IBJ Commercial Real Estate Power Breakfast – transcript

IBJ reporter Cory Schouten moderation a panel conversation with commercial real estate pros Katie Culp, senior managing director, principal, Cassidy Turley; Mike Higbee, president, DC Development Group; Christie B. Kelley, chief financial officer, executive vice president, Duke Realty Philip; G. Kenney, president, F.A. Wilhelm Construction Co.; Thomas K. McGowan, president and chief operating officer, Kite Realty Group; and Tadd M. Miller, CEO, Milhaus Development LLC.

What follows is an unedited transcript of the conversation.

SCHOUTEN: Let’s start with a question for the panel. Tell us what’s been most surprising about the real estate industry this year in your area of expertise.

MCGOWEN: Well, I’ll jump in there for everybody because the first one’s always the toughest, but I would say from a retail standpoint I think one of the big surprises is the lack of new supply has really put a lot of strain towards demand, especially in Class A shopping centers, so I think if you look around Indianapolis, the quality centers, the ones along 82nd Street, not to put in a plug, but a shopping center like Rivers Edge you see great strength and great interest and high quality real estate, so I think that’s the first one, that even though we had the downturn, we’re starting to see that demand come back, which is very good. I think the other surprise is just the incredible advancement of cap rates, advancement meaning down, downward pressure, so I think a lot of us, when we went through the downturn, kept wondering what will happen long-term with cap rates, but as we’ve seen, it’s an incredible recovery and they continue to push down for quality assets.

KELLY: And I would just follow on with that. I mean, I have, actually, notes on the same two   points. I mean, when first you take cap rates, I mean it’s really surprising if you take a look at the past year of performance and, you know, albeit taking a look at the spread in the 10-year Treasuries, cap rates have come in 50, 100, 150 basis points for Class A space across the board, and when you look at what’s happened with 10-year Treasuries, even with maybe some of the volatility that we’re going to experience today with the meetings and the like, 10-year Treasuries have really only come in some 50 basis points and albeit at all-time lows, and so the question I think is as we look forward and you look at, for example, that historical spread, you really see that there’s an opportunity for cap rates still to continue to compress, but how low can they go? And then just from the perspective of area of expertise as it relates to industrial, at Duke Realty we have over 65 percent of our investment in Class A, high-quality, what I would call Type 2, Type 3 depending on the market, over 250,000 square foot space, and while we projected that the industrials base would come back and come back strong, if you will, we have just had outstanding performance, and when we look at our big-box space across the system, it’s well over 95 percent leased, just as we’ve been experiencing here in the Indianapolis market. Very surprising, very strong.

CULP: I think Indianapolis is an industrial market. I’ll piggyback on that. If you look at Indianapolis relative to other parts of the country, really, the low vacancy rate and the speculative development is very unusual when you compare us to other similarly-sized markets across the country.

MILLER: From a multi-family perspective, and I think it’s somewhat cliche, but how quickly the switch flips off and flips back on, especially for kind of a rookie on this panel who just barely survived its first kind of cycle, I mean in ‘06 we were 126 million in sales and then ‘07 was four million, so the switch was like so dramatic, and then last year I think we had like maybe 20 million dollars of construction going on and this year we will be well over a hundred million dollars of construction, and that’s all since November, so just the way the switch flips on and off is just kind of the biggest surprise for me, I thought it would be a much more gradual, you know, over the next 10 years we’ll kind of work our way up and it’s just like the switch is on, boom, how fast can you get it, pressure, pressure, pressure, push, push, push.

KENNEY: From the construction side it goes along with what they’re saying, that we’ve consistently had two or three projects in our estimating department to price for Duke, for Tom and others, and, in fact, we had to increase the size of our estimating staff to cover it, and I was telling Mike Higbee before breakfast that if half of these projects go we have a huge problem here, but that’s a good problem to have, but the most surprising is just the number of phone calls that we’ve gotten.

HIGBEE: I might add, just to bring up the back end of this, that I’m primarily working in urban areas and what you’re seeing is that people are making a choice and businesses are making a choice to really explore real estate that I think 10, 15 years ago they might not have looked at. You look at the strength of Massachusetts Avenue and the fact that it really is a live-work-play location now, and there are two or three other spots throughout the urban core where you’re seeing that kind of reinforcement. I think multi-family really has been the driver, it’s created a critical mass of population and then that’s creating a demand for additional services. As I was telling Tadd earlier, I didn’t think I’d live to see the day where we would be looking at rents at $1.50/$1.60 and beyond in the downtown area, but that’s now the norm, and you’re starting to see that spread from the urban core as well and maybe impact some of the neighborhoods that are   looking to be redeveloped.

SCHOUTEN: A lot of great themes there that we’re going to explore in more depth here in the next few minutes. Let me throw out another question to the panel. Who are the buyers and sellers in today’s market and are any of them new to Indianapolis?

MCGOWEN: I would say from a national standpoint when we’re out competing and putting in bids on shopping centers, and I’m sure that’s going to be in just about every sector, it’s mostly public company dollars because there’s a lower cost to capital and it’s very, very competitive, but I think in the Indianapolis market I think you’re also seeing a lot of great private buyers that are out there and just to throw out a name, a guy like Phil Larman, he can come in and do a great job with Nora Plaza, so we do run into that, but with the amount of capital that is out there that is helping, once again, push cap rates lower, it is very, very competitive. I mean we’ll bid on centers and there will be 10 to 12 very, very strong, qualified buyers, so it is very tough right now.

