A conversation with Bennett Klepper at Klepper Industrial

In this conversation, Co-CEO Mark Hurley sits down with Bennett Klepper, Director of Klepper Industrial, to explore the firm's strategic focus on Class B industrial properties across major Texas markets. The discussion delves into Klepper's value-add investment approach, recent success with adaptive reuse projects, and their methodical strategy for identifying overlooked opportunities in high-demand markets. Bennett shares insights on navigating the competitive Texas industrial landscape and how their hands-on acquisition strategy has delivered impressive returns for investors.Ben, what inspired you to establish the firm, and how did your previous experience shape your approach to creating this venture?

I think I’ve always had the entrepreneurial bug, and my previous experience in real estate private equity made that more obvious. I was fortunate enough to be one of the first employees at a local REPE startup and benefited from the strong mentorship of its founder/CEO. He put me in charge of acquisitions where we went from $5mm to ~$200mm in AUM in three years, and built a sizable team along the way. Getting that many reps in and being focused exclusively on Texas industrial real estate was instrumental in learning the ins and outs of these markets and submarkets. Market expertise and relationships are everything in this business and they don’t come overnight.

I partially attribute nostalgia to what inspired me to break off and start my own industrial real estate investment firm. In the early days of my previous firm, I got so much energy from being autonomous, nimble and scrappy in an effort to kick up some incredible little deals. The natural progression for many shops is to start chasing institutional-sized deals with institutional-sized checks; it makes sense for a lot of folks but it’s a different world where I personally lose that edge and excitement. Klepper Industrial bought a $10.2mm deal followed by a $900k deal a few months later, and we’re equally thrilled with both!

The best part about entrepreneurship is being able to tailor the company’s long-term vision to always play to our strengths, and in the same vein, we can commit to where not to go: we will never set arbitrary acquisition targets, never measure success on “vanity metrics” like AUM, and we will never let pressure to deploy capital influence our investment decisions. We want to build a small, tight-knit community of family offices and high net worth individuals who share in this vision; investors will always come first and we will roll out the red carpet for them.

Klepper Industrial has carved out a specific niche focusing exclusively on Class B industrial properties in major Texas markets. Could you share the strategic thinking behind this focused approach and how you identify overlooked opportunities in these competitive markets?

Absolutely! Let’s start with the Class B industrial aspect – these are typically older, decently-maintained, functional buildings found in well-established industrial pockets on the outskirts of major cities. They can be acquired cheaper than new Class A buildings (i.e. can buy these on a PSF basis well below replacement cost) without sacrificing much functionality. At the same time, Class B assets are a step above properties that are older, less functional (low clear heights, poor access/circulation, irregular-shaped, insufficient loading/parking capabilities) buildings that will likely require significant capital improvements.

While we probably aren’t going to fetch Fortune 100 tenants that the Class A guys will, a quality Class B asset will attract small-to-medium sized stable businesses that need functional space but don’t want to pay for the bells and whistles of a Class A building. Regional distributors, light manufacturers, contractors, trucking companies, and service-based businesses who lease our buildings don’t have as much red tape and can make leasing decisions much faster than the national companies, which is also very attractive from a landlord position.

Texas’s major markets are industrial hotspots; we have proximity to the ports (Houston and Laredo), logistics and e-commerce hubs (DFW), and tech-driven growth (Austin). We’re also benefiting state-wide from population growth, landlord-friendly laws, and generally a business-friendly environment. Texas is not land-constrained by any means, so it’s very important to know these submarkets and buy at the right basis.

Your recent project converting the former Thirsty Planet Brewing facility into a Restaurant Depot location exemplifies your value-add approach. Could you walk us through your process for identifying, acquiring, and repositioning industrial properties, and how this translates into value for both tenants and investors?

That was a fun one. We bought an infill vacant building here in Austin that had just gone through a rough eviction process with its brewery tenant. We were able to ink a 10Y lease with Restaurant Depot about a week before closing and flip out of it right away. Every deal is so different that it’s hard to speak about the process so broadly, but very generally there are a few things I focus on for every value-add opportunity:

• Lease-up: Leasing is the lifeblood of commercial real estate and nothing else matters if tenant demand completely dries up. What rental rate do I need to offer to get this leased within 12 months? 6 months? 3 months? Immediately? Flex your leasing assumptions to see the impact on investor-level returns if you patiently wait for top-dollar rents versus solving for occupancy.
• Flexibility/versatility of the building: Who are my target tenants? We place a strong emphasis on identifying buildings that could lease to the widest possible tenant pool. For example, on the Austin deal you mentioned, we had interest from Restaurant Depot, equipment rental companies, microbreweries, a soft drink distributor, several pickleball groups, Austin Community College, and even a Harry Potter World experience. As landlords we are always looking to maximize value with credit-worthy tenants, but (especially in a downturn) we want maximum leasing flexibility for downside protection.
• Upside potential with downside protection: Is the juice worth the squeeze for our investors? Like any good fiduciary should, we are always focused on risk-adjusted returns. If we can go across the street and buy a cash-flowing 6.50% cap stabilized deal with 5 years of term, should we really be taking lease-up risk on a deal to hit an underwritten 7.50% on cost? The value-add strategy is a game of achieving a meaningful spread (for us, usually 200+ bps) between your stabilized yield on cost and the projected reversion cap rate, while simultaneously structuring each deal to protect against downside (prolonged vacancy, capex contingencies, property tax increases, tenant default, etc.). We would rather capitalize deals with large reserve fund contingencies and sacrifice a few points on projected IRR if it means we drastically reduce the chance of a capital call.

You've mentioned that broker connections and direct outreach to property owners are core to your acquisition strategy. How has this relationship-focused approach differentiated Klepper Industrial in a competitive market, and what creative tactics have proven most effective in sourcing off-market opportunities?

You’ve probably heard it a million times before but relationships really are everything when it comes to deal flow. Broker relationships have been the difference maker in finding these off-market opportunities. I don’t know if there’s any secret sauce to building these relationships other than being proactive and genuine. Have a rolodex of brokers from the most junior level (green, hungry, cold-calling machines chasing their first commission) all the way up to the 20+ year veterans (know the submarkets, have sold the same building 3+ times, have seen the cycles, and repped the big tenants). Pick up their calls, give them a quick yes or no to every single deal they send you (and an explanation why), be transparent, know their kids’ names, let them invest with you, and keep bringing them business, and after a while you’ll build a good reputation and be their first call. I’ve found that it’s pretty amazing how much you can differentiate yourself by simply being prompt, pleasant, and easy to work with.

One of your recent deals moved from acquisition to disposition in just eight months, achieving a substantial increase in value. Could you discuss your approach to hold periods and how you determine the optimal time to exit a property versus maintaining it in your portfolio for longer-term income?We generally pursue a capital event immediately after the value-add plan is complete, but we are committed to full alignment with our investors and cognizant of changes in the capital markets environment. On the most recent deal that we took full-cycle in 8 months, we got a fantastic unsolicited purchase offer and our investor elected to roll the proceeds into one of our new deals.

In terms of optimal timing for a sale, I am comfortable saying we have absolutely no idea how to make that determination. Anyone who says they know where interest rates and cap rates will be in the future with 100% certainty should be trading bonds and on their way to becoming an overnight billionaire! Our focus is to add meaningful value by repositioning assets and optimizing operational and leasing inefficiencies without relying on favorable fluctuations in market conditions. We do know that the commercial real estate market is cyclical, so being opportunistic sellers on deals that are capitalized to withstand a long-term hold is the best hedge against market forces that are fundamentally unknowable.

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To learn more about Klepper Industrial, visit their website here.