Industrial Real Estate Risks Explained by Chad Griffiths | Warehouses, Leases, and Investor Mistakes

Chad Griffiths (00:00)
He bought the property for 1.75 million. It was a large construction company that was using it.

They had been in there for 20 years. They had four years left on their lease when he bought it. So everything went fine the first two years.

So the owner was still thinking, okay, I’ve got a two year runway to try and find another tenant for this. But because it was a specialized building, it didn’t find a sub tenant for that whole two years. And then at the end of the term, he now had a vacant building where he was trying to lease it for significantly less than he was making and still couldn’t lease it.

And what the end result was, because it was out of town, his insurance company had a rider in there that he had to personally inspected every two years

ended up going into foreclosure and went into receivership because he couldn’t find a tenant for it. It sold in receivership. So that this whole process ended up taking several years, but it sold in receivership for $900,000. So his entire equity position was completely wiped out.

Cody Crabb (02:30)
Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel. Today we’ve got Chad Griffiths with us. He’s an industrial real estate investor, broker, author, and self-described industrial real estate nerd

with 20 years in the business. He’s been in the weeds on this stuff for a really long time. He said it’s his passion, he’s obsessed with it, and we’re gonna dig into why industrial can be a huge opportunity, but in his words,

why a lot of investors maybe shouldn’t touch it unless they know what they’re doing or they should stay away from it. So Chad, this is going to be a good, interesting episode. Thanks so much for joining us today.

Chad Griffiths (03:03)
Yeah, awesome to be here, Cody. Thanks so much for having me on the show. I’m excited to nerd out about all things industrial real estate.

Cody Crabb (03:08)
Awesome. Well, before we dig in here, I’d love to get a little bit more about your background. How did you come to be in this industry? And am I detecting a Canadian accent there or is that Minnesota? is that? Yeah, it’s, I was gonna say, you can spot it. You can spot it. yeah, and I mean, that’s maybe even another question there. Yeah, so I’d love to hear about where you started from.

Chad Griffiths (03:22)
It is Canadian. It’s very similar to the Minnesota accent.

Cody Crabb (03:36)
in Canada and how you got here.

Chad Griffiths (03:38)
Yeah. And even though I’m based in Canada, I actually have quite in a deep.

appreciation for all things industrial across North America. I’ve studied, I’ve come close to investing in some major US markets. So I’ve studied them intimately. And part of the process of writing a book and, and the podcast that I do is I actually interviewed ⁓ numerous people all over North America. So even though I’m based in Canada, the focus of our chat here today won’t necessarily be able to Canada at all. About that’s probably the biggest giveaway. I

Cody Crabb (04:05)
Sure. If I hadn’t noticed it by then, would have been like, you’re from Canada. Yeah.

Chad Griffiths (04:12)
generally

try to actually keep everything pretty North American wide because there’s so many similarities between what’s happening in my market in Western Canada and what’s happening in New York or what’s happening in Dallas or what’s happening in Phoenix. There’s so many similarities and overlap that I generally speak at a very high level with the.

urge or nudge I should say to to say to people anytime you’re interested in industrial is get the fundamentals and then dig deep into whatever market you’re doing. So I’m sensitive to that as well. But I do generally try to keep things pretty high level. But back to your original question, I started

building my own portfolio in 2014. That’s when I first started investing. And for context, everything that I have right now is either JVs that I’ve done with other owners, or I’m also a limited partner in a few funds, but I’ve never raised money myself by design, I don’t have the interest and the time and the appetite to do a GP.

syndication myself right now. So everything that I’ve invested has been my own money. And I started with a very small property that was in 2014. I started as a broker in 2005. So that’s, that’s 20 years that I’ve been working directly in industrial real estate and got my feet under me, really learned the industry, learned the nuances of what makes a good property, what makes a bad property. And I’ve certainly had mistakes along the way as well that we can talk about.

But it was really learning the business for 10 years or so. And then 2014, I started buying properties and pretty much bought a property every year up until around 2022, when interest rates started rising. And that’s when I pulled the brakes on on and buy anything new. And I haven’t actually bought anything myself in the last few years. If anything, I’ve sold a couple of properties recently, including one that that we’re just exiting as we speak.

