SMARTCAP’s industrial development strategy is to build flexible-use buildings supporting multiple types of users, such as manufactures and distributors. We design buildings to support multiple size formats, ranging from 5,000 SF to 100,000 SF. The size range is a unique advantage as it supports more potential users. Black Creek, a large national industrial developer, shares a similar strategy to SMARTCAP. In their 777,000 SF Atlanta area project, they are constructing buildings that will support leases between 40,000 and 400,000 square feet.
How will co-working spaces perform during a recession? With WeWork’s failed IPO in the news, SMARTCAP is being asked for their opinion on the long-term viability of co-working spaces, as well as how they will hold up in recessions. The article shared highlights some of the challenges the co-working industry faces. At the heart of the co-working problem is their business plan. Co-working operators are signing long term liabilities (leases in a building) but have short term revenue to support those liabilities (short term leases to their customers). When economic stress is applied to that equation, the only way for those co-working companies to survive is to have large cash buffers. For SMARTCAP to buy a building with a co-working space, we want to see the space’s existing occupancy over 95%. In addition, we want to see lease rates that are supported by a co-working space occupancy rate of 60% or less to ensure the rent can still be paid during a recession.
SMARTCAP has often mentioned that eventually businesses will embrace the power of opportunity zone tax incentives. By building industrial manufacturing and warehouses in Opportunity Zones, SMARTCAP is creating the space for many of these manufacturing businesses that we think will emerge have a place to locate.
Over the last several years, we have reduced our investment scope in order to become industry experts, specifically in office and industrial. Our two primary areas of focus have been east side (east of Seattle) suburban offices and north Seattle industrial developments. The last year has been an exciting time for SMARTCAP, and a culmination of the focus we have had over the last several years. In 2019, we closed $50MM in office acquisitions and launched our second development project, which will total $22.5MM in total cost over two phases of development. We are currently negotiating an office acquisition that will be a $40.5MM off-market investment and expect to close before the end of 2019. The success we have seen over the last 12 months has solidified SMARTCAP as a major player in the Seattle region and has changed the dynamic of our company in the market. Since 2014, we have seen an average of 3-5 off-market deals a year. Often, those deals were heavily marketed or otherwise well-known. In the last three months alone, we have seen 11 off-market offerings that are truly off-market, including the acquisition we are currently negotiating. For the first time in our company's history, brokers are bringing SMARTCAP opportunities first. We are also having sellers say yes to our offers in a major way and no longer questioning our ability to execute!
These changes are incredibly exciting and give us the opportunity to be selective in which investments we make offers on, as well as providing the capability to see the best assets first. This will increase our ability to bring our investors high-quality offerings with great value and continue to grow with a smart, conservative, and value-based approach to real estate investing. All of this leads to stronger, more stabilized investments for you, which is our mission. Thank you for being part of our company. We look forward to many more years of successful investing alongside each of you.