KELLY: And I would say just as it relates to the Indianapolis market, if you take a look at across the sector the Indianapolis industrial, medical office and suburban office space has been quite competitive,   but as I look back over the past year there really haven’t been any significant transactions of note, I mean maybe 10 to 12 over the past year, and as it relates to the competitive capital, we’re seeing primarily institutional buyers in the market, REITs, some, you know, very large private equity funds. Cap rates are very competitive, I mean we’re talking about 7, 6 and a half in the industrial space for really top- quality space. Medical office, you know, traded, we saw Ventus (phonetic) in the market probably back in the 2010 time period, but, you know, 7 cap rates coming down 100, 150 basis points. Suburban office, you know, around 8. So, you know, a lot of activity out there, and of course we can’t forget the Blackstone transaction, right, just dialing back the clock to December of last year where Duke Realty was able to execute over a billion dollar transaction in our suburban office space at an 8.3 cap rate.

MCGOWEN: Just real quickly on cap rates as it relates to retail, Christie talked a little bit about industrial/medical, but there’s a lot of people here that aren’t directly in the real estate industry, so to give you a feel, we all remember caps, you know, 10 caps in the late ‘80s. From a cap perspective right now in high-quality realty, you know, great credit tenants, you   saw the caps drop to 7 and now they’re starting to drop to 6, I mean this is the top-of-the-line retail and now you’re starting to see them fall at times sometimes below 6 percent, so it’s pretty amazing what has happened over the last year.

MILLER: The multi-family space, it’s really not an institutional market like the other commercial sector, so it’s pretty much all high net worth, regional players, and most of the stuff that’s selling not to locals, at least most of the significant transactions in Class A stuff, it’s out-of-town, high net worth families or smaller institutional insurance type companies, but very little institutional capital.

SCHOUTEN: Based on what you’ve said about the market and the outlook, it may be a really good time for the City of Indianapolis to embark on an ambitious rezoning initiative, and they are indeed, the City’s launching a zoning and development regulation overhaul for the first time since 1969. The Indy Rezone Initiative is funded by a federal grant and is scheduled to take two years and consider input from hundreds of stakeholders. I want to start with Mike on this. What would you like to see accomplished?

HIGBEE: That’s a good question. I think, No. 1, that the community get engaged with that process.   I think the City is spending a lot of money and effort on looking at what the future land use decision-making is going to be over the next 25, 50 years. Indianapolis was one of the first communities to adopt zoning and really planned land use for Marion County. When that was done we really thought in the form of suburban communities and you can see what occurred was a low density development throughout Marion County. I think we averaged somewhere between three to four people per acre in Indianapolis and that’s a significantly lower density than most urban areas. What we are seeing now is that we are getting density throughout Marion County, and those places with density are some of the more popular places for retail and living and playing, like we were talking about earlier. So I just zoned a project that had some density to it, was about a mile from the urban core, and in order to get that zoning I had to have 11 variances, and, fortunately, we had a very understanding zoning staff that said “Okay, we’re going to grant those variances, we understand that that used to be a parcel that we envisioned single-family homes on, but now it’s really a parcel where people want density, they want critical mass, they want scale. So this Rezone Indy Program really will look at urban design, will look at form-based zoning, will look at how   to incentivize developers to get good quality mixed-use development in the right locations. We were talking about Lafayette Square earlier. Lafayette Square probably will be one of the beneficiaries from a good Rezone Indy effort, but it really is going to take a lot of input from the development community, the real estate community and the neighborhoods in order to make sure we get it right and that it’s going to be implemented in a way that is encouraging development, not discouraging it.

SCHOUTEN: I’d like to hear from the others on that, but, Mike, quickly, what is that project you talked about that you needed 11 variances for?

HIGBEE: It was a senior development project, 45 units, and it was located on six parcels of land, but, again, 50 years ago that land was envisioned as small, modest, single-family homes. It’s on a primarily institutional street that has some scale to it but that is not what these parcels were really scheduled to be.

CULP: I think there’s no doubt that certainly this is long overdue, I mean 69 was — I wasn’t born yet, so I think it’s a long time coming to revise this and I applaud the City staff for getting a federal grant to take a look at this. There’s always a   natural pull between the planning view of the world and the developer’s view of the world and I think the right balance probably has a little bit of tension on both sides. I do think it’s critically important that those in the commercial real estate community do participate in this process. I think that absent a lot of feedback there’s an opportunity that there could be changes made that would make it more difficult to do business here in Indianapolis and I don’t think that’s the intent of anyone but it certainly is a potential outcome, so I think it’s really important that people pay attention to it and I think that’s one of Indianapolis’s competitive advantages when you look at us from a national standpoint when we compete for economic development projects in other parts of the country, there are communities that have made it very onerous to do business in from a planning and zoning standpoint and that’s certainly been one of our advantages and I’m glad the process will be a long one because there’s going to be ample opportunity for all sorts of stakeholders to provide feedback.

