Transcript - How to Win Work With Pattillo Industrial Real Estate, with Larry Callahan

Audio:                    Welcome to AEC Marketing for Principals, brought to you by Smartegies, where we help design and construction firms navigate sales and leverage marketing to win more projects. Here are your hosts, Katie Cash and Judy Sparks.

Katie Cash:                    Hi, everyone. Welcome to today's episode. I am excited to be here today talking with Larry Callahan, the chief executive officer at Pattillo Industrial Real Estate. Pattillo is one of the largest privately-held industrial development operations based in the Southeastern United States. They specialize in the development, acquisition, and management of industrial buildings, so we are really excited to talk with you today, Larry, and I really appreciate you taking time out of your day to share your thoughts and opinions with our listeners.

Larry Callahan:              Well, thank you, Katie. Looking forward to it.

Katie Cash:                    Great. As we get started in today's discussion, maybe you could share just a little bit more about Pattillo and maybe what your firm does, how many facilities you guys look at developing each year, maybe where those tend to be, and anything like that, that you might just provide some context behind your particular company and what you do.

Larry Callahan:              Well, thank you. We are fairly well-known in the industrial world. We're based here in Atlanta, but we are now invested all over the Southeast, and we're as far North as Louisville, Kentucky. We're in Nashville. We're obviously got a lot in Georgia, based around Atlanta. We are actively investing in Greenville/Spartanburg area, which is near the BMW plant there, in Charleston, South Carolina, which is an economy that's being driven by major investments by large companies like Boeing, Mercedes, and Volvo. We have manufacturing plants there. We're in Jacksonville, Florida, and we're poised to move into other locations once we identify them as outperform locations. Our company started in 1950, so we're actually closing in on 70-years-old. The company has been through a lot of evolution over time, but we've been involved in the creation of over 1,000 industrial buildings at this point. We've done a lot in the industrial arena. It's the area that we know, and we're just going to keep doing it.

Katie Cash:                    Well, that's great. I love that you shared that background with us. Wow, 70 years kind of focusing on one vertical market of industrial development. I bet you've seen a lot of things come and go. I bet you're kind of anticipating the next big thing in terms of trends in development. Could you share with us maybe what that economic forecast might look like for industrial development across the southeast? As we sit here today going into the fall of 2019, what are you guys looking at and what are you expecting?

Larry Callahan:              Well, the industrial market has changed dramatically. Probably, the early stages of it we saw in the '90s, but it really accelerated when you got around the year 2000. A push, as I describe it, for the base of industrial buildings to move to a different scale, and I refer to it, as we were describing to our team, as the move has been to go to taller and younger. The the scale of industrial buildings when I started in the business back in 1985, 100,000-square-foot building was a very large building. Now, a very large building is something over 1,000,000 square feet.

Katie Cash:                    That's a big change.

Larry Callahan:              Yeah. There's not that many businesses. If you were in there automotive business then, cars have changed and a lot has changed, and safety features and things of that nature, but cars are still about the same size. Maybe a little smaller for a lot of them, but not dramatically. A big building is now 10 times the size it was when I started. It's not just the footprint of the building. They're substantially taller. Large buildings in the 1,000,000-square-foot range are now frequently pushing up near 40 feet as the clear height inside the building, and that's a major shift too, because when I first started, it was common to see buildings that were 20 feet tall in 100,000 feet maybe. 100,000 square feet is a building that is roughly the size of, say, two football fields under roof., so that's a pretty big building. But again, now the standard is 1,000,000 square feet for large fulfillment centers, for e-commerce buildings, and things like that. That's closer to, say, 20 or 22 football fields under one roof, so those are very large buildings.

Katie Cash:                    What's really driving the size of the new industrial buildings? Is it consolidation in terms of having one major location? Is it just the complexity of the equipment? Is it automation? What's kind of driving that new 1,000,000-square-foot facility?

Larry Callahan:              Well, e-commerce is the biggest user of these big buildings. There's a huge transformation going on in the utilization of commercial space that's designed for the delivery of products to customers. We used to call that process retail.

Katie Cash:                    Sure.

Larry Callahan:              It's not that retail has gone away. Retail has moved toward, they call it, experiential, trying to give you a good reason why you need to go to the store and actually touch and pick out what it is that you're going to be putting on. Some people won't buy shoes online because they don't know what they're going to feel like on their foot, so they actually go out and try them on before they buy them. There's things like that, but there are a whole lot of products now that the way that people receive them is they, either on their phone or at their computer somewhere, go to a online store, whether it's Amazon or Walmart or Home Depot or whoever they might decide that they want to go shopping with, and they click on it, and it shows up at their door. They don't think about how it got there.

