Transcript

AARON STRAUSS

You’re listening to The Dealmaker’s Edge with A.Y. Strauss – diving deep into stories behind commercial real estate leaders.

AARON STRAUSS

Sean, thank you so much for joining our podcast today. We’re excited to have you on! You’re really one of the leaders in industrial real estate today, and we’re excited to learn from you, hear your background, understand your challenges, some of your successes. Let’s kick it off – maybe you can give us some of your background, you obviously come from a family business.

SEAN DALFEN

Sure; thank you for having me. Our business, the Dalfen name alone, I guess, started in 1935 by my grandfather, Joseph Dalfen. He came over from Eastern Europe to East Coast, Canada and started selling clothes to farmers. In the early 90s, my father, Murray, who was then President, made the decision to close the retail side of the business and focus exclusively on a new business, which was real estate in the US. In the mid-2000s, I joined. And, together, we made the decision, at that point, that it made sense – because of market conditions we couldn’t buy – so it made sense to sell. And we decided to sell the majority of his portfolio at the time. It was asset agnostic; there were office buildings, retail, industrial. And then I launched the fund side of the business and decided that we were going to be experts at one thing. At the time, it was called infill industrial, and that meant industrial properties that are close to the population or within the population centers. You fast forward to where we’re at today, and we’re one of the leaders in last mile industrialized as it’s termed today. And that’s all we do.

AARON STRAUSS

I think was pretty prescient; the bulk of the sale was sort of right before the precipice, right? 2007, if I recall correctly.

SEAN DALFEN

So, it was really between 2006 and 2008. You know, it was prescient; some say it’s good luck. We’ll take both. The way we operate our business is by looking at what’s happening on the ground and making decisions from that. And what we saw were tenants having trouble paying rent in certain markets and the velocity of new lease deals that slowed down. We couldn’t buy any assets because the pricing was too high, so it just makes sense to sell.

AARON STRAUSS

Well, the people I speak with in industrial really have some of the most amazing, amazing insights, which we want to try to pull out from you, generally. But we’ll take another track here, I know you deploy, in your day-to-day decision-making, a lot of proprietary technology. Without giving anything away too proprietary, maybe you can just address how you feel about technology in general, how you leverage it to understand the big picture, and how it informs your decision-making?

SEAN DALFEN

Well, analytics go into our business, really on a fundamental basis. I mean, what we utilize is what we call a top-down, bottom-up approach – meaning that we’re using our own proprietary last mile analysis to determine what does an optimal last mile location look like nationwide, and then, in individual markets, what are the best last mile locations within those markets. Then we use our bottom-up, which is our boots-on-the-ground in those respective regions and markets to find the assets that meet our property criteria. So, we use technology as a key component of our success in defining what is last mile and where we should be in the first place. Not to mention all the other technology we use, whether it’s tracking our deals or CRMs. I mean, every aspect of our business has some kind of technology involved.

AARON STRAUSS

Some people invest in industrial – they’re just obviously buying existing – but you’re really heavily developing too, which I think obviously gives you another facet of the sector that a lot of people don’t have. Tell me about how you guide that development team day-to-day, the infrastructure a little bit; you know, it’s a lot to undertake in real time.

SEAN DALFEN

We are doing a lot of development. I would say that we do more acquisitions than we do development, but development is a big component of our business and how we operate in our development side is similar to our acquisition side, meaning each region that we have, has its own specific deal team. That means, using the development side [as an example], we have the development director who sources the developments themselves, who also is well-versed in building of projects, understanding local laws, the right contractors, etc. And then underneath them, they have a team of construction professionals, a construction management team. So, you will have a development manager and a project manager. And we also have due diligence professionals who help within the acquisition.

So, each team focuses on a specific region and has to know that region intimately. And how we’re able to stay on top of all these projects is we’re incredibly organized, I mean, we have a very talented group of people, and we focus our resources where they need to be. They’re not spread out across the country, they focus exclusively on one area, and they know that area really well. And they’re able to piggyback on, you know, their experiences there in order to get things done. So, we certainly have a lot of people, but it’s about the systems you have in place from an organizational standpoint, where each person owns their respective role, and they understand their responsibility within that role and the timelines to get it done. And you have a leadership team in place that holds people accountable and ensures they get things done on time.

