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Mississippi commercial real estate dodges highs, lows

The downturn in the national economy has hurt commercial real estate activity in Mississippi, but not to the degree seen in other areas of the country, says Philip Holman, CCIM, president of Mississippi Commercial Association of Realtors and vice president of leasing and sales for the Mattiace Company in Jackson.

“Mississippi is a little different compared to other areas such as New York and California,” Holman said. “They experience the highs when real estate is booming at its fastest pace. And when the economy slows down, they have the exact opposite experience, and are hurt worse than other areas of the country. Mississippi is more a second-tier market, and we have a more even keel. We do experience an up, but not as much up as major cities. Therefore, when there is a downturn in the economy, we are not hit as hard.”

The diversity of the state’s economy also helps. Houston, Texas, for example, took a big hit because of problems with large computer firms. And the Silicon Valley in California has been hard hit by the decline in the technology market.

“We don’t have as many technology companies as they do, so it doesn’t hurt us as bad,” Holman said. “We have a much more diverse business community. Retailers are looking for the economy to improve next year, and are especially looking at an upsurge in the second quarter of next year. Retailers feel we have leveled out and seen the worst.”

Statewide commercial realtors report there are still a lot of companies interested in Mississippi, but these companies are now much more selective regarding which cities and locations to consider. Holman compared it to a rifle pattern rather than a shotgun pattern.

As far as office space, in general, growth seems to be moving towards the suburbs. But while some businesses are moving away from downtown areas, Holman said the downtowns are staying strong. Other businesses are coming in to lease areas left vacant.

“The downtown throughout the state is strong as far as office space goes,” Holman said. “Probably the biggest trend in office space is national companies consolidating their offices. They might decide to close a Mississippi office and move it to Atlanta or New Orleans where they have a larger office. And that has created an opportunity for the business people out there because as these national companies leave, their space is still under lease. The tenant that has left is willing to sublease the space at an under-market rate to have a tenant in there rather than pay all the rent for empty space. So the new tenant is able to have nicer space for a lower rate.”

With interest rates at the lowest level seen in decades, it can be a great time to buy real estate. Purchases and acquisitions are popular at this time. Another trend Holman has observed is that a number of owners are selling their property, and are looking for opportunities to do a like-kind exchange, or a 10-31 exchange — the designation used by the Internal Revenue Service. This allows an investor to take the proceeds from the sale of a piece of commercial real estate and invest in a new piece of property without having to pay capital gains taxes until such time as the second building is sold. Investors can keep trading up to larger pieces of property without owing capital gains tax until making a sale, without reinvesting in more commercial property.

“The lower interest rate is spurring this,” Holman said. “There have been a lot opportunities for like-kind exchanges lately. It has caused a ripple effect.”

Regarding the sale of land and warehouse space near the Nissan plant in Canton, Holman said there hasn’t been a great deal of activity thus far. But once the plant is completed, interest is expected to pick up.

“There is a wait-and-see attitude anticipating a spike in the demand for manufacturing and warehouse facilities here in central Mississippi. But it is still a little early in the game for that,” he said.

On the Coast there has also been a slowdown in commercial real estate activity.

“The first half of the year I could have just played golf,” said Brooks Holstein, senior vice president, Sterling Properties, Biloxi. “The activity was good, but it was more retailers in the evaluation mood with a wait-and-see attitude on the overall economic activity in the country. Many of the companies re-evaluated new store production in 2001 and 2002, and reduced new store production 20% to 30%, which had a big impact on what I do. We were working, but we weren’t getting new projects completed.”

Then in early July activity dramatically increased both in retail expansions and retail contraction. Sterling Properties, whose headquarters is in Covington, La., got listings on a number of soon to be closed or abandoned retail locations in Mississippi and Louisiana.

Holstein was recently in New York City at an International Council of Shopping Centers conference. He said the consensus was that holiday sales will have a dramatic effect on 2002 and 2003 expansion plans. Sterling Properties is still working on marketing an additional 300,000 square feet of retail space at Crossroads in Gulfport. But Holstein said most of the companies interested have delayed final market tours until the first quarter of 2002.

In addition to being more cautious about new stores, retailers have become much more aggressive in eliminating and closing unprofitable stores that in years past they may have continued to operate.

Sterling Properties has been representing Tulane University of New Orleans in their expansion to the Mississippi Gulf Coast. Holstein sees the Tulane expansion as a good leading indicator of continued growth along the Gulf Coast. Also promising is that retailers at Crossroads and other centers managed by Sterling properties have seen sales either the same as 2000 or down only slightly compared to any substantial downturn.

Mark Utley, Utley Properties, Olive Branch, owns a number of shopping centers in North Mississippi in DeSoto, Tate, Marshall, Lee and Panola counties. He said that while commercial activity in the later part of 2001 has been down, there is a silver lining to the cloud.

“You have to be an optimist to be in this business,” Utley said. “Money is cheap because the Federal Reserve is doing everything it can to stimulate the economy. The tax cut is starting to have effect, and fuel is cheap. All of those things are positive for real estate. The other thing is that real estate compares very favorably with other investment opportunities out there. When you look at the stock market, there are very few stocks you can put your money into right now. There are just so many good solid commercial real estate opportunities and when you can leverage at 6% financing, it creates an incredible return compared to other options out there.

“I think looking forward to 2002, the real estate investment opportunities are the best they have ever been because the spread between capitalization rates and interest rates are wider than they have ever been.”

Utley said that the opportunities for real estate investments are fantastic assuming the economy will rebound. It always has, and there is no reason it won’t this time, too, he said.

Contact MBJ staff writer Becky Gillette at mullein@datasync.com or (228) 872-3457.

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