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CEO Roundtable: Real Estate

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Springfield Business Journal Editor Eric Olson discusses commercial real estate with Ross Murray, president of R.B. Murray Co.; Ron Tappan, agent with Reece Commercial Real Estate; Titus Williams, president of Prosperiti Partners LLC; and Anita Zimmerman, agent with Wilhoit Properties Inc.

Eric Olson: In one word, how would you describe the commercial real estate industry?
Titus Williams: Hot.
Anita Zimmerman: Flourishing.
Ross Murray: Stabilized.
Ron Tappan: Very good. In balance would be another look at that. With buyers and sellers and product, of course. Right now having some problems in the product area. I’d have to say that inventory becomes an issue. We’re all selling certain products that are hot in the market but not ready for sale, and that’s a difficulty.

Filling in the gaps
Olson: What other types of real estate are moving?
Tappan: Decent apartments don’t stay on the market very long, if they’re priced halfway decently – from an investment standpoint. And of course, there’s no such thing as a starter home anymore. People talked for years about that $78,000 home that Morelock-Ross built, well that’s $160,000 now. Since starter homes just don’t seem to exist, where do people want to live or have to live? Apartments.
Murray:The young professionals that are kind of behind my generation, they don’t necessarily want to have that American dream that we all are accustomed to. To have that starter home. They want to live in Galloway or somewhere that is easily accessible where they work, live and play.
Olson: If you’re talking to a developer, what type of spec developments would you steer them to?
Zimmerman: These office users, they need space, but they don’t necessarily want the colonial looking office building in midtown. And they can potentially afford to pay to accommodate new construction prices and pay on the spec spaces and they want something brand new and shiny, which also speaks to the hiring thermostat in Springfield. If you’re going to hire all these millennials, they want this amazing workspace. They want Google.
Murray: Eric, you asked a good question about what type of product. Just as much as what you build, the sustainability, modern architecture, because the culture of what the company is trying to put forward to employ different people, it speaks volumes of somebody that’s been in a 1985 law office building that steps out and builds a three-level institutional building that’s kind of more conventional than the bigger cities. From an attraction of talent, it gives them a leg up. In the accounting industry, when BKD built its new building downtown, that was one of the very few newer, nice institutional buildings in the city of Springfield. That attracts a lot of young talent. It’s kind of like we talked about before with what’s going on in Galloway and all the new multifamily. It’s that approach at the home that kind of just dovetails right into the workspace, as well. They want the whole package.
Tappan: Look where these people came from. Look at the Hammons Tower right now. A perfect example.
Murray: In its day, it was prime time.
Olson: What’s the vacancy rate there now?
Murray: It’s like 50%, 55%. It’s struggling.
Tappan: And the rates have gone way down, and they still can’t make it. I don’t think there’s any magic wand that you’re going to all of a sudden transform so something will be more attractive. It’s a very high-maintenance building. They had a big major tenant when they got in there, which they don’t have now, and they thought they’d be able to fill in behind them and so far they haven’t been able to.
Olson: That is our skyline. Do you think there’s not room for that sort of building in Springfield anymore?
Murray: I don’t think it’s necessarily the building or the geographical area, I think it just needs a lot of capital expenditures to get to a spot where it is modernized. You have to give the people what they want. They need ultra high-speed internet, they want super nice common areas, they want workout facilities, they want experiences. If you can’t create an experience, then they’re going to go elsewhere.
Williams: It’s design, amenities and quality of life. If you can’t hit on those things when it comes to multifamily and retail, especially when it comes to location of retail and/or office, then you’re not going to be able to get the people into those places. It always boils down to that except for when you talk about industrial. That’s a completely different section of commercial.

Why retail?
Olson: When you look down the road, do you see retail having a significant portion of occupancy of commercial structures? Or is Amazon just that powerful? Is this the beginning of the end of retail?
Murray: I don’t think so. Technology is changing the industry so fast. It takes a couple of years for it to react. I think the last three to four years you’ve seen a complete paradigm shift in retail. If it doesn’t have some kind of value add or an experience, and you’re not selling somebody on just price. That’s why I think Bass Pro [Shops] has been successful because they’re selling you not only a product, but they’re selling an experience. It’s like the Branson Landing. You may not see a lot of people with bags, but they’re there for the experience or they’re eating. They’re just there for the afternoon.
Williams: If everything were to shift to online, what happens if you’re a retailer is you dilute your brand because you are no longer in the marketplace. It gives an opportunity for other people that are competing with your same type of thing, but potentially different price points, that you would potentially dilute your brand to the point that you no longer are relevant. A piece of retail will be the billboard.
Tappan: At the same token, if more online would occur, which I think it will, some of the manufacturers are going to have a little problem. They make a lot more money selling to a shopping mall or an individual retailer than they do selling to Amazon or selling through Amazon, or even Walmart or Costco for that matter.
Williams: Real estate is real estate. If you don’t have the showcasing of goods in a retail store, it has to be stored someplace because people are still going to buy those wares. Those wares go into a warehouse. That’s where you’re seeing the uptick in industrial and warehousing. You might see less occupancy in retail buildings, so you have to be more conscientious on your lease rates. We’ll transition into a different type of real estate space.

