preach to people about when we do get together is company wide that we focus on the micro. That's where we make our money. But in these times, it's impossible to ignore the macro. And so such a big influence on our business. I was at a CBRE event, maybe a couple of years ago, and Carl Panatoni, whom you know, was a featured speaker. And one of the attendees in the crowd asked Carl what it meant to him to have his son in the business and working at the firm that he founded. So I wanted to ask you the same thing, you know, to have Jill and Joel, both in the business working for the company and just your thoughts on that and what that means to you. Well, I think it's great. I've three children. I get to work in a way with all three, but the two you mentioned, Joel and Jill, or with our company have been for a long time. And they're both in very senior roles. And they're good at what they do. My other child, another daughter is Lauren. She and I do some residential projects together in the Aspen area. It's great to work with family. It really is. I never set out to build a family company. Joel and Jill both went to work for other companies in the real estate industry, kind of cut their teeth there, so to speak. And I think I said to each of them individually at some point, hey, what do you think about coming to work with us? And with Joel, that was very early. I think you are third employee. I sure like it personally. And they add a lot to the success of the company. Yeah, that's great. I appreciate you sharing that. And then the last question I wanted to try to have you answer here is, you obviously had a very long and illustrious career and you still have plenty in front of you. So what would you like your legacy to be? Well, that's a tough one, but basically to leave a company behind me that goes on well after me with the right people running it and keeping the core values. I think that's a good word. I mean, we try to be true to our word, you know, say what we'll do, what we'll say. And who just build on it in their own way, they don't have to do it the way I did it. Circumstances were probably dictates and differences and approaches. But just to feel like I left something substantial behind and that a lot of people enjoy working there and are successful working there. Well, Bob, thank you. This has been really great. And I love to keep going, but I think we're running a little bit out of time. And I just wanted to thank you for joining us and thank everyone also for listening to this one's podcast. So I think you Bob, this has been fantastic and I really appreciate your time and spending some time to chat with us. I'm glad to do it. Thank you, Jay. This has been great. And I've listened to your other podcasts and have all been extremely good. Thank you. Well, yeah, thank you very much. And just as Bob said, we have several previous episodes that you can also find on all the major podcast platforms. So please access them at your convenience. And we look forward to having you join us next month.