Retail growth in suburban markets is the biggest trend in commercial real estate, as evidenced by the recent announcement of a sprawling high-end retail shopping center being built at the corner of Old Agency Road and Highland Colony Parkway in Madison County.
“Retail … that’s definitely where the action is,” said Mark Bounds, president of Mark S. Bounds Real Estate in Madison.
The Mississippi Business Journal caught up with Bounds, who had just returned from an International Council of Shopping Centers meeting in Las Vegas, where much of the buzz centered on post-Katrina rebuilding.
Mississippi Business Journal: Everyone’s eyeing the Mississippi Gulf Coast. How will the commercial growth develop there?
Mark Bounds: The first big swing will be housing, both single- and multi-family. Then with casino redevelopment and the housing back online, you’re going to see phenomenal new retail growth all across the Coast. You’re also going to see a lot of growth in the industrial and distribution warehouse sector. You just have to have a certain amount of distribution warehousing to serve a market the size of the Coast. We’ll see significant growth in all of the commercial real estate sectors along the Coast as the cleanup progresses, sometime in the next 12 to 24 months. Of course, a great deal of that was destroyed and much of it will be rebuilt in a grander fashion.
You’ll also see a number of new office buildings, but retail will be making the big play in the commercial sector.
MBJ: What other Mississippi markets are primed for growth?
MB: Hattiesburg is experiencing phenomenal growth right now. We just filled up an old Wal-Mart location with a Sofa Express. They’re expecting at least 1,000 new homes built out along Highway 98 West over just the next 12 months.
Baton Rouge has been the big winner in the distribution market so far, but we’ve got several national clients we’ve had to find space for in Jackson because they couldn’t serve New Orleans out of their space in Baton Rouge.
We’re doing an eight-site acquisition for a national retail company. They’re about a 20,000-square-foot user. We’re looking at the Coast, Hattiesburg, Tupelo, Southaven, Olive Branch, Jackson and Meridian because the national crowd wants to be in markets 50,000 or bigger. Those are small numbers in the retail world; 70,000 is better. With them doing eight sites in Mississippi now, it’s a clear indication that Mississippi is on the screen and those will all go to suburban markets.
vMBJ: New construction versus existing properties?
MB: A lot of the existing properties have been consumed post-Katrina. Now you’re seeing a wave of people taking advantage of the GO Zone incentives. We’re doing the same thing. We’re buying a site for a new distribution warehouse for that very purpose. The GO Zone incentives will, in fact, engage the private sector not only in rebuilding the Coast but also in other counties further north. The incentives are so sweet; you’ll see a wave of growth in Mississippi like never before. We’ve sat down with several tax law groups and our own tax lawyer and it’s not that hard to understand that you can’t put that type of incentive out there and not have tremendous interest from all over the world.
MBJ: How does this fare for Jackson?
MB: It’s clearly been good for Jackson. We’ve had a really great run with companies that have to distribute and have run out of space in Baton Rouge, so we’re seeing an influx now to Jackson. We’re leasing up space that has been sitting vacant for years. The Fred Jones Company (redistributor of Ford Motors rebuilt engines and transmissions) got wet in New Orleans so we brought them here. We did a 100,000-square-foot acquisition for them at Hawkins Field.
MBJ: What factors most determine whether a project gets built and succeeds or fails?
MB: The developer’s confidence and financing has a lot to do with it. You’re going to see some speculation and you’re going to see some projects fail. Let’s face it. When you see incentives like GO Zone out there, there are going to be a lot of people trying to take advantage of it who have never developed before.
Also, if infrastructure is not available, it impacts the speed and rate at which a project gets done. The Coast, in large measure, north of Interstate 10, does not have a lot of infrastructure. Getting that built is very, very important.
MBJ: Plenty of money seems to be available to be borrowed, with lenders flush with cash right now, both institutional and local commercial banks. What could spoil it?
MB: The rate environment. We’ve seen commercial interest rates go up 150 basis points in the last two to three weeks, which is huge. There’s discussion now about whether the run that began in 1991 is about to come to an end because of inflation in commodities. That could have a huge impact on whether or not some of these projects get liftoff. For example, there are 3,000 condo units at Orange Beach, Ala., available. That’s a year and a half’s supply. There are a number of projects that are not even out of the ground down there that we think probably won’t even start because rates are going up. Insurance rates have more than doubled, so the cost of ownership is way up. On top of all that, banks are beginning to pull in their horns on the idea of 10% down for pre-construction. If rates continue to kick up, it’ll slow down the market.
If interest rates continue to rise at the rate they have lately, it could absolutely, in many cases throughout the next year, cancel out the GO Zone opportunity.
Obviously, for a real estate project to work, it has to cash flow. The real estate world works off leverage. Clearly, if we see the rate increases of late, some projects will not work simply because the cost of construction is at an all time high.
If we see another 150 base increase sometime over the next year, some projects simply won’t get done. It’s tight right now with the cost of steel and concrete, but if you add another big bite on the debt side, projects will cancel.
MBJ: So what’s the way to go with financing?
MB: On the construction side, unless a project is super large, commercial banks will still be the way to go. The banks are about to have a phenomenal run. I’m a director and owner of First Commercial Bank and see it first hand from that end. The banks should get ready. If you’re in the commercial banking business, the next few years should be very good.
Contact MBJ contributing writer Lynne W. Jeter at Lynne.Jeter@gmail.com.