Amidst the tech and dot-com frenzy of the late 1990s, investors fearlessly engaged in the risky world of “growth” stocks, throwing their money behind companies that compensated for a low-to-non-existent dividend by offering a seemingly limitless potential for price appreciation. Losing favor in this investment climate were the REITs, which also had been considered “growth” stocks in the early-to-mid ‘90s before being betrayed by their stable but modest returns. However, once the tech/dot-com bubble burst and the rest of the stock market collapsed in the early 2000s, demand soared for “value” stocks that might have been growing rather unspectacularly but which provided significantly higher dividends. As a result, REITs, which are required to return at least 90 percent of their net income to shareholders and which also offer the collateral of “hard” assets, have reemerged as attractive investment vehicles.

Heartland Real Estate Business spoke with three REITs that are active in the Midwest about how their business has changed as a result of this increased popularity, how they currently view the region as an investment market, what metropolitan areas they are emphasizing and their goals. The interviewees were:
• John Gates, co-chairman and CEO of Oak Brook, Illinois-based CenterPoint Properties;
• Dennis Gershenson, president and CEO of Southfield, Michigan-based Ramco-Gershenson Properties Trust; and
• Doug Kiersey, senior vice president and Mid-Atlantic regional director of Denver-based ProLogis.

CenterPoint Properties

CenterPoint Properties has positioned itself well with its exclusive focus on big box warehouse/distribution facilities and its geographic emphasis on a region that centers on Chicago but stretches from Milwaukee to northwest Indiana. This market contains roughly 40 percent of the industrial base in the Midwest, with some 1.3 billion square feet of space in the property type. CenterPoint, with its 32 million square feet of space, can only claim a market share of 2.5 percent — implying tremendous opportunity for further growth.

In addition, the Chicago region is more diversified than the Midwest as a whole. With 17 interstate highways and all six of the major railroads, it is the undisputed freight hub of the United States. As a result, consumer goods distribution has been able to fill the gap created by the nationwide decline in heavy manufacturing. Also, the area represents the largest wholesale market in the world, and a number of wholesalers are currently in the process of consolidating smaller regional operations to cut costs.

Unlike most other industrial REITs, CenterPoint is not a long-term property holder. Instead, the company chooses to seek out assets with upside potential, add value and then sell. “We keep a property for an average of 5 years, which means that we sell 15 to 20 percent of our book assets annually,” Gates says.

With an approach that emphasizes liquidity, CenterPoint’s debt load is 25 percent less than the REIT standard. Its earnings growth is 100 percent greater than the REIT average, and its stock outperforms its REIT competitors. Due partly to these unique characteristics, CenterPoint has been especially well-positioned to take advantage of the increasing interest in REIT stocks. In light of the collapse of so many highly leveraged private real estate concerns in the last recession, investors are looking for strong balance sheets like CenterPoint’s. In addition, more investors are placing emphasis on income generation (as opposed to capital appreciation) and gravitating toward the “buy, add value and sell” mentality.

CenterPoint is seizing a number of opportunities in the form of distribution technology. For instance, Chicago has emerged as the world’s third largest container port next to Singapore and Hong Kong. Goods shipped from the Pacific Rim, that do not stay on the West Coast, are brought here via rail and then placed on trucks destined for consumer markets throughout the nation. In response, CenterPoint recently opened the 2,200-acre CenterPoint Intermodal Center on the former Joliet Arsenal site. The new center is located 40 miles southwest of Chicago on the Interstate 55 corridor and 5 minutes from that highway’s intersection with Interstate 80. The project is anchored by a 621-acre multi-modal facility for the Burlington Northern Santa Fe Railroad, and it also includes 17 million square feet of distribution/warehouse/light manufacturing space.

CenterPoint is also managing the construction of a 1,230-acre, multi-modal facility for Union Pacific Railroad in Rochelle, Illinois, minutes from the intersection of Interstate 88 and Interstate 39. When finished in a year, this development will serve as a container-handling venue and will house adjoining warehouse space.