We do the same thing for acquisitions. You have that same structure, where you have, you know, the acquisitions officer, and you also have asset managers and property managers and analysts and associates within each region. And they cover those regions. It’s a holistic approach. So, the asset managers are very helpful in determining what we should charge for rents. Everybody has their role and knows what they have to do – they have regular meetings on a daily basis. Once you have a well-oiled machine, there are always things that go wrong, but you’re able to determine where the issue is a lot quicker.

AARON STRAUSS

It’s a great description of the infrastructure, and very impressive. I think a lot of people don’t get that if you’re going to buy and manage and oversee and develop tons of real estate, you also have to, you know, manage that machine, which seems like you’re really doing an amazing job. On the development side, you’re obviously doing industrial plays last mile. It’s sort of an interesting topic in today’s times. With a lot of the obsolescence of old-fashioned retail, some other centers can be repositioned. Have you explored those quasi-industrial plays out there, repurposing, a shopping center to add on adjacent industrial or an out parcel making industrial in connection with retail? There’s just so few industrial assets that are easy to buy today. So, I know, we’ve talked about sort of creatively getting those spaces.

SEAN DALFEN

We have in lots of different ways. We have a platform that has focused on a component of it, rezoning certain properties, typically standalone buildings that are ideally located. I mean, we’re doing it. I got off a call a few minutes ago that was related to that. Changing the zoning, scraping it, and then building an industrial facility on it. I can tell you that I am not personally a believer in converting dead malls into industrial that everybody talks about; I think it’s a pipe dream for the most part And most cities don’t want industrial, they just don’t want it.  They want retail. I mean, they want other things that may not be viable anymore, you know, every step of the way. They’ll put roadblocks in your way. And, you know, for good reason in lots of areas, they want industrial, and they want something else. Maybe they want a lifestyle center, more multifamily. The point being is that the effort associated with doing that and your level of success, the odds of you being successful – it’s a time value of money thing.

AARON STRAUSS

Yeah, the risk doesn’t pencil out. And now maybe we’ll talk about the fundamentals. You are, I know, obviously very bullish, I think, you know, in the last half year, and I probably overestimate I know it keeps going up and up in real time. But it’s been over a billion and a half in deals in the last half year or more at this point, and you’re acquiring heavily. But the last year, I mean, you’ve been on a tear, I think, even by your own standards. You’re just growing and growing; there doesn’t seem to be any signs of slowing down in the last mile logistics space. But when you see deals – other than understanding the last mile component with the proprietary tech – what are the things you’re thinking about? The first five minutes as you are underwriting a deal?

SEAN DALFEN

First, I just want to address one point, and it’s in relation to our growth. We have not grown exponentially. We’re acquiring slightly more this year than we did last year, but we have been incrementally growing over the years. It’s just more public and noticeable today because people are really into industrial. So, before we would have been ignored because we were just industrial guys; today, it’s like wow, you’re doing all these deals. Well, we were doing these deals last year; no one paid attention; and the year before.

What do I personally look at? Well, I’m a deal guy. And so, the first things I look at are the construction of the buildings. Are they good buildings? And do they have the ability to be released easily? What are the locations of the buildings? Is it in a good location? Is your access to it, what is your ability to access the population surrounding? What is the use of this facility? Is it a fulfillment center or a larger distribution/fulfillment center where you may have to rely on heavy employee base and if so where your employee is going to come from from the warehouse end? There are all kinds of different factors. But in the first 10 minutes, we can usually determine if it’s a deal that we’re going to continue to look at.

We don’t get too creative in what we buy, from the standpoint of, we want to buy Class A and B+. Occasionally, if it’s infill B properties. You want modern, high quality industrial buildings that don’t have too many warts on them, that can be leased to a myriad of different tenants if they’re not already leased, and that they have long standing value from a location standpoint. So, if it doesn’t meet those criteria, we’re likely not going to buy it. And even if something yields a lot, you know, we could go after flex buildings and get really good yields, far higher than the type of product that we buy today, but we’re not believers in that space. We stick to our niche and our knitting, and we just improve on that.

