Driven to Succeed: An Emerging Brokerage’s Story
- Jan 28, 2019
Cincinnati is part of the wave of Midwestern secondary markets that are racking up significant growth in the industrial sector, primarily due to the booming demand for distribution facilities triggered by the online commerce boom. In 2018, roughly 6.3 million square feet of industrial space was delivered in the metro, more than half of it coming in the form of speculative development, according to a recent report by Cushman & Wakefield. Even so, vacancy during the fourth quarter of 2018 remained below 3 percent.
The office sector shows similarly strong fundamentals as it appears to be near a peak, reported Adam Rath, founder & owner of Rath Equity. The company started operating in the Cincinnati area since last year and is now focused on growing its base of industrial and office clients. In a wide-ranging conversation with CPE, the entrepreneur touched on the trends, challenges and opportunities in the metro’s commercial real estate market.
What is your general view of the office sector? What are the main trends?
Rath: The major factor contributing to a strong office and industrial market in Cincinnati is a strong local economy and revitalized downtown that has aided in the ability to retain educated workers and have accelerated a strong economic growth. The unemployment rate has compressed to under 4 percent.
The Cincinnati office sector is currently strong and healthy. In the last few years, we have seen rising rents and vacancies going down. Also, sales are strong but appear to be reaching a peak at both cap rates and price per square foot.
What about the industrial market?
Rath: The Cincinnati industrial sector is very strong. We are experiencing some of the lowest levels of vacancy in 15-20 years. The return of manufacturing and the explosive growth of the e-commerce industry have contributed to a strong lease-up. The more notable tenants in the market have been Amazon, Hayneedle and Wayfair. Thus, the vacancy rate has dipped to 3 percent and is causing a major uptick in new construction to meet the demand. Key indicators—5.7 million square feet of absorption, year-over-year rent growth at 9 percent.
Tell us about the challenges you see in today’s market.
Rath: The major challenge we are faced with today is economic uncertainty in the next one to three years. We have seen record growth/investment over the last few years and debt limits starting to reach pre-recession levels. Most people in the industry are starting to feel a pullback. The majority of the investors I speak to feel a pullback is needed to bring pricing within limits to deploy capital. This economic uncertainty should provide an opportunity for investment.
What are the trickiest aspects of being a medium-sized company?
Rath: Rath Equity was created to be a boutique investor-friendly brokerage and built to be able to adapt and pivot as the market dictates. The trickiest aspects are identifying and using the best processes/technology we can to provide the best services to our clients. Silicon Valley has been trying to disrupt the real estate industry over the last decade, so every day there is a new shiny program that is the savior for brokerages. I’ve spent time chasing these programs. However, the only way to guarantee success is to pull up your sleeves and put in the time/effort over the long term.
How does technology fit into Rath Equity’s operations and services?
Rath: We must find creative ways to stay a step or two ahead of the national firms. In my opinion, the only way to do this is taking advantage of technology and be fast. We’ve used creative tech to market listings directly to the prospects—Google AdWords, 3D tours etc. We also use top-of-the-line industry management software to provide fast, accurate and clean reports. Using these have been advantages that increased the ROI for both the client and the brokerage.
What was the most unexpected thing about the business in 2018?
Rath: The most unexpected thing about Rath Equity in 2018 was the amount of growth we had in the year. 2018 was the first full year in business after we got through the red tape/start-up phase and started working on our growth. We grew tremendously in both sales, management and leasing. We have a network of clients throughout the country and when they understood our model, they wanted to work with us.
What are the company’s goals for 2019?
Rath: The main goals for 2019 are to improve on processes and procedures to best support our clients. The recent growth has been great, but our goal is to always strive to see how we can be better and improve to best meet their needs. We would not be in business if we were not the best option for the client. Therefore, being a smaller brokerage, we have to be in front of the technology curve.
Are you looking to expand to new markets?
Rath: Our current markets in Cincinnati and Columbus, Ohio, keep us very busy. Therefore, I don’t see a benefit to try and break into a new market without having a critical mass. We will see what 2020 brings.
How do you see the market evolving in the year ahead?
Rath: We all wish we had our crystal ball to see what the future holds in commercial real estate. The future holds many variables that we can all speculate on—more construction, tenant improvement, land, steel cost that will factor decisions for growth and relocation. My investors and I are looking at opportunities much harder to make sure the deal makes sense, whereas before we might have taken bigger risks. We passed on a few deals anticipating we are at a peak and we will see a pullback.
In my opinion, I see older, well-located buildings being redeveloped into new, trendy opportunities. In the last few months, a majority of the tenants have been wanting to be in this trendy environment. The issue people are running into with these redevelopments is parking. In the past, office buildings’ square-feet-per-employee ratio was approximately 250. Now, we are seeing 150-200 square feet to one employee. Past buildings were not built to handle these parking ratios and owners need to get creative. For the buildings with tighter parking ratios that we manage, we have discussed adding parking decks at a cost of approximately $15,000 per space. This will be a significant investment to add a few spaces, so we are looking at alternative ideas to meet these needs.
Image courtesy of Rath Equity