MCGOWEN: To Katie’s point, I think the biggest issue here is we have to look at this from the standpoint that staff, Metropolitan Development Commission, et cetera, has to really be viewed as a   partner to the developer and a partner to whatever project is ultimately planned. We’re developing out in Seattle right now, Raleigh, North Carolina, and southeast Florida, so we’re able to see the dichotomy of how people react and how they handle and react with developers, so it’s very critical to make people to want to come back and to invest capital, and down in southeast Florida, that’s a big, big investment and you have to make people understand that what we’re trying to do is we’re creating temporary jobs, we’re creating permanent jobs, we’re adding to the tax base, we’re helping create assessed values for the adjoining parcels, so you have to realize how much a development does for a community, how much it impacts everybody in that area, so I would just encourage, and I know there’s some important people in the crowd that are working on that, like Abby, but I would encourage everybody working on this to make sure you look at it as we’re a partner, we’re not a hindrance, but we’re a partner with this economic development and infusion of capital to think that way.

SCHOUTEN: And I’ll borrow a phrase from Tammara Tracy, the City’s lead on the effort, she told me the other day the goal here is to make it easy to do the right thing and along the way hopefully provide a   boost to the tax base and rebuild some crumbling neighborhoods, so is all of that possible with the zoning code?

MCGOWEN: It’s well said, though.

KELLY: Yeah, I say “hear, hear” and, again, as Katie said, it’s been a long time coming. I think we’ve got some great talent who’s really rallying around making sure that we get to the right answer, and so from the perspective of that partnership we’ve got some key talent from Duke Realty, Wes and Bob Falk, Wes Podell and Bob Falk, who are also on each of the committees, and I really encourage all of us in town, to the extent that you’ve got an interest, you are a stakeholder, to get involved and really give the Commission your feedback, and to further that, any time that we can create a pro-business environment for Indianapolis to really drive this great city, it’s all for the better, any time that there’s a lack of clarity, bureaucracy, lack of transparency, a lot of barriers to entry to really get that development and that incentive going it’s not a good place because there are a lot of other choices out there and we need to remain competitive, and to that point, you know, I’d really encourage everybody to then also look for best practices. When we look around and we see south Florida, we see Seattle, we see   Minneapolis, we see some of the towns that have gone through this in the past, let’s really reach out to them and create introductions so that our team here in Indianapolis can really get it right.

MILLER: To answer the question directly, yes, I do think it’s possible to accomplish all of those goals and a lot of that has to do with the culture of Indianapolis and under all of the administrations since I’ve been here it is a good process and this will just continue to improve the process, but we already have the culture and the history and Indianapolis is lucky to have the most significant projects done by local developers unlike a lot of places I go where they’re done by non-local developers, and we all have good communication, direct communication with staff and everything else, so I think the zoning code is very good that it’s taking place, but at the same time, you know, there’s a reason Mike can get 11 variances, because he’s doing the right thing and the staff works with him to get those variances and that’s common on about every project, so Indianapolis in my mind, in all of the places we work, is one of the best, easiest places to get stuff done and not easy because it’s “easy,” easy because they care and they’re responsive and they help you figure out real good solutions, market solutions,   but still hold you accountable, unlike a lot of other places.

HIGBEE: This is comparable, for those that were not around in 1969, this is comparable to the regional center planning that is pretty unique to Indianapolis. The regional center plan for most of the downtown area, Center Township, was undertaken I believe for the first time in 1978, and that regional center plan really created a roadmap for a failing downtown and it got the private sector and the public sector together and there was a great process with a lot of transparency and a lot of participation and it resulted in a downtown that now is one of the premiere downtowns in the country. This Rezone Indy effort is comparable to that and the process has to be just as good if we’re going to get the kind of result that we’re talking about here today.

MCGOWEN: And I think Mike makes a great point because I did want to mention urban core, that we have to pay attention to the urban core as part of this process and from a development standpoint the bottom line is it’s tougher to develop downtown because you have higher costs, you’re not able to get suburban land costs, you’re not able to get suburban parking fields, so we have to take away that barrier of entry Christie   had mentioned and allow it to be competitive with other parts of the city, but I think we all agree how important the core is and I hope a lot of time and attention is placed on how do we make an urban core as competitive as surrounding areas.

SCHOUTEN: I don’t want to leave you out, Phil.

KENNEY: I appreciate that. I just hope the end product is they simplify the process. In reviewing it, there’s over 40 zoning designations and over 500 pages that go along with that and it can’t be that complex of a process, so as the initiative goes along I hope they simplify everything.

SCHOUTEN: Let’s talk a little retail, so, of course, we’ll start with Tom. Simon’s revamp of the Fashion Mall and your own Rivers Edge have brought some notable new retailers to the market. Are there any other big names looking around and what companies or retailers are we missing that would be a good fit for Indy?

MCGOWEN: Due to the fact that we have the most powerful owner/developer of retail in the country, probably the world, being Simon, Indy does extremely well, and if you take a look at their new line-up at the Fashion Mall as part of the expansion with having Urban   come in and now Free People, they’ve got the enclosed mall side covered and then some, and from an open-air shopping center perspective we were successful in bringing three new names to the market and the positive is all three of those new names have performed at the very top of their companies, which shows the strength of Indianapolis, that being Container Store, Nordstrom Rack, and then another one being Buy Buy Baby, so it does show you that when these new retailers come in the market they can perform not just well but at the top 10 in their entire chain, so that’s very encouraging. A couple people that may be missing, and if you look around in the midwest there’s really not many, there’s the new concept Field & Stream out there that’s very, very fresh that we’re working with right now in other parts of the country, Off 5th, you know, Nordstrom Rack has done so well and Saks Off 5th is someone that we’d like to see come to the market. Ross I think you’ll see coming. We’ve all talked about IKEA and others. But I’ll tell you, Indianapolis does very well in terms of bringing these retail brands to our city and they perform well.