Level up
Olson: I’m going to read a quote recently published in Springfield Business Journal by a developer on the shifting of retail and how it affects real estate. It’s from Matt O’Reilly. He was speaking about Farmers Park, and what he said was, “We live in an unprecedented era where the top floors of buildings are now worth more than the bottom floor.” You agree with that?
Tappan: Downtown Manhattan I think that’s probably true. I’m not so sure that’s true around here.
Zimmerman: I think the intent of his statement there was just to talk about how retail spaces that you walked in from the ground floor, it used to be a premium price. But now because of the shift in office and retail, and service providers, office space is just as valuable on the ground floor as it is on upper floors. When we talk about retail space, at least in Springfield, we combine sort of the service industry and the retail industry as it encompasses the retail industry. And I think Springfield has done a good job of trying to shift to not just retail stores that you walk into but service providers that you can’t get online. You can’t get a cup of coffee online, you can’t get your clothes dry-cleaned online. There are certain things that we will always need that need retail space but aren’t necessarily selling retail goods.
Murray: The new development there on Sunshine and National, it’s 91% preleased and it was 50% leased before it was completed. And 70% of the tenants in there are service retail.
Olson: To go a little bit deeper on Matt O’Reilly’s comment here, I wonder if this is what everyone is seeing or if he’s on the cusp of something, but it was the apartments above that are more valuable to him and that development because it’s 98% full in the apartment space. He’s sort of rethinking how he’s going to use the ground floors because the retail that was there is vacating and he doesn’t see that as the future.
Murray: Farmers Park, in my opinion, is destination retail where if you look at the majority of those tenants, a lot of those tenants were also service retail, as well. Staxx, for an example, is going across to Brentwood Center. They aren’t going anywhere. They’re just shifting across the street from the mall. It’s a different product. His development is different than every other development in here. The old cliche is that the lowest level is the most valuable level on a two- or three-level building. That’s not the case here.
Zimmerman: Even finding multistory buildings here is hard.
Murray: I get a call once a week from other brokers that are hiring us to do site selection. They say, “Hey, send us a half a dozen institutional multilevel buildings in your market survey.” Well, I’ve got five, that’s it. Over time, that’s going to change.
Williams: I believe the future of retail is mixed use. And I think that’s becoming more and more sought after because it becomes a destination. Retail becomes the opportunity for your quality of life – that you work, play and live in a concentrated area. I think that’s what (O’Reilly) is kind of is seeing is that his mixed-use development is changing. If he has a component of retail space, he can use as a loss leader to then increase rental rate per square foot on his habitational type of real estate. That way, he has an opportunity to have higher occupancy on the whole because he has the users in the same structure as the service space retail or destination retail.
Zimmerman: Every savvy developer has to adjust based on the marketplace.
Olson: Why should we care about retail?
Murray: Everybody is invested. It’s jobs, it’s wage growth, it’s sales tax revenue for the city of Springfield most importantly. If that goes away and everything continues to shift online, then that hurts the city’s bottom line. And then we all suffer as a community.

Low vacancy
Olson: Let’s talk a little bit about the direction of occupancy rates and lease rates. It looks like vacancy rates are all in pretty close neighborhood of each other among the sectors.
Williams: Right now, it’s probably a very hot market, especially when it comes to multifamily. When you see occupancy rates are that high and vacancy rates are that low, it’s effectively like the unemployment rate – you’re fully occupied. You have attrition, you have turnover, you have the time where you have to fix those units up to get people in and moved in. Effectively, we have a shortage of multifamily. In fact, we have a shortage of almost every type of commercial real estate in the city of Springfield.
Olson: The range is at 3.6% vacancy in the office to 4.9% vacancy in industrial.
Williams: Industrial will throw you off every time. If you have one big industrial spec building on the market, your vacancy rate will be out of whack.
Tappan: In the office, they also include what I call captive. In other words, if O’Reilly [Automotive] office building is in this, and it’s not for lease commercially, and one of the hospital buildings is listed in there as part of the market, but they’re not open to public leasing, it creates a shortage in property, which means a higher vacancy rate.
Murray: I can do a market search right now ... if I look for 25,000 to 50,000 square feet in the city limits of Springfield that’s a newer building in the last 10 or 15 years, I’ll come up with three, maybe.
Olson: So let’s say you’re a developer. You’ve got money to spend. Where are you investing?
Williams: For us, multifamily. Based on how I’ve looked at the market in population growth and trends and absorption rates, that we could deliver anywhere from 500 to 1,000 units a year in the MSA and absorb them. I think the same thing of office. If you build it in the right location, for the right price and you’re wise about it, I think you can do fairly well. Springfield is getting to the point that there is not many more pieces of ground in good locations for us to be able to develop those nice products. And right now, we’re at an all-time high for construction prices.
Tappan: Now you can buy an existing apartment building for about $50,000 a door, something like that. And if you turn around and build that, it’s going to cost you pretty close to $90,000 per door for the same product. That same thing relates to office buildings. You could buy a used office building for $150 a foot, but if you’re going to start building one for yourself, you’re close to $200.
Murray: That’s why we’ve seen a lot of redevelopment because there isn’t large, big chunks really left to develop. So you’re faced with existing structures. That’s why you see all that redevelopment up and down Sunshine.

Seeing green
Olson: What trends can we expect to make their way into the Midwest?
Zimmerman: Medical marijuana. It’s a trend, but I think we’re all affected by it right now. I think we’ve all been inundated with callers looking for retail locations and trying to be the first one in this community to be able to open up that type of business. There’s a lot of (questions) that we can’t answer yet just because it’s such a new industry here.
Murray: I’m getting 50 [calls] a week.
Tappan: We thought we were the only ones.
Murray: They’re like head hunters. They are out to cherry pick markets that are yet to be tapped.

Excerpts from Features Editor Christine Temple, ctemple@sbj.net.

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