Larry Callahan:              There is a huge transformation in how it got there. It used to be that you'd walk into a store, and if you didn't find what you wanted, you walked onto another store. Maybe you got in your car and you drove to another place. Now you just click on it, but where does it actually come from? It doesn't actually, generally speaking, come from a mall. There's not a 2,000-square-foot store that receives your order and sends it out. It's all coming from the large fulfillment centers that are massive operations that have lots of products in there, and they are filling your order as quickly as possible, but they're doing all that in an industrial building.

Larry Callahan:              The demand for e-commerce, the sales growth in e-commerce is growing at, depending on whose numbers you look at, somewhere in the neighborhood of 10% a year in an economy that's only growing about 2% a year. E-commerce is dramatically changing the landscape, and they are requiring a large number of new industrial buildings every year. The reason that they tend to be new is there's not a accumulated inventory of 1,000,000-square-foot buildings from 20 years ago that are filling the e-commerce needs.

Katie Cash:                    Yeah.

Larry Callahan:              There weren't industrial buildings at that size. In fact, if you go back to... I believe it was 2005, in that time frame, Amazon was basically a virtual company in many respects. They were receiving orders and getting them shipped from other places, and they had about three of these large fulfillment centers in the United States back in that timeframe. Well, now the latest count that I've seen is they have somewhere in the neighborhood of 400 facilities that they're using to try to basically be the supply chain that delights you by getting the product to you within a day or a day or two. They'd like to eventually be able to have you click on things and they can get it to you within a matter of hours.

Larry Callahan:              In order do that, they to have huge networks of buildings and facilities and partners, and they're more and more pushing into being, in addition to an online marketplace, in addition to being a huge provider of internet services, they're also becoming a delivery company. They have all these facilities, and they are more and more pushing to have the whole supply chain under their control. Everybody's aware that the post office delivers products for Amazon and UPS delivers products for Amazon. Until recently, FedEx delivered products for Amazon, but FedEx decided not to renew and not to keep doing that, which is, I think, reflective of the thinking that Amazon may actually be competing with them. They're competing, in my opinion, with UPS.

Larry Callahan:              Also UPS, about 10% of their a business is delivering for Amazon, but Amazon is building the infrastructure to directly compete with what UPS does. Amazon has got something in the neighborhood of 60 planes that it now operates out of a hub that it has created in the Cincinnati area. It has recently purchased 20,000 Sprinter vans and is encouraging both existing employees and other people to set up delivery services using their software and tying into their systems, but the independent companies delivering for them, 20,000 vans is a lot of vans.

Katie Cash:                    That's a lot of the vans, but I'm just one consumer, and I know that I order on Amazon probably at least once a week. There's something that I decide that I have to have and I don't want to go to the store for it, or I don't want to wait for another retailer to send it to me in two days or three days or even a week, so I'll just order it on Amazon. You're right. It's there the next day. I appreciate their efficiency. It's kind of also spurred this expectation, I think, in the average consumer's mind that all retailers will do that. Do you see other retailers kind of following suit and that's kind of spurring the addition of this industrial kind of boom we're seeing right now, keeping up with Amazon?

Larry Callahan:              Absolutely. We're in a world economy in a world market, and you are either world-class or you will be run over. Yes, it has raised the game of everybody. For awhile, it looked like Amazon was going to take over the world, and they are certainly setting the standard for a lot of things, but there are other providers that are very much in this game. If you're at Amazon, your issue is you didn't have a physical infrastructure. That's why they've gone up to the point now where they have 400 facilities, most of which, I believe, are leased. I'm sure they own some, but most of them are leased. You compare that to somebody like Home Depot, who did not start as an internet-based company but now has become a major player in e-commerce.

Larry Callahan:              Home Depot has the advantage of having several thousand stores that can be used to help with the delivery process. The stores like Walmart and Home Depot and many others have their own e-commerce strategies, but those involve the integration of selling directly out of the store and selling through the e-commerce system. They've created their own multiple buildings in the 1,000,000-square-foot range, establishing a network of e-commerce delivery, and they've also integrated that now and they're all working to integrate the delivery systems to include deliveries directly from the stores. That's an advantage that they've got.