SCHOUTEN: Let’s stick with you, Tom. To date, the predictions that online shopping and other forms of retail would lead to the demise of shopping   malls seem to have been wrong or are the predictions just premature?

MCGOWEN: There are a lot of predictions and I do believe the predictions are wrong, and there were times that I think everybody said “Close malls, it’s over, you know, open-air shopping centers, it’s over, you know, it’s over.” The bottom line is there’s a tremendous amount of sales that are coming from retail. Everyone throws out the different numbers of 2010, some people say over 160 billion. Everybody’s got a different number. But I do think the playing field is being leveled and there’s legislation and a lot of activity with things like Main Street Fairness Act to make sure that the brick-and-mortar retailers are on the same playing field as the online folks, and the bottom line is they’ve got to start paying taxes. Just look at Indiana alone, Indiana alone as a state, which is a big deal to us, say we’re losing, whatever number that would be, but say around 300 million, we have got to bring in that tax revenue. New York state may lose a billion dollars a year. So we’ve got to level the playing field. But the bottom line is brick-and-mortar retailers do tremendous things for our economy, for our communities. You’ve got the temporary construction jobs, you’ve got the permanent jobs, you’ve got the tax   base, so it is so important to maintain that level and that’s why we need a level playing field and they need to pay taxes and generate the revenue. It should’ve been coming in for a long time.

SCHOUTEN: Christie, are you in agreement on that as a company that has Amazon as a pretty large tenant?

KELLY: I am in agreement with that, Cory, and I would just take the question in a little different angle. I mean, if you look at the trends, I mean, the demographics are there, internet sales are up. If you look over the past 10 years, 10 percent of sales now are going through the internet. If I look at my children, I mean they buy differently and they may go to retail, they will buy specifically. For more commodity-like goods they’re buying over the internet and I don’t view that changing. And as it relates to our industrial space, I mean we are seeing changes with our tenants. I mean, you mentioned Amazon, for example, Cory, you know, we just completed with our industrial team up to a million square foot expansion for Amazon, really, to start moving goods or to provide for the goods moving through that space. Carter’s, for example, we just did a large transaction at the beginning of the year for Carter’s to expand and make room for their internet   sales capabilities. So I think it’s here, it’s changing, but I don’t view that it’s going to be the demise of the bricks-and-sticks, as Tom said.

MCGOWEN: One other point to think through is that these retailers know they have to react and this is kind of interesting, but Staples is the No. 2 retailer in terms of internet sales and they’re using their stores as distribution channels, so these guys are figuring it out and making sure they’re able to counter this because, as Christie said, it’s not going away.

SCHOUTEN: Here’s a question for Phil. A series of large projects from Lucas Oil Stadium to the JW to the new Wishard have helped support the local construction industry, you alluded to this earlier, but are there more big projects like that in the pipeline or is it more smaller projects?

KENNEY: Well, I’ve been told by some of the old-timers in construction that everybody lives through one boon in their life and that’s every 30 years, that’s the life of a stadium, the life of a hospital, and in Indianapolis a new airport, a new hospital, a new football stadium, a new basketball arena, so I think the boon in Indianapolis, central Indiana, is over, at least in my lifetime, so I think we will go back to a more normal year, back from seven or eight years ago before   all of these huge projects. I just don’t see it, at least from what crystal ball I’m using. I think you’ll see it in other parts of the state, and Cincinnati is booming, the state of Ohio is booming right now and I think you’ll see that in northern Kentucky, those kind of areas, but for our area I just don’t see it.

SCHOUTEN: I’ve got to make sure to get to this one since Greg Morris previewed it, but what’s your take on the impact of the right-to-work legislation on the industry?

KENNEY: I think short-term it’s been very positive on the construction industry. Because of some of the dates in the legislation, management and labor were able to meet and work out some extensions to some current contracts that were very cost-effective and we’ve been able to pass the cost-effective pieces on to our clients, so short term, again, I think it’s been great. I don’t think we’ll see the effect, if any, in construction for probably three to five years when these agreements run out. I have not heard of any widespread people leaving the unions or anything else, not at all. In fact, I think it’s the opposite, I think they’re recruiting newer, you know, younger people into the unions, so that’s the short-term and long-term effect.

SCHOUTEN: Anyone else want to weigh in on   that?

KELLY: I think it’s important, again, just from a pro-business perspective. Any time that an entity’s looking to enter a new market, a new city, it is one of the things that are considered, so from that perspective, again, taking down another barrier, one of those reasons that would really put a black mark across Indianapolis, I think that it is very positive for our community. All of that being said, and Phil was starting to get into this, too, is that from a Duke Realty perspective, we’re not affiliated and whenever we go into a market around the US we’re making our choices based on the highest quality, best provider of services and that’s bottom line, so regardless, union, nonunion, it’s important to be competitive and it’s important to do and say you’re going to do and deliver the best product at the end of the day.

SCHOUTEN: Moving along. I have a question. I’d like to start with Tadd. Multi-family, as everyone has mentioned, has been a bright point, driving many of the larger development deals. Are rent growth and rising values sustainable or do you see a bubble forming?

