Trammell Crow’s Tom Bak On Investing in Southern California and Las Vegas

Tom Bak has been with Trammell Crow in Southern California since the 1980s and is currently senior managing director of the Newport Beach team. Bak spoke with Commercial Observer recently about the company’s strong foothold through the economic slowdown and expanding into one of the nation’s top life sciences hubs.

This conversation has been edited for length and clarity. 

Can you talk about some of what defined your office’s activity over the past year or so? 

Tom Bak: One of the things I focus on is how we differentiate ourselves. As a developer, we control land as the key to our business plan. We either own it, control it through an escrow, or control it vis a vis landowners who venture with us. I think today in this market, land control with a low to market cost basis is the real focus for us.

A second differentiator is our access to capital to close on land with our own money. We’re well capitalized as a corporation. And that enables us to take positions in land that others might not. 

At our core, we run our business as a development business, not just a series of deals, and that allows us to better navigate through economic cycles, like we’re facing now. Today, we face a pivot point in our cycle as a development group running a development business. The capital markets, being what they are, have frozen the debt and equity markets, and, with that, there’s obviously a change in market cycles.

First, the amount of industrial space that we completed and pre-leased. That’s 4.7 million square feet in the Inland Empire and in Las Vegas that our office completed and pre-leased in 2022.

That was done with the keen focus on controlling land in the Inland Empire market that dates back to 2012. So, if you can imagine us buying 2012 land, controlling 2012 land, and then delivering and pre-leasing in 2022, it’s easy to notice how low our cost basis is compared to market.

The second important milestone from the past year is our life sciences business. We’ve been looking at this product specifically in San Diego for the last couple of years, and last year started construction on our first life sciences building in Sorrento Mesa totaling 117,000 square feet.

The third important achievement is our product diversification to include multifamily. We have a very focused effort on the growth market in the San Diego multifamily marketplace, and we control a strong and well-placed multifamily land parcel in San Diego. 

Can you talk about this year, your expectations, and how you’re carrying that through?
Here’s our growth strategy: First and foremost is the concept of diversification — by geography and by product. Five years ago, we were not in Las Vegas. Today we are. Five years ago, we were not in San Diego. Today we are. The same principle applies with multifamily and life sciences. 

I’ve been with the same company since I graduated from business school and, you know, I’m a learner just like everybody else. Not only do I get excited about learning new geographies, but also learning product. Everything we do is to differentiate ourselves in the market with product that is either differentiated by design, differentiated by location, or differentiated by amenitization. 

Second is growing our development team platform. We’re creating opportunities for our existing people to grow and learn, but we’re also heavily recruiting deal professionals as well as development managers. 

Another thing to note is that we can leverage our balance sheet to buy land so we’re also growing by controlling and owning land. And this is a huge differentiator. The ability to buy land today is unique and we’re using it to our advantage. 

A majority of what we do is to be a partner with some great investors. But we do a lot of development for third-party clients who own land. They might have build-to-suit requirements, and that allows us to have a split between profits that come off a principal deal, and fees that come from third parties, which allows us to differentiate our revenue stream. 

And while running a business, it’s a big advantage that I don’t have to do deals to make a living. And it allows us to ride through cycles having a balanced business between third-party fee business and principal business. 

Our company is involved in long-term projects that typically require four to five years before receiving payment for the development of an industrial property. Due to the inherent risk associated with such extended cycles, we place significant emphasis on studying and analyzing this risk to ensure successful project outcomes. 

Considering how the Inland Empire spiked over the past five years, do you feel like the market is normalizing now? Does it feel like things are stabilizing with a market correction, or is it still just so rampant right now?
The Inland Empire market is exceptional based on statistical measures, fundamental principles of supply and demand, and just the overall vitality of the market. There’s just not a lot of supply in the future. That’s really the story that needs to be told. 

Supply used to always be an issue at the end of cycles. Today, due to the inability of a developer to chart a path for the entitlement process, there’s a lot of development that has been curtailed, delayed or prevented by the entitlements that are difficult to get today. 

I also think that people underestimate the level of demand that exists in the marketplace. The pre-leasing that we did last year is really a testament of the amount of demand that’s out there. And when you don’t have that lease-up time, you can imagine what the fundamentals of the financial picture look like. So, I would say the market is robust and it is strong.

Another critical point to consider is the capital markets impact, that the uncertainty that exists in the decisions of the Fed and where interest rates are going. There’s very little equity, at least from an institutional basis, to buy land, and there’s the rare opportunity or circumstance for a major bank or financial institution to make loans. So, if you don’t have access to debt or equity, you’re not in the business.

Despite the phenomenal fundamentals of the market, such as a vacancy rate of less than 2 percent and the anticipation of double-digit rent growth, the inability to secure a loan from a bank is concerning. You can imagine what’s going to happen to supply.

What are the kind of major projects that you’re excited about this year, whether they are more life sciences, or more land buys or multifamily? What are the big things on your calendar this year?
I like what’s happening in the Inland Empire, and what’s happening in San Diego. They’re both growth markets for different reasons. In general, the growth in the Inland Empire continues to be the growth in e-commerce and retail, as retailers continue to look for space. The lack of available space, but, more importantly, the demand that comes from the retailers that’s been consistent over the years, we expect the Inland Empire to continue to be strong.

San Diego has the most upside in terms of opportunities in life sciences and multifamily because it’s a growth market with an influx of high-income individuals. The city’s lifestyle and employment opportunities are there. 

And, if you look at just job creation in the life sciences business, it’s closely tied to the intellectual capital there. University of California San Diego is a great example of a university that provides the necessary talent that life sciences companies require. Furthermore, job creation in this sector leads to opportunities in multifamily as well.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.