Larry Callahan:              But the world of retail and the world of industrial have intersected in a way that they never did before. It is wind beneath the wings of anybody who's in the development business, in the industrial development business in particular right now, and it's creating a lot of opportunity. It's creating a tight market, and it's creating a need for new space to be created. This new space is significantly different from the space that existed in the past. You can't just fill this new need by putting somebody who needs 1,000,000-square-foot fulfillment center that's 40-foot clear height. You can't solve that problem by putting them in a 100,000-square-foot building that's 20-foot clear that was built 35, 40 years ago.

Katie Cash:                    Yeah.

Larry Callahan:              It's driving [inaudible 00:14:06] in the business.

Katie Cash:                    Well, and maybe let's talk about that a little bit more. As I'm listening to you talk and I'm kind of thinking of the major markets, you mentioned some pretty sizable markets in which Pattillo has serviced in the past, Atlanta, of course. You mentioned Nashville. You mentioned a handful in Florida, a handful across the Carolinas as well. But if your clients are looking for 1,000,000-square-foot facilities, I have to imagine that's a pretty sizable land acquisition ask. Where do you find 1,000,000-square-foot land parcel these days when I keep hearing that there's really not that much left to develop and everything's going to brownfield sites? What does that kind of process look like as you're trying to develop those new facilities for 1,000,000-square-foot facilities? Plus, on top of that, you have to factor in parking for the staff that's going to work there as well as loops for the trucks and everything, correct? It's not just the building. It's got to be a much larger footprint for the overall development.

Larry Callahan:              Yeah. That's a key question, and it's a hard one to answer. I'll answer it on two levels, but first of all, just trying to find sites. Not every building getting built is 1,000,000 square feet. The average building that's getting built these days is closer to 200,000-square-feet, maybe 250, somewhere in that range. Those are still pretty big buildings. We're talking a building that's maybe five or six football fields under one roof. There's a lot of activity in that range right now, but even those buildings do require big chunks of land. As a company, one of the things that we have done for many years is accumulate prime industrial sites in many locations. We own literally thousands of acres of industrial land that is already zoned and ready for this type of development, but we don't have an unlimited supply. Nobody does.

Larry Callahan:              This has been going on for a while. There does start to become a shortage of sites because a site that can accommodate one of these 1,000,000-square-foot buildings, and some of them get bigger than that, but they tend to be sites in the area of 100 acres to accommodate both the building and the parking and employee parking that goes with it. Finding a 100-acre site that doesn't have a stream through it or a utility easement running that can't be moved or something like that is not easy. That's player number one. Yes, it is a concern, but people keep finding those sites. But the historical answer in terms of where industrial went, industrial tended to move further out from the core of a city and tended to go to farm land and convert farm land into industrial buildings, especially over the last 60, 65 years. They tended to be located close to the interstates because it's all about distribution and...

Katie Cash:                    Yeah. Ease of access. Yeah.

Larry Callahan:              The ideal place to put an industrial building was an exit or two beyond where all the activity is and convert farmland to that. And ideally convert it as close as possible to the interstate. Yes, it is a problem trying to find the next site for the next 1,000,000-square-foot building. It's an issue all over the country. That's one issue. But then the next issue, which makes it even more significant, is that the big push with e-commerce is now everyone has figured out how to take orders and delight the customer by this selection that you have, and them again by quickly getting the product to them. That's what Amazon Prime has been all about, and there are now 100,000,000 people in the U.S. that are Amazon Prime members. They're paying a fee in order to be able to get things quicker and less expensively from the shipping standpoint.

Larry Callahan:              Now the big push is, "How do you keep improving?" The improvement is all about quickness to get things to people. The only way you can do that, if you have, say a national distribution center somewhere in the country, and you try to take all orders there and ship all over the country, you can get things to people within two or three days pretty consistently. But if you want to try to get things to people in a matter of hours or, if nothing else, the next day after you click on something, if you want to do that, you've got to place that product close to where the people are. As I said, historically industrial tended to be on the outskirts. There are people that really don't even know where all the industrial is. They'll operate in a city and come and go and ride the train or be on the main highways, and they've hardly ever seen industrial because it's always a little bit off the sides of things and not usually in the center of town.

Larry Callahan:              Well, now the ideal location for these distribution centers would be right near the heart of town. Well, that's very difficult because the heart of town is both very expensive and probably already developed as something else. The availability of land tends to be greater the further you move away from the heart of the city. The demand right now, the ideal demand, is as close as possible to the center of a city for distribution purposes. The results of that have not played out already.