MILLER: It’s definitely not sustainable. Nothing’s sustainable forever like it has been. I mean,   again, going back to how the switch got flipped back on it’s somewhat insane for us right now. I would not want to be in our business if I didn’t have a significant capital source like we are fortunate to have and I would not want to be in our business right now if I wasn’t able to do anywhere from 25 to 50 percent equity in deals to make sure we have plenty of runway in case bloodbaths start to happen in the next few years as all of these units come online. That’s not to say there’s not ample demand and supply, it’s just depending on what submarket you’re in, No. 1. The same thing happened in the condo market where we were very focused and we did very well because we stayed pricepoint sensitive where pretty much 80 percent of all of the people could afford it, there seems to be a trend to kind of the thinnest market at the upper end, and so I think it’s great for those of us who are early, you know, we’re the first or second project in each of the submarkets we’re in and I don’t think you’re going to see many more announcements from Milhaus in Indianapolis, we’re pretty much going out of state at this point and let the chips kind of fall where they may with a lot of the products to see where that supply goes, but I would not want to be starting new projects and I would not want to be a developer that’s leveraged more than 70 percent, and   even internally we’re questioning should we put a little bit more equity in than that.

SCHOUTEN: So Tadd already answered my follow-up question. But there’s some bullish talk about the market coming back really strong and, as Tadd said, he doesn’t think it’s sustainable in the long-term, so how is everyone else preparing for that eventuality? Is there a little more conservatism based on the downturn?

MCGOWEN: Well, I would say the type of projects that you develop would be one. I think everybody’s looking for a more conservative risk profile on the type of development, making sure that the credit of the tenancy is strong, so I think, without question, everybody looks and deals differently than we did prior to the downturn. And I think Tadd put it right, you’ve got to make sure your capital structure is set up properly, and that was one of the problems we had was the debt levels were just too strong, so I think conservative debt structure is important and then the profile and type of project and the credit tenancy of who you bring in are all critical points.

KELLY: And I think to that point we, too, were not spared from the great recession and the capital markets closing down, and as we look at our business going forward at Duke Realty, we have about a half a   billion dollar development pipeline going right now. As it relates to the characteristics of those projects, primarily fully leased build-to-suit projects, you know, high credit quality tenants. We have sprinkled in a couple speculative projects, but suffice it to say, that’s less than 15 percent of our total commitment. And when you look at, for example, the operating discipline and how we’re running our business to protect our shareholders and really drive returns going forward, it’s all about cash flow, it’s all about quality assets, cash flow, managing leverage to that 50 percent range for us and that’s really looking at unsecured and preferred debt and then really driving that performance and making sure that we don’t overextend, you know, really run a zero balance on our 850 million dollar line of credit and really reserve for a rainy day so that we can complete our projects as we always have and really drive that performance going forward.

KENNEY: And I was just going to say, we always lag the two east and west coasts by a year or two and the contractors in those areas, that high-density, high-level housing is what’s booming on the two coasts, what I’ve heard, so I think that there will be some of that here. Also, my college-age children, I’ve asked them and their friends and they have zero interest in   owning a home, a single-family home, have no interest in cutting the grass, painting their house, nothing, they’d rather live in an area with people their age, with all the amenities right there on one property, so I think some of that’s here to stay.

SCHOUTEN: They should have a conversation with Tadd.

KENNEY: Right.

SCHOUTEN: Katie, I’d like to start off with you with a question about TIFs. There’s been a bit of a debate lately with the City-County Council. Where do you stand on this? Are they an essential tool to support development or potentially a slippery slope that eats into the tax base, or somewhere in between?

CULP: Well, I think they are an essential tool, it’s absolutely critical that we continue to have the opportunity to use TIF that cities do across Indiana. I know there has been some controversy with how Carmel took use of some of their TIF funds, but that is an anomaly for the way TIF is typically used. A lot of times when I’m working with clients that are looking at multiple markets they want everything, right, they want the kitchen sink and everything in it when it comes to incentives, but when you really look at what state and local government is permitted to offer, they’re   really very limited in terms of the tools in the toolbox and local government really only has tax abatement and TIF as tools, and tax abatement is not a very flexible tool, it just is an offset of taxes that are generated over the life of a new capital investment. TIF, on the other hand, is really the only opportunity that local government has to be a little bit nimble, to be a little bit creative, and I think we can attribute a lot of the amazing development in downtown Indianapolis and all over the Indianapolis region to the successful use of TIF.

SCHOUTEN: I’d like to send a follow-up to Mike. As a former DMD director you know something about the balancing act here. Do you have any misgivings when debt for downtown projects is refinanced, maturities pushed back, for some future generation left to settle?

HIGBEE: Well, I think you have to look at what’s been produced. I go back to downtown when, and certainly Tom remembers this, Bill McGowan’s in the audience, he remembers this, that getting investment in downtown was next to impossible. Thinking about a structure like this being built in downtown you would’ve been laughed out of the room and that’s back when you could not make the numbers work on downtown development, and I had developers that were very successful out in   the suburbs that used to come in and pound on my desk and say “Forget about downtown, it’s never going to come back, it will never work, you’ll never get retail to work, you’ll never get office workers back in downtown,” and obviously we’ve done a pretty good job as a community getting that to happen, but the tool, as Katie says, was TIF and if it wasn’t for being able to capture the revenue from that new investment, an investor, back in downtown in a very strategic fashion a lot of this would’ve never happened, so I think the discussion that has been occurring on TIF is a good, healthy discussion. It can be abused, it can be overused, it can be extended too long, and there is a time to return that base back to the tax jurisdiction so they benefit and we keep our taxes at a reasonable level. On the other hand, that but-for test, as long as it’s being deployed when you’re looking at development and as long as you’re deploying it on development that is needed, that’s a priority for the community, it’s an invaluable tool and it has to be there because, as Katie says, there are very few tools for the local government to work with.