In response to the skyrocketing popularity of overnight delivery and next-day air shipping, CenterPoint built O’Hare Express Center, an 800,000- square-foot business park devoted exclusively to air freight and currently 100 percent leased to top-tier tenants such as the U.S. Postal Service, DHL Airways and British Airways. Following the success of this venture, CenterPoint has embarked on the development of O’Hare Express North, an 800,000-square-foot built-to-suit facility designed for the same purpose.

Finally, CenterPoint and Ford Motor Land Development Corporation are working together on a “supplier park” in southeast Chicago that will be the first of its kind in the United States. At this 155-acre, 1.6 million-square-foot project, tenants will “sub-assemble” major components of the new Ford hybrid SUV/station wagons before driving them to a Ford assembly plant 0.5 miles away to be manufactured. Gates believes this distribution/production model will become standard practice for the automotive industry in the future. Indeed, although it is not set to open until 2004, the campus is 100 percent pre-leased.

Ramco-Gershenson Properties Trust

Ramco-Gershenson Properties Trust is a retail UPREIT with 11.5 million square feet of GLA in 59 properties across the Midwest, Southeast and the Mid-Atlantic. Fifty-five of these holdings are neighborhood, community or power centers. More than half are supermarket-anchored, and much of Ramco-Gershenson’s current dealmaking involves discount-oriented boxes. The company is intent on insulating itself from the economic downturn and, as a result, it prefers anchors that provide for essential needs (groceries and other convenience items) or cater to value-seeking shoppers (discounters and category killers). Despite its Michigan address and strip emphasis, it is not overly exposed to Kmart. The struggling retailer appears in only five of its centers (as of December), and Ramco-Gershenson reports strong interest in those spaces on the part of other discount department stores.

The company was created by the 1996 merger of Ramco-Gershenson, Inc. and RPS Realty Trust, and its presence in the Midwest stems from Ramco-Gershenson, Inc.’s development activity there from the early 1950s to the mid-’90s. “We’ve always been bullish on the Midwest,” Gershenson says. “It’s a part of the country with relatively high income levels and a stable population base.”

Ramco-Gershenson is further encouraged by the increasing diversification of some of the region’s major markets, which are now better able to withstand the effects of recession. The company is following the lead of anchor tenants and currently looking at a number of cities in Ohio, Indiana and Wisconsin, and would consider a good value in the Chicagoland market. But Ramco-Gershenson remains the most optimistic about the Detroit metropolitan area, where it has a significant concentration of assets. “With a very strong labor market, and very significant wages up and down the employment ladder, there is always a significant income base [in metro Detroit] for necessary goods and services,” Gershenson says.

Ramco-Gershenson traditionally has avoided inner cities, instead concentrating on suburban and ex-urban areas. Much of its work, especially with closer-in, largely built-out settings, consists of redevelopments of existing assets — efforts that usually focus on the provision of new and/or expanded box spaces.

One of its highest-profile projects in 2002 was the “de-malling” of Tel-Twelve Mall, a 1960s-era enclosed mall at the intersection of Telegraph Road and Twelve Mile Road in the Detroit suburb of Southfield. In this center, now renamed Ten-Twelve Shopping Center, the majority of the in-line space was eliminated, and a slew of category killers was added.

At West Oaks Shopping Center, on Novi Road and Twelve Mile Road in the Detroit suburb of Novi, existing spaces for Kohl’s and Jo-Ann’s Fabrics have been significantly enlarged (in the latter’s case, to Jo-Ann’s Etc., the chain’s superstore concept). Interestingly, roads surround this property on all four sides, so no additional land was available. Yet rather than abandon the center for other sites several miles away, the two retailers chose to expand vertically and operate two-level stores.

