The State of Development
By: Ron Derven, contributing editor, Development
Editor’s Note: We asked three recent Developer of the Year honorees about their development plans for 2013 and beyond, and what, if any, lessons they learned from the recent economic downturn.
Ryan Companies Wants to Double Its Size by 2015
Pat Ryan, president and CEO, Ryan Companies (2007 Developer of the Year), Minneapolis, Minn., wants to double the company size by 2015. “In today’s post-recession environment, 85 percent of our revenues come from third-party construction and 15 percent from development,” he said. “The goal is to get back to where we have been historically, 50 percent third-party construction and 50 percent development.”
Ryan Companies US, Inc., is a builder that designs, develops, owns and operates real estate. “We are fortunate to have excellence and brand strength in construction — that has helped us weather this tough market,” the CEO said. “The company is looking to restore more balance between construction and development, but with the lethargic economy, it will take longer than planned.”
Ryan pointed out that the company has refined its strategy to focus on five key national market sectors, including distribution, mission critical, retail, health care and the public sector. “This approach provides stability during times of market fluctuation and enables the firm to grow its national brand. Ryan continues to look at regional markets for local and national opportunities. Senior housing, charter schools, disaster recovery, headquarters development and asset management have all been bright spots because they play to our sweet spot: the ability to tackle complex projects with demanding schedules — and knock them out of the park,” said Ryan.
Lessons learned from the last recession: “Nobody anticipated that the drop-off would be as sudden or as deep as it was and, like many businesses, Ryan Companies didn’t right-size as quickly as it should have. On the positive end, the company sold or stopped developing speculative space so there wasn’t a lot of vacancy in the portfolio. On the down side, Ryan wasn’t as disciplined about land and ended up with too much inventory in that category.”
The Alter Group Favors Big Bulk Distribution in Select Markets
Richard M. Gatto, executive vice president, The Alter Group (2010 Developer of the Year), Skokie, Ill., said the firm’s first priority is to finish the lease-up on all buildings in its portfolio that were developed, but not fully rented, in the latest development cycle.
“Alter is developing some medical office properties and those deals are typically sponsored by the hospital group,” he pointed out. “There is strong credit and leasing behind medical development so they represent a product that, even in today’s more difficult capital marketplace, can get construction loans.”
The Alter Group is beginning to see a rebound in industrial development in southern Florida, the I-80 corridor in Chicago, and within the Inland Empire in California, that will permit speculative industrial, big bulk distribution facilities to be built. “The Alter Group is close to starting a building in Florida and is in the pre-development phase for industrial buildings in California and Chicago. On a national level, the warehouse and distribution market will probably lead the new construction rebound. This new development will be driven by more equity sources. There is a strong desire in the capital marketplace to put out equity dollars rather than debt. This is fostering the development of the bigger bulk distribution buildings because the dollar amounts that they want to put out are large.”
Lessons learned from the last recession: The real estate downturn in the early 1990s was the industry’s fault, due to overbuilding. This time around, the industry’s problems are the result of the tepid economy and lack of job growth.
CenterPoint Properties Sees Industrial Markets Firming
Paul S. Fisher, president and CEO and Michael Murphy, chief development officer, CenterPoint Properties (2011 Developer of the Year), Chicago, Ill. said that nationally the company is seeing firming in most of the industrial markets.
“There is decent absorption and rent stabilization. Certain markets like Los Angeles, northern California and parts of New York and New Jersey have started to see rental growth and the advent of speculative development, particularly in southern California. That is where CenterPoint has witnessed the most speculative development and sensed confidence among developers and owners that rents are actually increasing. CenterPoint continues to focus on a supply chain-advantaged industrial play. During the last 12 to 24 months, the company has capitalized on users who are getting into more efficient buildings, located closer to their nodes of transportation,” noted Murphy.
Fisher commented that a goal of the company, through development or acquisitions, is to build a unique portfolio of assets that share transportation advantages with respect to trucking drayage or proximity to ports or intermodals. “Not many firms are in that market so we really see ourselves at a relatively narrow part of the spectrum in very few markets. However, in those markets, CenterPoint is highly focused, active and aggressive.”
Lessons learned from the last recession: “The strategic focus has become paramount because if you’re trying to do everything for everybody, you’re going to get hurt. On the other hand, if you have a well thought out approach, you’ll be better off,” said Fisher.
The Future of State and Municipal Incentive Programs
With states and municipalities cutting budgets and workers and voters unhappy with government giving businesses money, will incentive programs to foster development be cut or eliminated in the future? According to Jay Biggins, executive managing director, Biggins Lacy Shapiro & Company LLC, and Michael Rhodes, director, economic development and incentives, Ice Miller LLP, incentives will be maintained or expanded even as budgets are cut.
“Notwithstanding the economic conditions and the fiscal stresses that most states are under, including cutting popular budgetary programs,” said Biggins, “states will generally maintain or increase their commitment to financial incentives. Although these decisions face a political backlash, leaders understand that you cannot cost-cut your way to balanced budgets.”
Biggins noted that states and municipalities are also willing to make investments to aggressively attract new jobs, and to invest in retaining companies and jobs in danger of leaving the state. States need to retain the jobs they have before they can add new ones.
Michael Rhodes suggested that there will be more programs and funds available than ever before because millions of dollars are at stake: “With 15 million people unemployed,” he said, “it is very difficult for states not to get increasingly aggressive.”
Rhodes cautioned, however, that it is not incentives alone that draw a company to a specific location. “Companies tell communities that the highest incentive package does not necessarily win the day. The numbers go into a spreadsheet along with about 10 or 20 other variables associated with the location. Incentives are a way to offset cost disadvantages of a particular location and, obviously, the more the better.”
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