MCGOWEN: From my perspective I think it’s very simple, you have to be cautious, you have to be thoughtful in terms of the way it’s done, but the bottom line is you have to have TIF, especially in the urban   core, and we were the beneficiaries of TIF when we developed the Indianapolis Marriott downtown with the Whites and we were also the beneficiary when we developed the Conrad. As you look at this building, Bruce White and his team, there is not a chance that you could develop this building without economic incentives. It’s a simple premise that you need somewhere around 33 percent, it may sound like a big number, but you need somewhere around 33 percent of incentives to help in the capital stack structure to develop a hotel because we don’t have the rates that larger communities, larger cities have, so this building without incentives would not be here, there would not have been the ability to expand the convention business, so you have to do it. The other big point that people need to realize, it’s not all increment financing, you know, it’s increment financing, so what you’re doing is, you’re not eroding the original tax base and AV, you’re taking the increment from where it is today to the new assessed value, so you’re not eroding that level, so you’re generating an increment to service the bonds to ultimately develop the capital to put into a project, so people I think sometimes think that you’re taking all of the tax, you’re not, you’re taking the increment, and that’s why it’s tax increment financing, so if you’re   able to take that increment on something that wasn’t there previously and add to it dramatically and then take that capital, service the bonds and develop expansion in and around that area, it’s absolutely a win.

CULP: I would add, too, that TIF is important not just for downtown and urban development but also for some of our surrounding communities that are developing. Without TIF a lot of the infrastructure that’s been a large part of the support of a Plainfield or a Lebanon or even Noblesville, that wouldn’t occur, so it’s important not just for the urban core area but outlying areas.

MILLER: People forget that my biggest vendor is the City. Everybody looks at this as the developer receiving money and there doesn’t seem to be the headline of “City Just Made Great Deal,” which is typically what a TIF is because when I look at my chart of accounts on any given project on the up-front capital side, if you don’t bundle all of those construction contracts, or even if you do, they’re either just behind the construction contract as my largest expense and largest revenue goes to the City more than any other vendor, and then when you look at my operating expense, every year by far my largest check paid is always to the   City, so nobody earns more from this project, no subcontractor, no developer, I pay the City far more than what my profit is, all of our vendors make less than what the City makes on any individual project, and if you look at it, every one of these deals should be, if they’re negotiated and managed well, should be places where the City is making far more money than they’re giving.

SCHOUTEN: I want to direct another question to the panel, and we’ve kind of touched on this already, a lot of the development lately involves property overhauls, Rivers Edge, the Congressional by Lauth, Ambrose and Whitsett doing the American Building and Consolidated Building downtown, do you see a lot of similar opportunities or are we going to see a shift to ground-up development?

MCGOWEN: I feel like redevelopments make a lot of sense right now. From a redevelopment standpoint, if you think about it, you’re able to maintain a stream of revenue, you’re able to hold onto a certain amount of net operating income. As you go through the redevelopment process you’re really not exposed to the risk of unforeseen conditions, whether it be a difficult zoning battle, unsuitable soils, so all of those go away in a redevelopment and you’re able to   maintain some form of income, so it’s a tremendous advantage from a risk profile standpoint, like Christie was talking about, that as we look at the way we reduce risk exposure, redevelopment’s a great way to do that, but ground-up will have its day but right now there’s a little bit of a disconnect and it’s going to still probably take a little more time.

SCHOUTEN: Have you bought any sites lately?

MCGOWEN: Raw land, we’re not buying raw land, and I think everybody in our industry did that at one point in terms of making sure you establish inventory, but back to the risk profile, the day of raw land just doesn’t make sense and you buy land when you have tenancy and credit and a stable net operating income to support the project.

SCHOUTEN: Pan Am doesn’t really count as raw land, though, right?

MCGOWEN: I’m not sure how you want to describe that, Cory, but Pan Am was a very undervalued asset that we took an opportunity to purchase the best square block in downtown Indianapolis and it was tied up in a very complicated situation where you had a garage owner owning the garage, a plaza by Kite and then an office building, so you had three separate owners, and we took the risk that we could work out an arrangement   with the garage owner, Arman Lasky from New York, which we have, we now have development rights below, so that was a really long-term development play, but that was done in a profile that we understood it would take time.

SCHOUTEN: How long is that going to take? Is there any update? Can we make news here in the room today?

MCGOWEN: I’m going to grab my crutches real quick. No. But from a Pan Am perspective, it’s going to probably take time for the economy to come back a bit because it really needs to be a dense, large, mixed-use development, and whatever we do, because we have such a low basis, we want it to be done properly. Needless to say, if there’s another hotel in downtown Indianapolis, it is the premiere site due to its proximity, right across the street from the Convention Center. From a housing standpoint, whether it be multi-family, condo, it’s a great entertainment district square block that’s fully assembled, so we’re going to take our time and make sure that when it’s done it’s done properly.

