CEO Summit The View From the Top Ahead to 2009 …Here’s Hoping

[ By Ellen Rand ]

	Stephen A. Crosby, president, CSX Real Property, Inc. CSX Corporation, based in Jacksonville, Fla., is one of the nation’s leading transportation companies, providing rail-based transportation services.
	Michael Mullen, chairman and CEO of CenterPoint Properties. CenterPoint is the largest owner, manager and developer of industrial real estate in metropolitan Chicago with 24 branded business parks.
	Aaron Paris, chairman and CEO of Paris Development II and former chief operating partner of DP Partners.
	Par Tolles, president of DP Partners/Dermody Properties. Dermody Properties is privately held, with a 47-year history as an agile and responsive private commercial developer.
	Joan Woodard, president and CEO of Simons & Woodard. The Sonoma County, California-based company has a one million square foot portfolio, with 20 employees.

Editor’s note: At NAIOP’s recent development ’08 conference in Las Vegas, Development had an opportunity to sit down with five CEOs – including three NAIOP chairmen — who talked freely about the challenges facing the economy, the industry and their own companies; where they believe we are in the cycle now and where they expect us to be in another year. Here are some highlights of this roundtable discussion.

The Immediate Crisis: The Economy, TARP, Expectations for ’09

But Steve Crosby warned that there could be a huge liquidity crisis between the banks and their customers and that confidence alone is not enough. “I don’t know how they’re going to fix that,” he said. “We have to be more worried about tenants, where we’re most vulnerable.”

Mike Mullen agreed that “when banks don’t lend to banks, that’s a very bad time. For a market to operate, you have to have buyers and sellers. If no one has access to credit, the market just stops.” Mullen took heart from the fact that LIBOR is coming back to a normal rate and that the world got together and rescued itself from a “major cratering.” He is mildly optimistic because he sees liquidity starting to return to the market. But, he said, “we need to get the engine running quickly; we need a Work Projects Administration (WPA).”

Woodard remarked that in some ways the current climate is a “perfect storm,” and expects that we will face a far longer period of recovery than we’ve seen before. Among other factors, she cited the burden of high gasoline prices, which has prompted a large company like Wells Fargo to have its project managers working at home.

There was a consensus that the key difference between this cycle and prior recessions is globalization -- how interconnected the economy is with the world. Paris predicted that there will be a significant contraction – that all indices are going in the wrong direction and very quickly at that. The next barometer to watch will be unemployment. He sees a need for a WPA-like program to get people working.

Woodard said that Simons & Woodard has already experienced tenant “escapes” in the middle of the night; the company has, in fact, budgeted for others as it expects more of these to take place.

Tolles reported that DP Partners/Dermody Properties has three million square feet under construction in six markets, scheduled for completion within 30 to 60 days. He said that leasing has been remarkably strong -- 40 percent rented. He observed that tenants are not “over-negotiating” on leases of longer than five years. However, he also pointed out that tenants are moving for logistical reasons, not to accommodate growth.

Steve Crosby said that CSX has experienced “a fair amount of domestic activity,” with more outbound traffic than it has had in years. Agricultural and coal markets have been strong. He believes that softening is to be expected, but doesn’t see it as severe. His company will be addressing infrastructure issues.

Mike Mullen said that CenterPoint has seen some failures of smaller tenants, but doesn’t expect the “colossal bankruptcies of the past.” To him, the climate feels like ’91 or ’92. “Our goal is to keep our powder dry. This will not go on forever.” As to what a recovery might look like, Tolles predicted that there would be “a gradual movement toward positive numbers.” Crosby agreed, but expects that it will vary from market to market; Paris believes it will vary from region to region. What will be the driver? Crosby said that if we are relying on population growth to fuel housing demand, “it’s going to be a long haul.”

Mullen believes that the engine for new growth will be energy-related and a few CEOs speculated how the movement to alternative energy could boost the economy, while Crosby commented that “We haven’t figured out how to make the green enterprise pay for itself.” He recalled that the dot-com and telecom industries at their height had produced a “huge economic multiplier; they brought tremendous leverage. We’ve been riding the wave of that productivity since 1991.”

Regarding innovations in green technology, Paris said, “China is building a coal plant every month. If in three or four years, they build a wind farm a month and we can be the creator of that science, that would have a positive effect.”

Plans for ‘09: Any Opportunities to Pursue? Looking at Different Product Types?

Tolles reported that his company’s debt relationships are stable and that bank financing terms may be changing, but not drastically.

Citing the continuing trend to intermodalism, Crosby said CSX is starting to invest in terminals at both ends of the line that are “greener, bigger, better and more efficient. When we come out of the downturn, we will be on a greener path.” He pointed out that rails are not just cost effective, they are also environmentally friendlier than gasoline.

Mullen observed that at the moment, equity investors are on the sidelines. As for looking into debt opportunities, he said, “No one wants to catch a falling knife.” He would not hazard an educated guess as to when investors will return to the market. “We’re in for tough sledding,” he said, so it will be important to preserve capital and cut costs. He is convinced that there will be “a pot of gold for those who survive: an opportunity to make a tremendous amount of money.” Tolles said that the silver lining in the current cloud is that those companies looking to expand will find “a lot of good talent out there.”

Paris said that he believes in doing what one knows how to do, which in his case is industrial. He has no interest in trying something different, such as medical office development. “That’s a formula for failure,” he said. He is studying how the supply chain is changing, noting that “You make money as things change.”

