What’s on the commercial real estate horizon for Springfield? Why is the East Sunshine corridor so hot? To find out, Springfield Business Journal Editorial Director Eric Olson sat down with agents Mike Fusek of Sperry Van Ness/Rankin Co., Ross Murray of R.B. Murray Co., Ken Schwab of Wilhoit Properties and Brad Thessing of Thessing Commercial Properties LLC.
Eric Olson: Describe the commercial real estate industry in one word.
Mike Fusek: Vigorous.
Ross Murray: Stabilized.
Brad Thessing: Active.
Ken Schwab: Robust.
Olson: Which segment of real estate is leading the local industry?
Murray: Retail seems to have picked up, restaurants seem to have picked up, industrial seems to have picked up. The office has still been lagging a bit, but it seems to have picked up significantly in the past four months.
Olson: Going back to the recession, the office sector had the most lag?
Murray: Absolutely.
Schwab: I would say all segments from the recession. I have been in this for 35 years, and I don’t know if I can point to a time where we had a lull in construction for eight years. Are we absorbing it now? Yes we are, but there does still seem to be a lag in investment rates in terms of building new properties. You can see East Sunshine [Street.] The corridor is filling up with torn-down properties.
Murray: The problem is the speculative construction. Construction costs don’t correlate with the rent costs. It changes the rent in those cases and business were downsizing due to retail needs changing.
Olson: Do you see spec buildings across all segments?
Thessing: There is in most segments, but there is an argument to be made for industrial centers.
Olson: Chamber officials have been pushing that. Do you agree these spec buildings will attract businesses?
Thessing: Yes. There’s a handful of buildings coming out of the ground with newer quality stuff. The old stuff, short ceilings, are harder to come by. In the (Interstate)-44 corridor everyone wants state of the art stuff.
Fusek: I think on your point of office lagging, there are a couple factors. One, that market has changed. There are some significant efficiencies that office users are going to. Rather than budgeting 300 square feet per employee, now they’re trying to crunch that number down to 170, so your absorption rate has slowed down a bit compared to other property types. The other point in that market is a lot of people are working from home or desk sharing. The recession, slowing things down, was exacerbated by people striving for efficiency.
Thessing: E-commerce allows some people to produce what they need, work from home and send things to someone else’s house. It has really changed the footprint of what builders need to build. Retailers just don’t need as much space. Wal-Mart used to ask for at least 70,000 square feet, but now they ask for 20,000 or 30,000 less.
Murray: Prerecession you had Best Buy and Circuit City, so you would be doing about 100,000 square feet (combined). But now you’ve got just Best Buy and are doing about 30,000 square feet.
Schwab: Case in point on the office: Principal Financial had about 15,000 feet behind Primrose Marketplace, Blue Cross Blue Shield had about 65,000 square feet, UnitedHealthcare closed up and had 60,000. That’s 125,000 right there.
Murray: Then you had Jack Henry (& Associates Inc.) that moved out and built their own campus.
Fusek: The future vacancy bomb is banking centers. You’ll see future consolidation in the banking market in the next five years.
Schwab: You mean in terms of retail stores?
Fusek: Yeah, as far as back office. I think eventually you’ll see some branches close. In our market, we haven’t seen that as much because banks tend to gobble those branches up, but nationally, the trend is for these branches to close. That hasn’t hit us yet.
Olson: What are your projections for this next year?
Murray: The retail stores by the mall always are doing fine, but it’s the retail stores in some random strip mall somewhere we see the 20 percent vacancy rate. That’s what you have to fight to some degree. You always are going to have a gap, but it will continue to improve.
Thessing: It looks like there ought to be some speculative property in the market. Even if you go by design, Farmers Park for example, came out with an innovative design. It had to be higher because you couldn’t rent it out for those lower prices
Schwab: I think that risk paid off because that product was unique to our market. As long as you can provide another product, you’ll only pay a little more.
Thessing: National tenants will pay more for new construction rather than second generation because they know it will cost them less in the long run.
Schwab: But we’ve all seen there are retailers who passed on our market because they couldn’t find the right product at the right spot.
Thessing: Yeah, location is a big part of that shift in retailers, but you have to tear down buildings to build up for that shift.
Schwab: When you see the East Sunshine corridor get so in demand that you’re tearing down buildings, now you have your site costs being $20 to $22 a foot. You just see what would’ve been a $12-a-foot profit become a $14-a-foot profit because no one can find a raw site.
Olson: What about the population factor? Is there a magic number? It was around 500,000 for the metropolitan statistical area.
Thessing: I don’t know what the magic number is. I don’t even know if 500,000 is enough anymore because retailers have gotten a lot more scarce.
Murray: And greedy.
group laughter
Fusek: But it’s kind of like your vacancy question. There’s more to it than a magic number. Take northwest Arkansas. They have much higher incomes, which will draw retailers despite their population numbers. There’s other things that go into it, but one of the things that hurts us is that we have lower incomes.
Olson: In terms of retail, what would you say Springfield needs most?