AARON STRAUSS

Well said. Well, somebody out of school comes and sits you down and manages to coerce you to get a cup of coffee with them and wants advice about breaking into industrial real estate today. What are you telling them in this in this really hot time, really hot market? How are they getting into the space or generally commercial estate investing?

SEAN DALFEN

Well, my career advice is, wherever you do, do it well. Try things out and see if you like them. I don’t think that any of us who have experience in a space continue to do it, and like what we’re doing, because we don’t like the problems that we’re dealing with it. Whatever you do, you’re going to encounter problems. That’s all I deal with every day is just dealing with problems. Find something where you like the problems. And hard work. I mean, that can’t be underscored. I know we’re in a generation of, call it instant gratification. Maybe I’m old school, but I am of the school where you put in your time, you work those long hours, and you’re going to gain a lot from it.

I would tell a young person today that the real estate world today is not like the tech world, in that you can jump jobs every six months, a year, two years and you’re really going to grow your knowledge base and your ability to excel in companies. You have to stick around for a long time, and by you sticking around and putting in your time and working hard, you’re going to give yourself the best opportunity to grow and be successful in this space. I think real estate is real estate. Whether it’s industrial real estate or residential or retail, understand that space and find something within that space that makes you unique. And that’s how you can have a successful firm.

AARON STRAUSS

I mean, you said real estate has problems and day-to-day successful business has a lot of problems. It always looks really exciting on the outside, but day-to-day, it’s a ton to manage

SEAN DALFEN

Life is problems, Aaron.

AARON STRAUSS

Life IS problems; well said.

SEAN DALFEN

You know, I’ll just leave you with this; it’s something I read. I didn’t invent it, but I read it in a book. It said, you know, you don’t have a car, you have problems about how you get to work every day. You have to take the bus, wait for it. And, you know, you’re cold, and it sucks because you’re waiting outside. Then you get your car. And then you have to pay for the gas and maintenance on the car, the cost of the car. And then you get a nicer car, and you know, so on and so forth. You just increase the level of problems; they just become different. Everything that you have to do in life is a problem, so just make sure that you are grateful for the problems that you have.

AARON STRAUSS

Really, really well said; I think that’s a terrific lesson. And I think that’s your edge. How did you, you know, get through all those problems?  It really seems like the mentality is there. You know, the mentality, the mindset, the open mindedness, that every problem is just an opportunity to refocus and re-establish yourself. But any advice on managing the mental side of the game that people don’t see day to day?

SEAN DALFEN

You know, my wife asked me that a little while ago, and she’s much smarter than me. I was home for whatever reason. I worked out of my house for the day, and she just happened to be around me more than she otherwise would have been at home. She said, how do you deal with all these problems? You’re on the phone all the time dealing with one stress after another. And I said to her that the benefit of having so many different stressors is it’s very difficult to focus on any given one.

AARON STRAUSS

Oh, that’s good. That’s deep, Sean. I love that. I’m going to use that.

SEAN DALFEN

It’s just the way my head works, I have so much to do there’s nothing to get stressed about, there so many, there are too many options.

AARON STRAUSS

I mean, yeah, they get diluted as a result.

SEAN DALFEN

So, I think again, it comes down to liking what you do and recognizing that we all need time off, too. I can say, for me, time spent with my family is more important than any time that I spend at work – although, you know, I have a tendency to want to work more than I probably should. You can’t get back time with your family, and you need to destress in certain ways. Everybody deals with stress differently. You can choose meditation; you can choose sports; or you can do all the above. But I think it really comes down to liking what you do; if you like the problems you have, then you’ll tend to be able to deal with them.

AARON STRAUSS

Sean, I could not have said it better myself, and really what a tremendous amount of advice given and thoughtfulness.

SEAN DALFEN

Thank you for having a terrific podcast!

AARON STRAUSS

I really, really appreciate you joining.

AARON STRAUSS

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