Larry Callahan:              It's going to take some time before it all is clear how that works, but some things that have happened include multistory warehouses being placed, and most warehouses are one floor. [inaudible 00:20:30] 40-foot clear [inaudible 00:20:31] one floor. They may have a mezzanine level installed that's made out of a metal usually, and racking systems and all of these things, but they rarely have a second. But they started doing this kind of thing in Asia because of price of land near big cities. That's one thing that's happening. The other thing that's happening is redevelopment. That includes such as malls, whole malls. There have been malls in the United States that have gone dormant, part of the retail restructuring.

Katie Cash:                    Yeah. Part of that-

Larry Callahan:              Some of those have been actually torn down... Yeah. They're either torn down or repurposed into fulfillment centers for e-commerce. It's kind of an interesting flow because it's a re-purposing for the same original intent. It was, "How do you get products to customers?" Well, it used to be you opened your door in a mall, and the customers walked in. Now they're clicking on something somewhere, and you just make it show up on their front door. It's a very significant shift, but the repurposing of various sites that are close to town... But I think industrial is going to be part of the redevelopment of older parts of major cities in order to be able to be close to the customers.

Katie Cash:                    I wouldn't disagree with that either. I think that's probably one of the biggest challenges facing the commercial real estate market these days is trying to figure out how to effectively utilize what used to be those large strip shopping centers, large malls, and repurposing them so that they become more part of the community asset. It sounds like there's a play here to repurpose them for industrial developments where it makes sense. Maybe while I have you on today's episode, I'd love to pivot just a little bit and talk more about Pattillo Industrial Real Estate, and for our listeners out there that are architects, engineers, program managers, or contractors that might want to explore being one of your partners and helping you develop or build or design your next wave of industrial projects, what that might look like. Could you share a little bit about kind of the process that your company uses in terms of entertaining client meetings with architects, engineers, and contractors, if there's any prequalification process, what that contracting partnership might look like, if it's a period of time or project by project? Can you talk a little bit to that?

Larry Callahan:              Well, one of the things I like having in our company and also when we're dealing with outside folks is I like people that are team-oriented because the development process is absolutely a team-oriented process. It is a process that involves a lot of people starting with the community in which something is happening. You always have to remember that the community has to grant you permission to do whatever it is that you're planning to do. There is a zoning process. There is a building plan review process. The community is already a part of the process of creating things. Then the team of people that get involved in actually executing the plan is substantial. It varies from place to place. People have expertise both in construction and design that is gained by doing things in a particular location.

Larry Callahan:              It's hard to find any one firm that is the answer for every situation. I think my count is something like 13 construction companies that we work with, and we've got a stable of architects and engineer's who we work with, depending on what the subject is. That's a huge part. They share in our success. In fact, our success is a byproduct of their expertise and their commitment and their willingness to work together as a team. Every project is a process where we try to figure, "Who is the best fit for what is needed here?" Whether we're talking design or selection of a construction company, our job is, at the start, to figure out, one, "What is it we are going to try to build here?", it's either a speculative building or a build-to-suit for one of our customers, "Who is best suited to do this project?"

Larry Callahan:              When you've been in the business as long as we have, you know the major players. Sometimes there's a new one coming up, and we entertain that also. But we know the major players in the business, and we've already established relationships with them. Then we allow them to bid on the opportunity to do what is going to be done. Most notably and most of the time, we have three people that are involved in the bidding process. Generally, it's selecting the architect that's going to be involved in it first, and they help us with the process of then creating plans with which we can prepare a very good set of estimates as to what this is going to cost. Then we decide who we're going to work with and how we're going to put the team together.

Larry Callahan:              Over time, the architects and the engineers and the construction companies all get to know each other, and they bump into each other in different permutations over and over again, but our process is... We are like any other professional industrial developer. We are looking at who we're working with right now, we're studying how they're performing, and then we love doing repeat business with people. They all work hard to earn that. Then, again, it's a selection process for us where we are always trying to find both the low cost and high quality that our customers expect. That's the process that we go through.

Katie Cash:                    When it comes to construction specifically, are you typically hard bidding the project or are you ever engaging, say, in design build or engaging a construction manager that brings in some pre-construction expertise, or is it typically you hire an architect, go through design, and then you bid it out for work?

Larry Callahan:              Yes. That's what we tend to do. We've got our own construction management in-house, so trained professionals that are very good at what they do and have lots of experience and have built millions and millions of square feet of industrial buildings. They're the ones who sort that out, and then we manage the process internally.

