CenterPoint Properties Trust is the largest owner and operator of industrial real estate in the Chicago market. Led by president and CEO John Gates, the company has consistently garnered praise from industry watchers. Recently, Gates took a few minutes to talk with Portfolio about the company and his formula for success.
Portfolio: You're an avid skier. What type of skiing do you like best? Downhill? Cross-country?
Gates: These days my skiing is pretty much relegated to downhill.
Portfolio: There's a 'sweet spot' in skiing—find it and you'll always have a point of reference for making good turns. In running CenterPoint, have you had times when you felt you were hitting a similar sweet spot?
Gates: We use the term sweet spot to describe the optimum size for a REIT: large enough to have significant economies-to-scale, investment grade credit ratings and a strong franchise in its market place. But not so large that it becomes a collection of slow-growth assets, or so large that it overwhelms the per-share impact. We think CenterPoint has been, for the last two or three years, very much in that sweet spot. We don't want to become too large and have very little impact from our value-added activities on a per-share basis. Nor do we want to get so small that we lose our investment and great credit ratings. We think that the sweet spot for us is about a $1 billion dollar equity market cap, and that's roughly where we are today.
Portfolio: You've successfully developed CenterPoint regionally. What advantages have you found in a regional growth strategy rather than a national approach?
Gates: It has allowed us to build a very strong franchise with wide name recognition and deep market penetration. We are the only industrial property company in metropolitan Chicago that's approaching being something of a name brand in the community. Second, virtually everything that is purchased in the commercial real estate industry is purchased locally. We are by far the largest purchaser of goods, whether it's industrial or anything else, and have achieved a certain economy-to-scale as a result. That's been beneficial to CenterPoint and our tenants. Third, I think developing relationships with key players in the marketplace allows us to provide a little bit better quality, service and delivery than someone who nobody knows from out of town. That's particularly true in dealing with government.
Portfolio: Did the relationship with the government help you when you took over a section of the huge Joliet Arsenal, a former brownfield site, from the federal government for redevelopment?
Gates: There's no question that those relationships were very, very helpful. We had to deal with approximately 60 units of federal, state, county and local government to make it happen. Being on a first name basis with most of the key government officials made it possible to get this done.
Portfolio: What are some of the challenges you encountered in that project and what do you see as the upside of redeveloping this site?
Gates: There's no question our biggest challenge has been coordinating all the different governmental agencies. On the other hand we think we have a development plan that allows us to get very attractive risk-adjusted returns on this project. We were able to receive $75 million dollars in structure grants, including a new four-way interchange, and a complete sewer water system for this twenty-five acre project.
Portfolio: How do you see the evolution of the Internet and e-commerce impacting the warehouse industrial sectors, especially in light of the changes with the dot.com market this year?
Gates: Internet commerce doesn't exist in some parallel universe to regular commerce and what regular businesses are doing. It is just another channel of distribution. E-commerce has never represented more than about two percent of retail sales in this country and I don't expect it to be more than about five percent by the end of the decade. And, to a certain extent, its success will be taken out of the hide of bricks and mortar retail or catalog retail or other retail distribution channels. We don't expect it to increase demand for industrial property at all. We do see it perhaps increasing the level of activity as some of the e-commerce winners need to expand and some of the e-commerce losers contract.
The fulfillment end of e-commerce has not been particularly large and most of it has been driven through Federal Express and UPS and others as opposed to having freestanding distribution buildings owned and/or operated by an e-commerce firm.
Portfolio: How has CenterPoint used capital recycling as part of a strategy for becoming self-funded?
Gates: We've pursued this strategy since the 1980s, but in earnest over the last five years. We view ourselves not as long-term holders of industrial real estate, but as a company that adds value to industrial real estate by virtue of solving a problem for a customer. We're also simultaneously creating some value above and beyond just the passive holding of real estate. When we have realized that value, and often that is in the form of a long-term lease with a good customer in a very nice industrial building, we typically have more of a fixed-income product. We tend to sell those types of properties to fixed-income buyers who are either private or institutional investors and take the capital, plus hopefully a gain that we have realized by virtue of our value creation, and redeploy that capital into new problems that we can solve for the same or new customers. And that has allowed us to become self-funding.
Portfolio: You were quoted in the past as saying potential tenants and buyers often suffer from "indecisionitis." What does that mean, and how do you factor that into your strategy?
Gates: There are two causes of indecisionitis. One is a slowing economy. And second, in our part of the world, is our harsh winters. So we factor indecisionitis into our first- and second-quarter projections. Indecisionitis causes tenants to have a higher rate of renewal because they don't want to move, and we tend to be a beneficiary of that. It also tends to have a higher rate of consolidation—they might consolidate one or two or three facilities into a single facility, and you hope to be a beneficiary of that. It also will delay the amount or increase the amount of down time you'll have in terms of leasing your vacancies. As a result, you tend to see a flattening of rents during this period.
On the other hand, because of the economy, you do see a lot of corporations wanting to reduce their capacity at relatively attractive pricing. They've bought many of these assets and redeveloped them into a state-of-the-art product that we are able to put on the market well below market rental rates, and still achieve very satisfactory returns.
Portfolio: When you're not directing CenterPoint or out on the slopes, what are some of your favorite activities for fun?
Gates: I have young children, so that pretty much dominates the rest of my schedule. I'm the beneficiary of numerous little league, soccer and basketball games.
