Under the leadership of James M. Ingram, Parkway Properties Inc. purchased 40 office buildings totaling 5.2 million square feet for approximately $500 million dollars in 1997 and 1998.
The company lists 1,000 tenants in its 7,000,000-square-foot portfolio and has 150 employees across the Southeast and Texas.
Prior to 1989, Ingram, an Ole Miss graduate, was a broker associate at Smith-Edwards Company in Jackson and a special agent for the Illinois Central Gulf Railroad in Chicago.
Ingram chatted with the Mississippi Business Journal about the rollercoaster ride of late with REITs, the possibility of overvaluation in the marketplace and trends in commercial real estate.
Mississippi Business Journal: With so much money chasing so many projects, something has got to happen – is overvaluing occurring?
Jim Ingram: We saw the effects of overvaluing enter the office sector in late 1997 and early 1998. Office properties were selling at premiums to their replacement cost and real estate companies were being traded at significant premiums to their net asset value.
This “buying frenzy” with little emphasis on the true economic value of the real estate may have been one of the factors that led to the shut down of the capital markets for the REIT industry.
By mid-1998, access to the capital markets was difficult and costly. As a result, the acquisition appetite for many REITs was significantly reduced and has remained at that level. Parkway chose to stick to our conservative investment criteria and make good investments which added value for our shareholders.
MBJ: REITs have taken a little bit of a beating in the last few months or last couple of years. Can you tell us what’s up?
JI: Many REITs were devalued after the buying frenzy stopped, on the assumption that funds from operations could not grow without continued acquisition activity. In addition, many companies were dealt a difficult hand of meeting short-term debt requirements in an unfriendly capital environment. That was late 1998 and since that time many REITs have shown Wall Street and analysts that funds from operations can be increased by sound management and leasing efforts and other alternative revenue sources, without substantial acquisition activity.
Some companies, such as Parkway, have implemented self-management and self-leasing procedures focused on tenant retention and have begun providing non-customary real estates services within their projects. In addition, some placed fully amortizing debt on their properties at the appropriate time in the cycle locking in interest rates at extremely low levels, never accumulating a lot of short term debt. Parkway has done all of the above, is analyzing other types of services that can be offered at the property level and has been rewarded by the investment community accordingly.
MBJ: What about downtown commercial real estate. What is the occupancy and how does MCI WorldCom’s building, now on the market, affect the overall vacancy rate?
JI: Prior to MCI WorldCom’s 110,000-square-foot building coming on the market in late May, the downtown Class A and B market was 4.4% vacant, representing only 95,000 square feet of vacancy. The WorldCom addition will more than double our existing vacant square footage and increase the downtown vacancy rate to approximately 9%. That news is not all bad however, since there have not been any large contiguous blocks of space in the CBD (Central Business District) for years. This gives us the opportunity to attract another large user to the downtown area. There are two or three groups in the marketplace today seeking a new headquarters complex. This will be a great alternative for those wanting to stay downtown.
MBJ: How does commercial real estate in downtown Jackson compare to the tri-county area?
JI: We divide Jackson into three sub-markets — the CBD, I-55-County Line Corridor and the Lakeland Drive Corridor. The completion of several new office projects on the Highland Colony Parkway, which is within the I-55 Corridor, has increased the vacancy for that sub-market to 9% as well. The Lakeland Drive sub-market has remained strong at a 5% vacancy level, but is the smallest sub-market in the city with approximately 570,000 square feet. Overall, the Jackson vacancy has climbed from 5.4% in the summer of 1998 to 8.5% today. The most significant factor was WorldCom’s building, which increased the overall market vacancy by over 2%.
MBJ: How does metro Jackson compare to similar metropolitan areas in the U.S.?
JI: Jackson has enjoyed one of the lowest vacancy rates in the top 100 cities in the U.S. since 1993. The American Bankers Association a few years ago ranked us as the third best market in the country. Our existing vacancy of 8.5% appears extremely high initially, when compared to the 5% to 6% levels we’ve experienced since 1993. We are still one of the stronger markets in the country today due the enormous development that has taken place since 1996.
The markets that are considered the top five today are Raleigh-Durham-Chapel Hill, N.C., at 3.2%, Seattle, Wash., at 5.8%, Austin, Texas at 6.5%, Minneapolis, Minn., at 7.2%, placing Jackson at No. 5 with an 8.5% vacancy. The next best market today would be Orlando, Fla., at 9.9%, according to The Penobscot Group’s May 14, 1999 First Quarter Office and Industrial Supply publication.
MBJ: What trends in commercial real estate have you noticed over the last 20 years?
JI: The most damaging trends that we have seen since the early 80’s which have had the most significant impact on the office sector are: (1) Developers will absolutely over-develop any market in the country, if given the opportunity, and (2) If you put enough capital in the hands of “acquisition teams”, they will continue to purchase assets and acquire companies whether those investments are economically sound or not. They get paid to “acquire”, not analyze.
Another trend that we have seen and experienced is the new level of sophistication of the tenants within our buildings today. Tenants expect services that were simply not available five years ago. Issues such as fiber optic cabling for internet access, more efficient office configurations and work stations, video-conferencing and extended work days are the more prevalent negotiations we see other than simply rental rates and lease terms. This provides a new challenge for office building owners today and those that can adapt to and meet these demands will be the successful owners of the future.
Parkway has tried to lead by example in this area, from being one of the first REITs to have a Wide Area Network system operational for immediate communication between our 20 regional offices to our interactive quarterly conference calls where our analysts and shareholders can access our Web site and “see” the presentation as it’s given. If we don’t stay current with cutting edge technology, life in the office sector will pass us by.
MBJ: Your company has been very aggressive buying properties. What’s next?
JI: Between 1997 and 1998, Parkway purchased 40 office buildings totaling 5.2 million square feet for approximately $500 million dollars. We certainly will not match that level of acquisition on a going forward basis and will not be required to in order to be successful in delivering a strong yield for our shareholders.
Operations will be the key to our success in the next few years. Our focus will be on how well we implement new technology, meet and exceed the demands of our 1,000 tenants, achieve the imbedded growth within our 7,000,000-square-foot portfolio, maintain our strong tenant retention ratios and occasionally acquire good assets or companies that meet our investment criteria. We have 150 dedicated employees across the Southeast and Te
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