⁓ So a lot lots to unpack there from the standpoint of what is a good property and why did it take ten years before I bought my first one? But I really am a big believer in industrial real estate provided an investor can spend the time upfront to really understand it and that that’s where we teed this conversation off with as well as that I Don’t think it’s a good asset class for most new investors. I think they’re better off pursuing other opportunities in

in more safe and more predictable asset classes like multifamily or even single family. But for those who do have a curiosity for it, I think it’s an awesome asset class and I personally wouldn’t have done anything different. And that’s all that I’m interested in going forward. It’s just industrial.

Cody Crabb (07:33)
So, mean, let’s kind of dig into that a little bit. So, what is it that got you in there in the first place? And then from there, what is it that makes you like, well, but it’s not the miracle thing that everyone might think it is? I’d be curious to know.

Chad Griffiths (07:47)
I got into it purely accidentally. So I joined in industrial commercial real estate brokerage back in 2005. And I thought it would be offices and shopping malls, that area of commercial real estate that people are at least familiar with. Everybody’s been in a shopping mall, everybody’s been in an office space, very few people have been in a in industrial building. So it was purely accidental that the majority of people in my office were focused on industrial. So just as a opportunity to learn, that’s what I

I got into. So knew very little about it at the beginning. And it was just drinking through a fire hose, the cliche, and trying to learn everything that I could. And the more I dug into it, the more I realized that every facet of life and business goes through an industrial building, whether it’s the mics that we’re talking on right now, these were made in a factory and

They presumably there is multiple components in here that were all made in factories and then put together in another factory and then sent to various warehouses and and all that supply chain from the raw materials to make this to get it assembled to go through all the different warehouses to ultimately get to where we’re using them today. The that chain of buildings could have could have been dozens if not hundreds by the time you really break it down.

And the more buildings that I started going through and seeing this is life. ⁓ We can’t operate life without having these complex buildings making everything that we use. And it was very evident during 2020 when the world shut down and we all remember offices were closed, some longer than others, but offices were closed. A lot of small retail were closed. Anything that wasn’t essential was closed.

Cody Crabb (09:19)
Yeah.

Yeah.

Chad Griffiths (09:31)
everything

in industrial stayed open. There wasn’t a single industrial building that closed because that was so important to our everyday life. So as I just started going through it and you start really getting a sense of how things are made, where things are made, if anyone’s ever watched those shows, how it’s made, where you actually do a deep dive into the factories on how something was made. just seen that in person was so awesome for me where I just, was so.

Cody Crabb (09:35)
Yeah.

Chad Griffiths (09:56)
inspired by the people that were making things on a day to day basis that I just fell in love with it very early on. And that’s what got me into investing. was really understanding what industrial is, what it isn’t, some of the weaknesses, some of the areas of oversight. But really it’s fueled by a passion for the industry. No different than someone that’s investing in stocks. They might only invest in companies that they like. They might only buy.

Netflix or Amazon just because they use them and they liked them. It was the same thing with industrial. I just had an absolute passion for it and just found it so fascinating that it was very easy for me to get up every day and be excited about it.

Cody Crabb (10:26)
Yeah.

Yeah, well I think, mean anybody that has that much excitement to get up and do something every day should just do that forever because it’s hard to find that. So okay, that’s really interesting. I mean, anybody hearing about investing, if one of the things that you hear about an investment is it’s so important that when the entire world shut down, that was the only thing that stayed open.

Chad Griffiths (10:42)
You

Cody Crabb (11:01)
Like I think some people would hear that and be kind of like, yeah, okay. Like that actually is saying something. just to kind of, obviously we know that industrial real estate is very important. And like you said, it affects every aspect of our lives. What is it that people should know about it, where it’s maybe not as easy of a situation as possible? Like the idea I kind of want to get to is,

It’s like when people find out about short-term real estate and they’re like, you can charge way higher rents and people are in and out and you don’t have to deal with all the, and they don’t think about all the other things that go along with that, like they don’t have long-term contracts and there’s tons of downsides. What do people hear and they go, that’s amazing, and they kind of ignore or forget about in industrial.

Chad Griffiths (12:17)
There’s some huge benefits with industrial, which I think people get attracted to when they hear and I’ll mention them, but that leads into some of the major risks which you’re teeing up. So some of the main things are longer term leases. It’s not uncommon to see a five or 10 year lease in industrial real estate. Sometimes tenants can stay for decades.

