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CEO Roundtable: Commercial Real Estate

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Where is commercial real estate heading in the Queen City? Springfield Business Journal Features Editor Hanna Smith sat down with Sperry Van Ness/Rankin Co. LLC senior adviser Jeff Childs, CJR Commercial Group President Shaun Duggins and R.B. Murray Co. President Dave Murray. They talked e-commerce, Kearney Street and how Springfield can be welcoming to incoming business.

Hanna Smith: In a word, how would you characterize the current commercial real estate industry?
Jeff Childs: Vibrant. I think we’ve seen an increase in activity over the last couple of years that we haven’t seen in the past.
Shaun Duggins: Opportunity. Leasing seems to be strong. Retail is strong. There are maybe not as many tenants as we’d like to see, but a lot of opportunity.
David Murray: State of change. You look from 2005-07, those are probably the strongest years I’d seen in my tenure. And then you go to the zero credit freeze in 2008-09. There was a tribulation there between 2009-2012. The good news is it’s changed, and we’re finally beginning to see demand rekindled in the last two years.

Smith: What segment is leading the local industry? Industrial, office, retail? And what do you see that’s lagging?
Childs: There seems to be a lack of supply for industrial. We’ve seen a push for space being absorbed in some projects we’ve worked on. In retail, the newer product is leasing, but some of the older is still sitting.
Duggins: Retail has been our strongest segment.
Murray: I go with industrial. The vacancy rate is less than 2 percent citywide. Although, sometimes statistics are skewed because, in the confidentially of this industry, some numbers are not publicly reported. But it’s interesting to see the change in the last three or four years of sizeable buildings (being leased again) – brought about by some rekindling of manufacturing. We are fortunate that we have a good base of skilled workers, especially who know how to work in metal, and Ozarks Technical Community College has a big role in the education of those folks.

The biggest elephant in the room, however, is e-commerce. Somebody’s making the products, they’re sold online, somebody’s storing them, and somebody’s selling them. E-commerce this year in the United States was up almost 17 percent in the last 12 months over the prior year. That tells me that a huge shift is coming away from conventional retail as we had grown up to know, and it’s all based on e-commerce.

Smith: Is there still a need for speculative industrial?
Childs: I don’t think that we are going to see as much as far as public construction of facilities, at least none I’ve heard of.
Murray: That’s the best way to do it without question: Private enterprise within the cities. What we faced when we first started to rekindle in 2012 or so was the cost of building in 2009-10 went down a little, and then jumped back up. And the rent didn’t catch up. Some of the buildings that rented for $5 a foot were only bringing $3.50 at the peak of the recession. But the construction costs were still there. So that effectively put a lid on the development world for a long time. Finally, when it got to the point where there was enough demand, people went out and privately developed and have been successful doing that.

Smith: In this area, what do you see as the greatest opportunity for commercial real estate growth and development?
Childs: As the population grows, it grows the pie for everyone. I think quality of life is strong in Springfield. The infrastructure is decent. We have a good atmosphere for business, and I think that’s the opportunity. It’s the overall market that’s going to grow. More people are retiring here, more people my age are coming back that may have gone away for school, or their families go to school and come back to work here. There is tremendous opportunity for that age group.
Duggins: Looking at the demand and need for apartments and student housing goes a lot into that, too.
Murray: The retail side is the wild card and I think that is going to be convenience retail. You will see quick-serve restaurants and off-price discount stores continue. The rest of the market is up for debate. I don’t know where it’s going; it’s just happening faster than I ever thought I’d see in my career. You look at what’s happened in malls throughout the country and the failure of name-brand department stores in leveraging products when customers can purchase online instead of going to the store. I met a pension fund manager who said he would not invest one dime in anything with the exception of e-commerce. To me, that’s such narrow-mindedness because they still have to buy their boxes from some place, someone’s still got to ship it. It’s all intertwined together.

Smith: What about Kearney Street? What do you think its potential is?
Childs: It depends where on Kearney. I think the corner of Kearney and Glenstone has been pretty active. Kansas and Kearney has always been strong. One issue with Kearney is the zoning is only about 150 feet deep. Most retailers need more depth. It’s old zoning classifications, similar to Glenstone between Sunshine and Kearney. You get development and redevelopment issues, and it makes it more difficult to make changes unless the community as a whole decides to utilize that infrastructure that is in place and allow the development to get deeper and accommodate someone. And the construction costs continue to go up. Something’s going to have to change. The pressure on rents will be going up.
Murray: Glenstone was two lanes. Once upon a time, there was depth, but the right-of-way took it and you had a 100-foot-deep lot and that is next to impossible to develop. By the time you put the greenspace and the clear water basin, the stormwater basin, you run out of space, and the cost gets gigantic. You fight those physical issues. There are some barriers that our city fathers could probably help us with. The difficult portion of Kearney is finding a way to take the infrastructure cost and not have the line so high that whoever goes there doesn’t have the margins to sell and therefore doesn’t put the store there because the demographic profile doesn’t support it. Kearney Street has to address the barriers of entry on the fiscal side to bring the site up to speed. It’s a political decision to decide how to fund that – whether they take some kind of blight status or whatever. But, that has costs, too, and that’s up to our politicians.

