Warehouse distribution centers are going to become more prominent than ever once an expanded Panama Canal opens in early 2015 and greatly increases an already-enormous volume of retail goods coming into the United States from China and the rest of Asia.
Jackson, though a trucking and rail crossroads, could have a difficult time taking part in the distribution center boom.
Blame it on geography, says David Hoster II, CEO of EastGroup Properties, a multi-billion dollar industrial real estate company based in Jackson.
As fate would have it, getting situated between the major distribution center cities of New Orleans and Memphis greatly diminishes Jackson’s appeal as a player in the competition for warehouse distribution facilities, said Hoster in comments at a commercial real estate forum last week sponsored by the Mississippi Chapter of CCIM.
Jackson’s potential to take part in the coming warehouse distribution boom was among a number of topics panelists addressed, including the affect online retail is having on warehouse building and leasing. Panelists also addressed the timing of possible interest rate hikes and downtown Jackson’s office building vacancy rate.
In a question-and-answer portion of the forum, the leasing agent for the 350,000-square-foot Landmark Center conceded Landmark lost the RFP competition to become the new headquarters of the Mississippi Department of Revenue purely on price. But the state put far more demands on the Landmark for fix-ups and retro-fits than it did principal competitor and lease winner South Pointe Business Park in Clinton, the leasing rep said.
Addressing Jackson’s potential to draw warehouse distribution centers, the EastGroup’s Hoster said the city is a victim of the desire of distributors to the nation’s giant retailers to “come out of one of those big boxes in a big city.”
It’s more efficient for distributors to do it that way, Hoster added. “There is so much regional big box distribution that nobody wants to distribute out of Jackson. We’re not a distribution area.”
In fact, noted Hoster, FedEx does not fly in and out of Jackson. “It all comes in by truck and goes back by truck.”
Hoster said that even if a large distributor wanted to come to Jackson and set up at or near Medgar Wiley Evers International Airport, the distributor likely would encounter difficulties dealing with the City of Jackson, a main landlord for airport-area land.
Hoster, whose company has 31 million square feet of industrial space valued at $2.5 billion, said he encountered a host of frustrations trying to develop some airport area industrial space. “Part of it was the politics of the city,” he said, calling the effort one of the “worst experiences of my career.”
Beyond development difficulties within the airport’s industrial zone, a developer must deal with the tendency of potential local tenants who want “a Cadillac at a KIA price.”
As a result, he said, “We deal with national companies that come (to Jackson) from another city. They are looking for quality and expect to pay for that.”
Here is a rundown of other subjects and issues the CCIM panel addressed:
>>> Look for online retailers such as Amazon.com to continue building regional distribution centers across the country to meet the demands of customers for next-day or – in some instance s—same-day delivery. Retailers “are trying to save money by sending overnight by ground,” Hoster said. “I think we (EastGroup) will benefit from that.”
On the other hand, online retail and its rapid-delivery effort could be tempered some by the inclination of Americans to want to see and touch the items they buy, said Jonathan Gould, CEO of New York City-based Stonemar Properties.
“Fifty-five percent of our economy is retail,” Gould reminded fellow panelists and the audience. “It’s not just how you can get a good overnight and so forth. People do enjoy shopping. It’s part of the fabric of America.”
Retailers, he said, are finally waking up and integrating the Internet with their brick-and-mortar operations, he said. This can include having the good ordered online and shipped to the store the same day or returning the item online, Gould added.
He said he sees an opportunity for home improvement retailers – a category he says is well-known for an absence of in-store assistance – to set up online operations that allow the consumer to buy from home and have the item ready for pickup at the store shortly thereafter. “When you walk in you can’t get any help anyway,” Gould said, and suggested the online approach should end the frustration of searching out sales assistance.
>>> Expect interest rates to rise by 2015 – provided the national employment levels reach the Federal Reserve target of 6.5 percent to 6 percent by then, said several panelists.
Fountain Barksdale, senior vice president and senior real estate lender for BankPlus Jackson, said the 6 percent to 6.5 percent employment level “is exactly the point where the Fed said they would start increasing interest rates.”
In 40 years as a banker, Barksdale said he has never seen a prime rate – 3.25 percent since Dec. 16, 2008 – this low. The average in his decades as a banker has been in the 6.7 percent to 6.8 percent rate, he said. “I would look for the rates to start rising in 2015.”
He cautioned, however, that investors are growing impatient with their yields and may force interest rates to move up before then. “”If you wait for the Fed to tell you interest rates are going to move up, it’s too late,” Barksdale said.
A contrary perspective came from Jim Ingram, executive VP and chief investment officer for Hertz Investment Group, a commercial real estate firm that either owns or controls more than 20 percent of downtown Jackson’s office space.
“I think the economy is brittle enough and the Fed knows any indication of increasing interest rates will absolutely send us right back into a recession even deeper than what we had in 2008-2009,” he said. “I do think the Fed is going to keep interest rates low. They are just ‘hinting’ about 2015. The only way our economy can grow is to keep interest rates low.”
>>> Assessing downtown Jackson’s office vacancy rate should exclude properties that are awaiting conversion to residential or are having build-outs done for new tenants, Ingram said.
Downtown’s actual rate – at least for Class A – is below the national average, he said. In a calculation that included Class A properties Pinnacle, One Jackson Place, Regions Plaza, 111 Capitol and City Center, “the vacancy rate is about 15 percent and actually a little better than the national average,” Ingram added.
>>> Conceding the Landmark Center lost its bid to South Pointe Business Park for the new the Department of Revenue HQ based on rent proposals, Ingram indicated the outcome could have been different had the state not set extensive build-out requirements for the Landmark.
Specifically, the state put much higher “cost-allocation” demands on the Landmark than it did South Pointe Business Park, Ingram said. “The allocated costs the state appropriated to Landmark greatly exceeded those of South Pointe,” he said, though he conceded: “I think I lost it anyway on rental rates.”
It’s much easier to be flexible on lease rates when your building is about to be 100 percent leased, he said of South Pointe, the former HQ of WorldCom.
“We were highly disappointed but not surprised,” Ingram said of Hertz Group, which has an option to buy the Landmark.
“I do think South Pointe may have had a better economic proposal.”
Landmark Center, meanwhile , is on the market for $7.6 million, down from $14.6 million 12 months ago. Ingram said the building is ideal for state office use, though he emphasized Hertz does not yet own the building so the firm’s interest in the state buying it is limited. “
“That building should be a state office building at some point. The state could save a lot of money by buying that building and moving a lot of state agencies into it.”
It’s got 350,000 square feet and a “highly efficient floor plate of 43,000 square feet,” he noted.