So someone might have a property that they’re buying where the tenants been in there for 30 years and there’s a current five-year lease in there That’s pretty attractive from the standpoint of not having tenant turnover to have to deal with all the time And then also they’re usually triple net leases, which in very simple terms means that any increases in operating cost of the building property taxes building insurance commonary maintenance will flow through to the tenant so that that’s not encroaching into landlord

profit. So there’s usually I’ll mention it just really quickly because it’s a topic in itself, but to try and just distill it into the bite size pieces, there’s typically two rents, a tenant will pay net rent or base rent, and then they’ll also pay operating costs or additional rent. So the base rent is going to be identified throughout the term of the lease, it might be a fixed rate, there might be yearly escalations, but that’s identified. The operating costs or additional rent is an estimate.

And it’s designed that at the beginning of the year, the beginning of the period, a landlord will estimate how much it’s going to cost for all the different operating level expenses. And they’ll collect that on an incremental basis. So they’ll collect it monthly. And at the end of the year, they’ll reconcile how much all the bills were and then either give a refund or give an invoice for any shortage of that amount. So if property taxes went up more than they expected, that all flows through to the tenant.

So most residential leases which people are familiar with are gross. So it’s gonna include property taxes and condo fees or whatever else is in there. And that’s just the amount. So in commercial, you might see a five year lease and those are on triple net leases where any increase in those operating level expenses get passed through. So I think that that’s one of the real advantages of industrial. And then the other is you’re dealing with corporations. So you’re dealing with companies that

you can see what’s on their balance sheet and you can see what their income is and you can see what their expenses are and you can really do a thorough deep dive to understand how much money is coming in and can they afford to pay this rent and you can get a, you can look under the hood much more than you could for a residential tenant where it’s going to be a lot more limited on how much you can dig into. And that think the other big part too that, that I’m a big fan of is that for the most part, industrial leases follow just simple contract law.

Cody Crabb (14:32)
Hmm.

Chad Griffiths (14:57)
So we don’t have a government that’s going to be very favourable to residential tenants on the residential side. Most commercial and industrial leases just follow contract law. So we don’t have that heavy-handed government oversight that comes with a lot of multifamily and anyone that’s had to evict a tenant from a house or an apartment ⁓ complex will understand how difficult that can be and time-consuming. It’s just a lot.

It’s more streamlined on industrial. So all those things together, I think is what makes industrial appealing where I would caution somebody and and this is the risk is that we say all the all those things and people are like, well, this is exactly what I’m looking for. I want to get rid of having to manage 15 residential tenancies in an apartment complex and and I want to have just one tenant that’s a national tenant and I know what that makes a lot of sense. I mean, that’s why people get intrigued by it. But the

Cody Crabb (15:26)
Yeah.

Chad Griffiths (15:52)
counter to it and why I say people should steer away from it is that there’s a lot more asymmetry and information and there’s a lot more complex risk that comes with industrial versus a multifamily or a single-family house. a quick example is if you have a multifamily building and it’s in a good area and the building itself doesn’t have any big issues coming up, you can always rent that out. Like if you have 15 units in there,

You might have to lower the rent a little bit if there’s a market downturn, but you’re always going to be able to rent that out to somebody. In industrial as, as by contrast is if you have a building and maybe there’s that tenant that’s been in there for 40 years and they have a lease coming up in five years, you might think that that could go on forever. But if you don’t fully understand what you’re buying at the end of that lease term, if the tenant were to leave maybe any number of reason companies, they sell to a bigger company, they decide to downsize there’s

an infinite amount of reasons on why they might leave. If they leave, it might take several months, might take years, it might not be leased again, depending on what type of building it is. If it’s just a traditional warehouse where it’s just for general storage, and it’s very simple, there’s probably a good chance you find another tenant pretty quickly.

But if that building was very specifically built for that company that was in there right now,

it might take a long time or it might cost a lot of money to retrofit it to have another tenant come in there. And I can tell a real quick story about this, about a guy that I know who did something very similar to this. He bought a property for one point, and I still actually remember this well, and this goes back a few years now.

He bought the property for 1.75 million. It was a large construction company that was using it. And it was in a town roughly 30 minutes away from our major metro area.

and our cities around 1.2 million people. So it was around 30 minutes away from it, bought it for 1.75 million. There’s a construction large construction company that was the tenant. And it was one of those scenarios. They had been in there for 20 years. They had four years left on their lease when he bought it. So everything went fine the first two years. The next after the two years passed, they decided that they didn’t want the space anymore. So they vacated the building.

continued to pay rent because they still had a lease in place, paid rent and tried to sublease it during the next two years. So the owner was still thinking, okay, I’ve got a two year runway to try and find another tenant for this. But because it was a specialized building, it didn’t find a sub tenant for that whole two years. And then at the end of the term, he now had a vacant building where he was trying to lease it for significantly less than he was making and still couldn’t lease it.