SCHOUTEN: Let me start a question with Christie. Sliding in a little industrial news, we are starting to get some ground-up development on the industrial side, some spec buildings in Plainfield and you guys are working on a new building at Anson,   finally. Are these buildings finding immediate demand or is this about anticipating future demand?

KELLY: Just from the perspective of the Indianapolis market and for a lot of my colleagues that are sitting over there together with Charlie Podell’s team, as it relates to the risk profile, the developments that we’ve done for the most part coming out of the great recession have been primarily build- to-suit 100 percent leased projects. We are anticipating demand as it relates to the speculative project in Indianapolis. This team over the past 40 years has been able to deliver and deliver consistently based on better than the underwriting that’s done. As it relates to the market and our specific position, in industrial I mentioned the fact that in the quality big- box space we have really nothing left and so as it relates to making that investment and the bet on the resiliency of the Indianapolis market being really the heartbed to the distribution space we’ve got some strong prospects and we’re going to keep delivering and work on leasing that space up.

SCHOUTEN: We only have a few minutes left here, so I’m going to start with some questions from Twitter, as well as questions from the audience, we’ll do sort of a lightning round. The first one I think   maybe we’ll start with Mike. Would starting a major transit initiative spur more development and maybe another boon?

HIGBEE: Well, we are behind. We were talking about how good a job Indianapolis has done on a number of other issues, but on transportation we’re well behind, we’re transit-challenged. I think it would absolutely open up certain pockets of real estate given where the transit’s likely to go, so I do think there’s a correlation between that transit investment and some real estate that could expect to see a significant upside if that should occur.

SCHOUTEN: Anyone else want to weigh in on that one? Transit’s a pretty big issue.

MILLER: Agreed.

MCGOWEN: The only thing I’d say on transit is Charlotte, North Carolina is a great model, I’ve got a brother-in-law in Charlotte that’s been working on their rail and, boy, it’s been tremendous for them through the Charlotte City Center, so if you want to take a look at a city comparable to Indianapolis, even though we’re a little larger, it’s a great model and I think it can work tremendously well here as well.

HIGBEE: Cory, just to add to it, to go back to the issue of redevelopment, Marion County,   especially, is a redevelopment county, it’s mostly developed out. Some of the development has outlived its useful life and with properly-placed transit that is going to be one of the best redevelopment tools we could have. In and of itself it’s a major incentive. SCHOUTEN: Another question from the audience here. Katie suggested that the real estate development industry needs to be at the table for Indy Rezone. How many of your firms have staff members who are volunteering or have invested time in that effort?

KELLY: As I mentioned when we were talking a little bit about that, we have two of our key team members who are actually here, Wes Podell and Bob Falk, who are intimately involved.

CULP: We’ve been in frequent communication primarily through the Chamber of Commerce and Develop Indy organizations, and the good news, too, I mean government never moves at a real breakneck pace and that’s a good thing in this instance because I think we have a couple years to provide feedback to the groups running this.

SCHOUTEN: In the same vein, what’s your best guess at why Simon has not yet announced a replacement for Nordstrom and what are the prospects for the space, and we have a question from Twitter in the   same vein, what’s it going to take to get more retail downtown?

MILLER: Because it’s really, really hard. I mean, if everybody remembers, and I was still in high school and college but already intrigued by what I do today and so I followed it pretty closely, but Herb, I forget how many — I think it was even tens of millions of cash he had invested before that was even a reality and I want to say he says it’s like 17 years or something that took him from his first plans to get that, and so just the fact that Circle Centre is even there with what we’ve still got without Nordstrom we should all be ecstatic about because as I travel we’re one of the only cities that has that, but it’s not been gone that long and it’s a really, really tough thing to do.

MCGOWEN: Yeah, it’s hard and it takes a lot of time, but the good news is we have someone named Simon that’s working on it, so I think we’re going to be fine.

SCHOUTEN: Have you heard anything specific or do you expect anyone in particular that will take that space? (No response.) All right, let’s go on. Ya gotta give it a chance. I’ll start a question with Tadd this time. The Market Square Arena site, you guys are   redeveloping the Ops Center. Are you looking at the Market Square Arena site and negotiating with the City at all? Do you have any idea of what the prospects are there for that larger site?

MILLER: I started looking at that site I think in 1997 and we’ve done plans on it on an annual basis since and will continue to do plans on it. I think we’ve actually, at this point, we’ve actually kind of held off starting our Phase 2 of Bank One just because we were hopeful something might happen there and we could try to integrate, and so if it gives you any level of our confidence at this point, we’re going ahead and moving forward on Bank One Phase 2 just because I think there’s no certainty that anything’s going to happen for a while there, so we would love to see something happen and would love to be a part of it.

SCHOUTEN: Does anyone else want to weigh in on the Market Square Arena site? Is that a site that it makes more sense to have held onto it for these years? Maybe Mike or Katie? HIGBEE: Well, there was a window for doing a mid-rise or a high-rise back when it was first offered up. I think the debate for the community is what is the best use of the site, I mean given what’s happened with residential elsewhere in the downtown core is that still   a good residential site or is there another function there, like maybe something tied with the City-County Building that makes more sense?

SCHOUTEN: Phil, is anyone doing a project that the MSA site’s been one of those calls you’ve been getting for new business?

KENNEY: We are accepting calls but that hasn’t been one of them.