Katie Cash:                    Well, and I would imagine if you are looking for either a design partner or construction partner for your standard industrial development, that 100,000 and maybe 300,000-square-foot facility, there's a certain set of qualifications that you're looking for, for that partner. But then when you start looking at the 1,000,000-square-feet and larger, I would imagine that's a different pool of contenders because there's an added layer of risk when you start getting to projects of that size and scale. Is that correct, or is it kind of it's four walls and the ceiling no matter how you scale it, big or small?

Larry Callahan:              I would say that we had the same players. Most of the buildings that we're building are in that 200,000 or above range.

Katie Cash:                    Okay.

Larry Callahan:              Either from a design standpoint, engineering standpoint or construction standpoint, all the firms that we're dealing with are capable of scaling it up from there to 1,000,000 square feet with with gusto and enthusiastic.

Katie Cash:                    I love that, with gusto. Okay. Well, I have appreciated your time today. I'm just going to recap for the audience based on my understanding of our discussion. If I've misquoted you in any of these, do chime in. But talking through the industrial market today, really what we're looking at is a convergence of both retail industrial coming together really to support e-commerce, and that's really what's spurring up a lot of the new developments. Some of these new developments are getting on that 1,000,000 square foot or larger in scale, roughly 100-acre site development, but the average remains in that 200, 250,000-square-foot facility.

Katie Cash:                    Really, the tenant need, your Amazon need, your Home Depot, those guys, the last mile delivery and this rapid technology evolution are what's reshaping the warehouse design needs in today's marketplace and kind of determining what those facilities look like, driving the size of it out, driving the height of it up, whether or not it includes additional office space and whatnot. Then also another trend is that location preferences are starting to change where you're moving from siding all of your industrial developments on the outskirts of town in that what used to be the rural farm lands and bringing it closer to the heart of the city and expecting to see that continue, really, as you continue to support that expedited delivery expectation for distribution direct-to-consumer as we see e-commerce to continue to evolve.

Katie Cash:                    When it comes to working with developers like yourself at Pattillo and others in the industrial market, it really is about finding partners that are a true team player because the scope of industrial development is a team sport, and you need people at the table with you that are invested and engaged in the project, engaging in the community, and moving forward, focusing on that end goal. If they're working with you, [inaudible 00:30:47] can expect to have roughly three people involved in that selection process, looking at finding the right partner, the right fit for the project, and, like you mentioned, building that relationship together, project over project, and learning the nuances and building some synergies and working on projects together over and over again. Is that a good summary for today's discussion?

Larry Callahan:              I thought that was a good summary. The one thing I will say is that push and that desire to be as close as possible to the customers for e-commerce last mile delivery is an ideal that is very hard to meet both from a cost perspective and a simple availability. There's only so many 1,000,000-square-foot sites that anybody has control of that's ready to develop, and there's even fewer of them the closer you get in to where the population lives. It's going to be something that there is a strong demand for, but it's going to be limited. One of the prices of doing this is the price of land keeps moving up. If it's land that fits the criteria that we just described, people will pay a lot for it. I saw recently where in New Jersey, which is obviously New Jersey and right next to New York, a huge distribution area because of the population that's there, but it's an area that's been developed for a long time. To get industrial land up there, the recent top price that they heard was $2,000,000 an acre.

Katie Cash:                    That's a pretty penny.

Larry Callahan:              Yeah. An acre is about the size of a football field, so for one acre, having to pay $2,000,000, and then you need 100-acre site to do something like this. That's a lot of money just invested in the land. As I say, you are correct. That is something that people are trying to find, but economics will require them to have economics and availability. There are still going to be a lot of industrial around the perimeters of major cities just because of the availability of the land that is zoned for this purpose is there, and it's going to be a trend that people are going to run into significant limits on. Picture if you want to put 100 acres in the middle of Manhattan. There's an office building there. Where do you want to be? There's an office building there already. It's very difficult to actually get to that. The result would be that you have a lot of things on the perimeter there.

Katie Cash:                    I agree. Larry, I really appreciate your time and certainly sharing your expertise. If anybody out there on our podcast listeners, if they want to connect with you, what's the best way for them to reach out to you or to get connected with everything that's happening with Pattillo?

Larry Callahan:              Well the Pattillo website is www.patillore.com. The R-E stands for real estate, so www.patillore.com. That'll open up the vistas of what we do and who we are and our team, which is a great team of professionals.

Katie Cash:                    Fantastic. Well, everybody out there, thank you for listening, tuning in. Hopefully you found this episode insightful and now you understand a little bit more about what's shaping the industrial market in today's marketplace. Have a great week, and we will see you next time.

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