Woodard, on the other hand, said that her company has gotten back into medical office buildings. It is also doing more philanthropic work, through the architecture side of the company’s business, tackling such projects as libraries and community centers. “We do what we can do to have fun and to do business because we think we can add value.”

Tolles compared Dermody’s regional office structure as a “hub and spoke,” and doesn’t want to stray too far from those markets: “a click away from the matrix,” he said. Industrial will continue to be a core category for the company, although it is doing a self storage development in Harrisburg. “It’s easy to educate the team on that,” he said.

Crosby and Mullen agreed that the wise choice would be to focus on what they do best.

Crosby said that CSX no longer had to compete for land with residential developers. But even if land costs are no longer prohibitive, the cost of materials and construction has not dropped. As a consequence, owners had been taking lower rents at higher costs, with returns being sufficient only at low cap rates. “I would think that construction costs would have to come down,” he said, and if they did, building could start again sooner.

Advice and Perspective: How the CEOs Expect to Look Back on 2009

Woodard said that it is time to “stop measuring success by money but by the contribution you make.”

What has the economic crisis taught them and how do they expect to look back on 2009 by the beginning of 2010? The question drew a number of philosophical responses.

Woodard observed that “the cause and effect of so many things can’t be known.” As a result, we may find ourselves saying, “Whoa, I never thought of that.” For example, several years ago the conventional wisdom was that there would be a labor shortage owing to the retirement of the baby boom generation – and the smaller number of workers in the “echo boom.” But, she noted, that was assuming that 20 percent of boomers would retire at 65. Now, how many can afford to do that, she asked?

Tolles said that “I’ve learned how to place more importance on things that matter…It’s been a perspective check, healthy in a lot of ways.” Crosby said that “It’s been a sufficient wake-up call to get back to the values we lost along the way. It’s brought us back to reality.”

With Fingers Crossed, CEOs are Hopeful for 2009

Insights from development’08 attendees…

“The winners in this market are those that have patience and scrutiny. Scrutinize proposals and make sure they have longevity – do not panic! The biggest challenge for 2009 is trying to weed through who is real, where the projects are that have legs rather than the people who are tire kicking.”
Industrial Landlord

“We were hoping there would be more distressed properties coming on the market through this downturn. The REITs are a big owner these days and have low leverage and a ton of cash. Small developers have assembled cash waiting to pounce on these opportunities. With that much cash out there, the ‘firesale’ scenarios aren’t going to happen.”
Baltimore Developer

“The winners are those that are nimble and can adapt very quickly. If you have money, you will call the shots. People at the upper end of the scale will not get hurt that much. The guys that get hurt are in the middle and will be in trouble. It will take one-to two-years and there will be a lot of blood in the streets.”
Large Developer

“This market is changing every day. Whenever you have this massive shift, you can have great opportunities. It is not for the guy on the street -- you better know what you are getting into. We are looking at buying great properties that we could not buy before, picking them up at 50%. We’ve been playing hard ball - now is the time to swing and hit out of the ballpark!”
Regional Developer/Owner

“I thought about taking money from my Wall Street and brokerage accounts and betting it on black or red, at least I’d have a 50/50 chance. There will certainly be opportunities in the future. You can have money set aside for real estate investments, but when do you enter the market? At this point, no one knows where the bottom is.”
New Mexico Developer

“The discussions in the capital market sessions are consistent with what we’ve been planning which is a 150-200 basis point increase in cap rates and IRR. The 2009 challenge – redeployment from our focus on land acquisition for development to entitlements and other aspects of our business.”
Texas Developer

“Times are hard and transactions are down, but there are strategies to weather it, particularly by reinvesting in your existing assets. Certain deals will have to happen so there are opportunities to pick up value-add properties (not distressed) as long as you have access to capital.”
Regional Owner/Investor

“Winners that are emerging now are those that have capital, reputation and resources. The biggest challenge in 2009 is tenants paying rent and corporate America making the decision to lease space going forward.” Developer/Owner

“I’m trying to become more knowledgeable, taking the time that we may not have had before to re-educate myself on the green movement and LEED. There’s a lot out there that I don’t know so I’m taking the opportunity to make myself a better real estate executive for the future.”
Northeast Developer

“The opportunity is to position projects for development as funding becomes available, so anyone involved with land use, entitlements and locating potential projects will be busy in 2009. People involved in construction will not be.”
California Asset Manager

“Medical office still poses opportunities that we don’t see in some of the other sectors.
North Carolina Owner

“The whole industry is focused on the problems with the capital markets. Every session was packed. There are a lot of good projects that are operating well and making money, but the development side has come to a screeching halt and is looking for any signs of hope that it will change.”

“The challenge in 2009 for commercial real estate has to do with the unemployment rate in the U.S. economy. If the unemployment rate goes up, you’ll see a lot more layoffs which will drive vacancy in office and industrial buildings and reductions in tenant size. Lenders will become even more nervous about making loans which will continue to freeze the credit markets impacting growth for developers.”
Developer/Owner

“The message we’re getting is that it won’t change in the next 6-12 months but will come back because there will always be demand for more and better space.”
Southeast Broker

“The challenge is maintaining cash flows and keeping people busy so that we don’t lose the energy and ideas of the young people who just entered the business.”
Regional Developer

“Everybody is in the same boat of making less money, stretching out retirement. This is a fundamental deleveraging of America and how the world is financed and it will affect everyone.”

“There could be a focus on infrastructure development if the government decides it’s another way to stimulate economic growth.”