Thessing: Banks.
group laughter
Murray: Convenience stores.
group laughter
Schwab: Our market is not a wannabe market, but the way it is, it wants to be like Kansas City. We want to be able to get here what would take a three-hour drive to normally get. But we don’t match up yet with the suppliers. We have a high demand, but because we’re a secondary market, we’ll lag behind.
Thessing: There are some tenants in Columbia who aren’t even in Springfield. And we’re three times the size.
Olson: Is the affluent demographic the difference there?
Thessing: Yeah, the median income is probably less, but the (Interstate) 60 corridor is consistent there. I think the higher tenants can survive here, but they just have to believe they can first.
Olson: How do you convince them?
Murray: I think it’s the community continuing to improve, population continuing to grow. It’s developers like Brad, you say guinea pigs, but the Fresh Market does what others do. If new people move here and succeed, others will follow. A Cheesecake Factory, P.F. Changs, northwestern Arkansas has them. Why? Because they probably have double our income. They can make money, not just (weekends), but Monday, Tuesday, Wednesday as well. They look at northwest Arkansas, Columbia, Kansas City and say, “We can do great there.” They look at us and say, “We can do good here, but not great.”
Olson: What are some of the most complicated deals you all have completed?
Thessing: I would say assemblages would be a tough transaction when they are coming on. You’re dealing with different entities and different moving parts.
Olson: Could you put that in layman’s terms?
Murray: You may have multiple parties, so you may have one group, one development, but you have to make five transactions to get to the one.
Thessing: You have to make all the timing work, possibly rezoning, possibly vacating, possibly creating or closing accesses.
Fusek: One of the challenges moving forward on the redevelopment side will be water detention. Water will kill a lot of deals. We are doing the Great Southern downtown, an eight-story building, and they are requiring water detention. That whole project is concrete and asphalt. The city wants water detention and greenspace, and now you just lost half of your building site. If someone does not get ahead of this with Springfield, their desire for water quality will reduce significantly the number of redevelopment sites.
Thessing: You go from a site that is 100 percent usable, to not being usable at all. The negotiations then greatly reduce the value of the property when you go to sell or develop it.
Fusek: Some cities have water buyout programs where they will buy out the water retention, but that’s not in place here.
Editor’s Note: Bank of Missouri is hosting sponsor of CEO Roundtable. As Springfield community bank president, Mick Nitsch, sits in on each discussion.
Mick Nitsch: There’s a rumor going around that SRC might peel off some of their office space [on East Sunshine Street] and turn it over to retail. It’s surprising none of you mentioned that.
Schwab: The problem is that it is inappropriate to talk about publicly.
Fusek: So, what he’s saying is, he’s got P. F. Chang’s coming to East Sunshine.
Schwab: It’s a good site.
group laughter
Fusek: I’m surprised that Hy-Vee hasn’t opened here on Sunshine.
Nitsch: Well, it’s no secret that lot is a bit tight for them. There were some conversations with them, SRC, about opening across the road. They are still curious about the sustainability of the store. Culver’s is trying to become our neighbor on the site, so it’s a hot spot right now. This two-mile stretch between here and 65.
Schwab: I’ll throw something out here. Your article in the latest SBJ about real estate disclosure [April 4 Opinion: “Time for Mo. to change sales disclosure laws”]. I appreciate it, but I strongly disagree. I fall strongly on the privacy side.
Olson: Personally or professionally?
Schwab: Both. I think that would be the voice of many of my clients and customers. I see the simplicity of saying if you do this, the job and fairness of taxation becomes substantive there. But that’s based on the premise that this tax placed on real estate should be there in the first place. If we’re going to agree there should be a tax on real estate, in my opinion, the citizenry should then say, we should pay for the process of complying and not put it on the backs of the same people paying the tax and saying, by the way, we want you to give up some privacy on the transaction.
Fusek: Sometimes the commercial real estate is somebody’s paycheck, and you wouldn’t want your paycheck publicized in the newspapers. And developers and investors probably don’t want their paychecks in the paper. And oftentimes the price something sells for, sometimes there’s a second side of the story. There’s enough volunteer data out there for assessors and other people to make a determination on value. To mandate that every seller discloses what the property sells for, I don’t think the benefit outweighs the downside. All of us, maybe once a week, every two weeks, sign a nondisclosure agreement that includes the sale price and we can’t reveal who bought or leased the building for 60 days.
Olson: Why is it working for 40-plus other states?
Thessing: I don’t know that those have been around that long. Did they always do it that way or did they recently convert? That’d be once piece of information that’d be interesting to know.
Fusek: Maybe that’s why property tax appeals are such an enormous industry in other parts of the country and not so much here in Springfield. If you have two houses next to each other, they probably sell for the same amount of money. But you could have two fast food retailers side-by-side, both have about the same square footage, but you can sell them for two or three times as much money based on the lease, based on the equipment and based on other factors that go into it.
Interview excerpts by Features Editor Emily Letterman, eletterman@sbj.net, and editorial assistant Barrett Young, sbj@sbj.net.