And what the end result was, because it was out of town, his insurance company had a rider in there that he had to personally inspected every two years to make sure that there’s no vandalism or floods or damage to the building. So he had to do basically a one and a half hour round trip commute every two days to check on this building where he was making no money and still having to pay all the operating expenses. He still had to pay property taxes, he still had to pay insurance and everything going with it. So he went

this 1.75 million building, $1.75 million building that he bought, ended up going into foreclosure and went into receivership because he couldn’t find a tenant for it. It sold in receivership. So that this whole process ended up taking several years, but it sold in receivership for $900,000. So his entire equity position was completely wiped out.

And he had to top it up because he have that much money in there. So he

paid money to get out of this problem after losing, I’m guessing probably put down five, five, $600,000. So this probably ended up costing him $900,000 to get out of this problem on top of having to drive there every two days for years to make sure there’s no insurance problems. So that’s a little bit of a long winded story to show that yes, industrial can be awesome, but there’s scenarios where it can really suck and

that wouldn’t happen in a 15 unit apartment building in a great area of town. just, you would never have that issue pop up like that. So I think that that’s full circle on that. think that’s why people need to be so cognizant of what they’re getting is that there’s completely different risks that go into it. And it’s not an asset where you can just rush into it and say, yeah, this is exactly what I’m looking for. I really do think that there’s a two to three year learning curve to really understand it.

And if you don’t wake up having that passion of being like, I really like industrial, I like everything about it. And you’re just, you have that zest to wake up and really study it and learn it. I would just stay with with easier asset classes. ⁓ That’s, that’s kind of my take on it.

Cody Crabb (21:17)
Hmm.

So is there like a simple way to tell whether an industrial building is like pretty broadly usable, like kind of maybe a little safer versus like way too special, like dangerously specialized unless you really, really know what you’re doing? Or is this just kind of across the board?

Chad Griffiths (21:32)
I would say that it’s actually more unique to find buildings that aren’t adaptable for future tenants. Most are. Provided you have a building that has decent site coverage, that there’s not, the building doesn’t cover too much of the land, so you’ve got parking area and you might have a little bit of outdoor storage for that, and the loading is fine and the power is fine. But even all that, even as I’m saying that, those are all things that you really need to understand what a tenant

ultimately is going to want and not want. So I would say that this the story that that I told is an illustration of the danger of it. But if someone’s buying right, the chances of it being that catastrophic are rare, admittedly. But why take that risk? Why have the risk that that something can go so wrong if you don’t fully understand it? So the short answer to your question is yes, there’s there’s certainly things that that people can do. And if they take the time to learn it and understand it.

It’s not rocket science by any means, but it’s still science. So it’s not just something you can, you can mail in. Like it’s still something that you have to really understand. And it’s not, it’s not native to most people. Most people have no idea what a tenant, like if I were to ask, and my, my dad is an example, who’s a retired teacher. If I was to ask my dad what, what an industrial tenant wants in a building, he wouldn’t have the foggiest clue, but he could tell you what an average apartment renter would want.

Cody Crabb (22:33)
Yeah.

Chad Griffiths (22:56)
just intuitively. there is a learning curve, there’s undeniably a learning curve. And a lot of investors have made a considerable amount of money investing in industrial real estate without having that risk. But they at least know what that risk is. And identifying it and avoiding it is takes time.

Cody Crabb (22:56)
Sure, yeah.

Yeah.

Yeah, I bet it sure does. So I’m imagining the people that would be the best suited to kind of dig into this immediately would be people that do kind of already have a good idea about, like maybe it’s your same market, like that’s your experiences in managing a business like this that deals with the warehousing or something like that. So ⁓ if someone is kind of just wanting to look at it and kind of get more information and dig in a little bit, what would you recommend they start by doing?

Chad Griffiths (23:40)
I would, the very first thing that I would do is start driving industrial parks in your city. And if you can’t do that for whatever reason, go on Google, Google street view and digitally drive the areas where you just start clicking and going through and just start really getting a sense for how large your industrial market is. And I still to this day drive industrial parks on the weekend where it’s very slow. Most industrial buildings are operating at a very small capacity.