Smith: Do you have advice for making that decision?
Duggins: Possibly expand the tax credits and expand the depth.
Murray: Every option comes with a cost and a benefit. You just have to figure out what that is. I think the biggest mistake is thinking that if you do it, they will come. Commit instead to saying, “If you do this, I will come.” The city as a whole should remain open to new types of development. That is one of the keys. You always have to have restraints but need to be open to the big picture. Quite frankly, the market knows best. There is a reason if property is not developing, and that’s typically the market. So, what’s the barrier to the market? You have to be somewhat cautious about trying to create a market that’s not there. You need to let the market create the opportunities.

If the city is going to do something, it needs to help streamline the process to make it easier so that overall cost is lowered because the demographics are not as strong as other parts of the city. The low-hanging fruit was gone years and years ago. We are left fighting difficult sites to develop, and that’s where the flexibility needs to come. When you mandate 20 percent greenspace because it looks nice, that’s good, but it uses a lot of ground. Maybe instead of 20, it’s 10 percent. There are all kinds of things other cities do. It amazes me when I’m traveling and I wonder why we do some of this in Springfield.

Smith: What are you seeing that should be implemented here?
Murray: Architecture. Offices have transitioned greatly, too, which we have been slow to embrace – sustainability, natural light, getting away from the bullpens. Cubicles are dead.
Childs: Being flexible with how you allow development to happen. If there’s a good idea, just because it doesn’t fit regulation, there still needs to be dialogue to allow the community to make a different type of project work. It’s just having the willingness to be open-minded. That’s just what it takes to be competitive. Everybody thinks their place is the No. 1, but there are a lot of Springfields out there. When you get people who want to come to the community with business, you better put out the welcome mat.

Smith: What type of new business does Springfield need to attract the most?
Murray: We have not been as successful as I would like in attracting an institutional style or successfully landing 100,000-or-more-square-foot users. And yet when you travel again, like Oklahoma City, it’s pretty amazing. We’ve lacked somewhere, missed the mark, on attracting those industries and I’m not really sure why. I would like to see that because that would drive the economy’s profile higher.

Smith: What’s been the number to watch this year as far as vacancies?
Childs: Rents have to move upwards. Interest rates are going up, cost of construction is going up, and vacancy is going down. There is only one way for rents to go and that’s up.
Murray: What’s artificially holding that down is you can’t build new product without pricing the whole lot higher.
Duggins: I think we need more focus on the absorption rates to determine where the need is.

Smith opens up the discussion to CEO Roundtable co-sponsors Richard Walters of Spencer Fane LLP and Mick Nitsch of The Bank of Missouri, as well as SBJ Publisher Jennifer Jackson, who are at the table.

Walters: Do you think Springfield is running out of developable property?
Murray: Low-hanging fruit, absolutely.
Childs: I have looked at different land projects for housing development, and the cost to develop a residential lot is so much higher. To do $150,000 or $200,000 houses, the infrastructure cost just to get the lot there … just pushes the price up. And you don’t get retail or any other development if you don’t have housing.
Murray: If you want to help the residential Realtors, which helps everybody, sell property so people can buy homes where they want to be. We need some sewer track extensions east. I think the rest would take care of itself, if you would get the sewer lines.

Jackson: How are we looking as far as someone who needs turnkey property?
Childs: It’s rare in our market, on the office side, to see a tenant over 20,000 square feet moving around. We don’t see enough of this to see people building big spec floor spaces. The industrial side, there is a lack of available buildings.
Murray: The customer is going to tell you what they want. You have to be nimble on your feet to produce a site without it being a protracted process of either rezoning or redevelopment. I don’t want to make it sound like it’s impossible here. I think the city has made some great progress in the last few years. There are plenty of difficult sites around the area that just need to be brought into the market.
Childs: If there are hurdles to jump, you’re going to have to jump. But you want someone to help over the hurdle. We as a community need an attitude of helping bring those people in the market. And word spreads quickly. If they have a good experience, they are going to let people know that Springfield may not have five building sites vacant, but they were quick to the market and responsive.

Inteview excerpts by Features Editor Hanna Smith,


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