During the last several years, Ramco-Gershenson has not engaged in much ground-up development, averaging just one new project annually. Instead, the company has focused on acquisitions, typically purchasing four to six properties per year. However, with demand for strips extremely high and cap rates for A and B+ properties in the low 8’s and high 7’s, the company expects to build more new centers on an annual basis starting in 2003.

Ramco-Gershenson’s one 2002 project was a roughly 600,000-square-foot power center on Interstate 20 adjacent to the Interstate 75 and U.S. 80 expressways in the Toledo, Ohio, suburb of Rossford. Although a number of malls elsewhere in this metro area have struggled mightily in recent years, Ramco-Gershenson points out that its Crossroads Centre enjoyed quick lease-up and above-average rental rates, and is located in a growing submarket to the southwest of the city.

ProLogis

With about 217 million square feet in 1,716 facilities owned, managed and under development in 73 markets throughout North America, Europe and Japan — and with a client base that includes numerous “Global 1000” companies — ProLogis is as close as the distribution industry gets to a global force. However, its U.S. portfolio, which encompasses 38 million square feet of mainly distribution/warehouse space, is concentrated primarily in the Midwest, with holdings also in Pennsylvania and northern New Jersey.

The explanation for this geographical focus is obvious: “If you look at the Midwest, you have several key distribution markets due to access to transport infrastructure — rail, highway or, in Chicago’s case, deep-water port,” Kiersey says. “In metropolitan areas like Columbus, Louisville and Indianapolis, you can reach a tremendous number of U.S. customers in a one-day drive.”

ProLogis is an aggressive buyer of raw land, often commandeering the top sites in a particular submarket in advance of user interest. “We want to be ahead of the demand curve,” Kiersey says. Even amidst the current economic slowdown, the company is extremely hungry for acquisitions and expects to be very active in key markets in the coming year by having a long-term outlook.

ProLogis is currently focusing on build-to-suit projects for companies interested in its dominant real estate, but it generally does not sell upon completion. Instead, it puts tenants on long-term leases and retains ownership of the properties (except maybe for a fund partner). “We are not a merchant-developer,” Kiersey says. “If you merchant-develop, you’ve given up on the customer relationship side.” This buy/build-to-suit/lease/hold approach enables the company to showcase one of its primary points of distinction: its ability to offer “comprehensive solutions” to existing tenants through a “suite of services” that includes material-handling equipment procurement/leasing and supply chain optimization consulting. This has resulted in a high volume of repeat customers, like Nippon Express, which has worked with ProLogis on eight different facilities totaling more than 500,000 square feet in North America and Europe.

Such additional services have proven valuable to Unilever Home & Personal Care (Unilever HPC). After its creation in 1997 as a result of the merger of Lever Brothers Company, Cheesebrough-Ponds and Helene Curtis, the global consumer products giant was faced with the challenge of integrating three separate supply chains. In 2000, it hired ProLogis to develop a new North American distribution network that would improve speed to market and reduce logistics costs. Announced in July 2002, this new system, which will consist of five super-regional centers totaling 4.87 million square feet (compared to the 15 smaller facilities in the original network), will result in a 15 percent improvement in distribution efficiency and a 7 percent reduction in cost. Of the five, four locations are outside of the Midwest and a facility in Pontoon Beach, Illinois, is under construction.

The desire to streamline and optimize distribution networks is projected to spread even further in response to the increasing number of corporate mergers/acquisitions and the realization among companies that such redesigns can cut costs and improve service levels to customers.

ProLogis is likely to continue benefiting from this accelerating trend because of its unique service delivery approach. For example, it assigns one team to handle all of the different submarkets and deals in which the customer is interested. This single point of contact allows for a smooth and efficient rollout, which in Unilever HPC’s case is scheduled to take less than 3 years. ProLogis can also offer a “capital-free roll-out” because it provides capital not only for building development but also for equipment leasing, which enables the customer to avoid this expense on its balance sheet.


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.