The president and CEO of a regional industrial developer based in Southern California shares his insights.
WATSON LAND COMPANY has developed, owns and manages close to 17 million square feet of distribution buildings within master-planned industrial centers throughout Southern California. Bruce A. Choate is president and CEO of the Carson, California-based firm.
Development: Could you tell us about Watson Land Company and about your background?
Choate: Our ownership traces back more than 200 years to Rancho San Pedro, the first Spanish land grant in the state of California. The firm incorporated as Watson Land Company in 1912 in anticipation of the Revenue Act of 1913 and elected REIT status in 1990, around the beginning of the modern REIT era.
I was always fascinated by markets and real estate, even back in high school, when I first began reading Fortune magazine and The Wall Street Journal. After college, I began working as a mortgage banker and went on to hold various finance positions with lending institutions, hoping one day to be a developer. My big break came when Bixby Ranch Company, another Spanish land grant company, hired me as chief financial officer. Watson recruited me about 10 years later to join the firm as CFO in order to help it transition into a privately held REIT. I served as CFO for 10 years and was named president and CEO in 2002.
Development: As CEO, what are your core areas of focus today?
Choate: My core focus is preserving the history, culture and values of the company, while at the same time looking to the future. Our early election to become a REIT and our pioneering efforts to develop buildings to LEED standards serve as examples of how we have blended both objectives. Given our long history, it is my job to pass the torch while making sure that it does not flame out on my watch. I have a great appreciation for Watson Land Company and its heritage: it was here a long time before I arrived, and it will be here a long time after I’m gone.
Development: What qualities do you look for when hiring senior staff?
Choate: We pride ourselves on being a good place to work and build a career. We rarely lose an employee, except to retirement. For a new employee, a high EQ (emotional intelligence) is equally important as a high IQ. Most people can learn a skill, but character is more difficult to come by. There are many managers in our industry, but not many leaders. Jim Collins’ “Good to Great” is mandatory reading for our employees. This book has given us a common philosophy and vocabulary.
Development: What market or economic data do you review on a regular basis to stay on top of your industry?
Choate: We find that demand for industrial buildings strongly correlates to four fundamental factors: industrial production, international trade, GDP growth and consumer spending. We have developed an internal dashboard to follow supply, demand, rental rates and occupancy factors in the markets in which we operate. We track availability and pricing in capital markets and, lastly, we follow demographics and general economic conditions. We do not pretend to be economists, but gather data from sources that have been reliable and accurate over the years. We believe in business cycles, but at the same time acknowledge that we cannot accurately predict where we are in a cycle. So we do our best to anticipate cycles and modify our land acquisition and development activities accordingly.
Development: At the moment, there is tremendous demand for industrial real estate. What locations and products are doing best and why?
Choate: New development is moving to the Inland Empire because most of the Los Angeles Basin is fully developed. We are finding that people who occupy distribution buildings are focused increasingly on functional features such as dock high doors and large concrete truck courts, and clear heights are getting taller, with 36-foot clear the new standard. Sustainability has become a big deal. Our corporate headquarters was the first LEED Platinum office building in Southern California. As our business becomes more institutional, investors and tenants are increasingly looking for buildings to be LEED certified.
Development: Are you seeing signs of demand letting up? If so, in what locations and for what product types?
Choate: Demand is fairly “steady as she goes,” and has been fairly consistent across Southern California markets. In the initial stages of the recovery, we saw a bias toward larger buildings, 200,000 square feet and up in the South Bay area and 400,000 square feet-plus in the Inland Empire. In the beginning, the smaller buildings were left out of the recovery and, oddly enough, some of the larger buildings were leasing for more rent per square foot than the smaller ones, which is something we had not seen before in our markets. But in the last 18 months we have seen smaller product make a huge comeback. Supply is now in a historically low range, and lease rates and sales prices are approaching peaks. We know that nothing lasts forever, and things are so good here that we are starting to look over our shoulders a bit.
Development: Are certain markets being overbuilt today? If so, which ones and why?
Choate: In all of the markets throughout the LA Basin, rental rates are high, occupancy is high, values are high, cap rates are remarkably low. New supply has been controlled, and the capital markets have helped with that. I cannot point to any indicators that cause me concern, except for the fact that trees don’t grow to the sky. So when things are going very well, that is when you think about taking your foot off the accelerator.
Development: Over the next 18 months, what challenges/opportunities do you see for your business?
Choate: Short-term, port disruptions concern us. The one on the West Coast in early 2015 was settled, but we are concerned about long-term damage from it. We are hearing from many of our customers that they are looking to the East Coast; they are talking a lot about redundancy and saying that “never again” do they want to be susceptible to disruptions here. So we do worry about how disruptions create competition from other ports. We are looking to develop and invest on the East Coast, especially around the New York-New Jersey and Pennsylvania markets. We are also concerned about the regulatory environment in California.
Development: Looking out three to five years, what do you see on the horizon that will impact your business? Could you tell us what you are doing to prepare?
Choate: We are concerned about rising land values and our concentration of assets on the West Coast, so we are looking to renovate and develop on the East Coast. We like Lehigh Valley, Pennsylvania, a great deal. We have a lot of customers interested in that area who are asking us to follow them there. When we are in Lehigh Valley, we feel like we are at home. Originally, we focused our attention on the ports in the east, but we have found that it is less about where the goods enter the country and more about where they end up being consumed.
Development: How has the industry changed during your career?
Choate: The biggest change is that the industry has become more professional and disciplined. Real estate ownership has become more concentrated and more institutional. Today, those who are successful in our industry are good allocators of capital, because success requires an ability to navigate a variety of markets and equity and debt sources that did not even exist years ago. Finally, it requires an ability to compete in markets that are increasingly informed and liquid.
Development: What is the most valuable lesson you’ve learned over the course of your real estate career.
Choate: When I first started in this business, I thought it was all about the bricks and mortar. Over time, I have learned that it is about the people who live, work, shop and seek entertainment in real estate; it is about the people who design, build and manage the real estate that we own; and it is about the family members and charities that own our company. I had it backwards in the beginning. I thought real estate was the goal, but it is really a means to an end. It is about the people.