SCHOUTEN: I’m going to ask kind of a general question here, just if everyone can kind of give a very quick answer and an explanation. What’s the most exciting or the top few most exciting parts of the city for new investment? Put another way, where would you put your money if you had a few extra dollars to invest? KELLY: Oh, absolutely our Duke Realty projects.

CULP: Industrial is where I’d put my money, the vacancy is so low.

KELLY: I would just add to that, medical office as well, Katie. You just can’t argue with the demographics and the low beta as it relates to lower risk profile in today’s environment.

MILLER: We’re pretty much in downtown central business core and we’re going to keep investing central business core.  

SCHOUTEN: I really want to hear from Phil and Tom on this one, too.

KENNEY: We’ll build anywhere, but from a personal point of view as an Irvington resident, I hope that that continues, that part of the city to be developed. KELLY: Well, even like a Wishard we know as well.

KENNEY: Right.

KELLY: I mean if anybody was able to drive by the Wishard development site, I mean what a great thing to be doing as it relates to serving the population, our town, really changing the face of that part of town, et cetera, and great use of capital, too, for our partners of Duke Realty.

HIGBEE: I think anything within a half mile radius of IUPUI or 16 Tech Park is pretty intriguing as well, there’s a lot being planned in those areas. IUPUI looks like a real campus now and I think there’s some tremendous opportunity and some underutilized real estate surrounding that area that I think is pretty exciting to take a look at.

MCGOWEN: I agree with Mike and I think the bottom line is be patient and do the right deals and never forget about the past.  

KELLY: That’s great advice.

SCHOUTEN: I’m going to wrap up with a two- part question I’d like each of you to weigh in on. If you don’t mind, name a few of the up-and-coming brokers, developers or contractors in the market we should all pay close attention to, and then, secondarily, what advice would you give to a rookie in this business?

MCGOWEN: I’ll start off. There’s a young guy, I’m not sure exactly his last name, John Crisp or something? I heard he’s starting to pick up a little bit of steam. But in terms of advice, some of the things that I would say is don’t be afraid to start in the trenches, you know, to really understand the industry. I think a lot of young people, when they come out, they want to jump up and be at a level that’s above their competency and I think everybody, if I look down here, has been in the trenches before, whether it’s sitting in the city plat room trying to figure out who owns a piece of property before the internet had all of that on it, understanding how to zone and battle in a zoning hearing, understanding how to walk a site and look for unforeseen conditions, but my advice is learn the business, then the rest will come to you.

KELLY: Absolutely, you roll up your sleeves, learn the business, really get out there and   understand not only within your area of expertise or schooling, whether that be finance, you know, engineering, political science, development, really reach out and understand what others are doing across what it takes to really build value-add product, and at the end of the day be reliable, do what you say you’re going to do. Historically the real estate industry hasn’t necessarily had that reputation, but based on the trades, the prices that we’re seeing and the institutional quality of investors in the space, you know, deliver.

KENNEY: As far as up-and-coming, I’m not sure, but in terms of advice is work hard, work a lot of hours when you’re young, and also learn all parts of your business, from the construction side learn accounting, estimating, operations, all parts of it and that will give you a much better base to grow on.

MILLER: When we formed Milhaus a couple years ago I was lucky — I think one of the smartest guys in our business is a guy named Michael Fascitelli of Goldman Sachs and now head of Vornado. I got to sit down with him and got all kinds of advice and issues, but I asked him this specific question because I was kind of at that stage and he said “Don’t run out of cash,” and I said “Yeah, that’s a given. Now, what else   do I remember?” and he said “Don’t run out of cash,” so after three times I think that’s the advice that always runs through my mind. As a young guy that’s hard to say because a lot of times it’s not our cash, but it’s very important in the beginning, whether it’s your cash or you align yourself with the right people that trust you, that are your investors, that you can be dependable for, this business is all about capital and your relationships with capital and when the going gets tough you’ve got to make sure your capital is taken care of first before you’re taken care of and if you don’t heed that advice, you know, that’s a very short-term view and it’s really going to limit your long-term wealth and success and that’s something I’ll always remember, from all the conversations I’ve had with Michael and how much he’s helped me in so many factors, that’s kind of the No.1, that financial capacity and that keeping your eye on the cash at all times is something so many people in our industry with big dreams and the cars and everything else forget about.

CULP: Well, you know they won’t let me back in my office if I don’t mention a few of the young brokers at Cassidy Turley and, truly, I don’t work with other firms since I work at Cassidy Turley, so “Spud” Dick is a new office broker and he’s showing a lot of   promise, and Bennett Williams, and these guys have been around a little longer but I think they still count as young, Andy Martin and Michael Weishaar really do a tremendous job. And in terms of advice, I think develop a thick skin and don’t take it personally and then do the right thing. You sometimes see in this industry people changing their values to get a deal done and it’s not necessary, so don’t be a jerk.

HIGBEE: And I’ll add, and I think Tom got it right, don’t be afraid to get into the trenches, and one thing is this community has great leaders in it and great leadership and if you can align yourself with some of that leadership I think is one of the best things you can do. I have the good fortune of working in a number of communities around the country and I can tell you that many of them are not blessed with the kind of leadership that we have in this community and if you’re young and just starting out and you ramp up that learning curve by finding ways to work with some of that leadership I think it makes a big difference.

SCHOUTEN: Thank you all.