So the roads are easy to drive through. There’s not a lot of traffic. I still do that to this day, just to see what’s happening or who’s moving into buildings, what business is going out of business, what spaces are coming available and really just start understanding at the most fundamental level, what is your market? And you might hate it. You might drive through an industrial park and say, I want nothing to do with these boring, bland concrete boxes. And that’s fine. Like I said at beginning, if it doesn’t,

fire you up. I just think that there’s way better investment ⁓ to do than industrial. But you might also get very excited and say, I no idea that this this company was here. Or one that I went through the other day was a business that just serviced arcade games. So they had 50 different like pinball machines and and Super Mario Brothers and Street Fighters and Mortal Kombat, all in various stages of repair and disrepair. And that’s all that they did.

Cody Crabb (24:51)
That’s awesome.

Chad Griffiths (25:01)
And I thought, of course there has to be somebody that does this because these things break down. They just did it at in an industrial scale. ⁓ Huge. Yeah. So if that gets you excited, ⁓ then yes, start driving industrial parks, start reading market reports. A lot of the big brokerage companies and appraisal firms put out quarterly reports specific to your market that will talk everything you need to know about the market at a high level and just really start

Cody Crabb (25:04)
Yeah.

And they’re huge, yeah, that makes a lot of sense.

Chad Griffiths (25:29)
understanding what the asset class is, and start getting a better sense of how you could see yourself diving into it. And the beautiful part is that you start putting your dipping your toe into it. And all of a sudden, you’re like, Okay, well, here’s something else I can, I can learn into, or actually, I didn’t know that my neighbor has invested in in warehouses, or this guy has been working at a industrial shop, or he owns a machine shop, things start connecting themselves as you start. It’s the thing where you buy a yellow car.

and then eventually you notice everybody driving a yellow car. That just stands out. It’s the same thing with industrial real estate is you start immersing yourself into it and you start connecting dots that you would never have thought of before.

Cody Crabb (26:00)
Yeah. Yeah.

Yeah, I suppose that businesses have to take place somewhere. Businesses have to take place somewhere and a lot of businesses can’t really just operate out of someone’s house. So like it makes a lot of sense that you know, you probably know a lot of people right now that are ideal tenants and things for that kind of thing.

Chad Griffiths (26:23)
For sure. And just driving through an industrial park is eye opening for a lot of people. You’ll see so many buildings that, by design, most industrial parks are out of public purview. The city planners don’t want to have these big industrial buildings in the sight of most people, so they’re tucked away. A lot of them are very ugly.

Cody Crabb (26:27)
Really, why is that?

They’re kind of ugly usually.

Chad Griffiths (26:43)
So they’re out of the public purview. So to actually go and start driving through them, you’ll just be amazed at how big some of these buildings are. And when you start doing the math and you start saying, well, that could be a $30 million building right there. Just to think of a $30 million house or a $30 million ⁓ multifamily building even, you really do get an understanding of just how large and…

Cody Crabb (27:02)
That’s a good point, yeah.

Chad Griffiths (27:08)
important obviously, but just how much opportunity there is within the industrial sector just by doing a 20 minute drive through an industrial park.

Cody Crabb (27:16)
Yeah, wow, wow, that is a little bit eye-opening, because I know that I’ve got some of those areas nearby, and I seriously just block them out. I can’t even tell you anything about them or anything. So that’s actually an interesting way to look at it, because I feel like a lot of people probably do that. And so if you’re an investor, maybe that’s a good place to start, depending on where you live. Well, Chad, thank you so much. This has been really helpful. If people want to connect with you and maybe…

I don’t know, learn, ask you some questions, learn more about industrial real estate or maybe pass you some deals or vice versa. Where can they where can they do that?

Chad Griffiths (27:48)
yet my website’s a good place to start industrialize.com. And there’s also information to my book on there. And I’m pretty active on social media as well, mostly LinkedIn and X. So if someone wants to connect on there, that’s a great spot as well.

Cody Crabb (28:03)
Fantastic. Well, again, once again, thank you so much for joining us today, Chad. And thank you listeners for also joining us. If you liked what you heard today, please go ahead and like, subscribe, do all the things, and make sure you follow us so that you don’t miss any more cool conversations with people like Chad. It’s been a pleasure. I really appreciate you talking to us today.

Chad Griffiths (28:21)
Thanks Cody, honoured to be here and thanks again for the chat.

Cody Crabb (28:23)
Yeah, of course. We’ll see you next time.

Chad Griffiths (28:25)
Take care.