On April 14, as part of its Power Breakfast Series, the Indianapolis Business Journal gathered a panel of commercial real estate and construction experts to discuss industry conditions in the local market. In a discussion moderated by IBJ Editor Tom Harton, panelists took on a wide range of issues, including tax incentives and the status of downtown's residential and retail markets.
Power Breakfast guests were Mike Curless, executive vice president and principal with Lauth Property Group; Mike Wells, president of REI Investments Inc.; Kathleen Culp, senior vice president and economic incentives expert at Colliers Turley Martin Tucker; Mark Writt, senior vice president of industrial properties at CB Richard Ellis; Bill French, senior vice president and retail expert at Colliers Turley Martin Tucker; and Jim Thomas, founding partner in Hearthview Residential LLC.
IBJ: The first question is for Mike Curless. What long-term effect, if any, will the recent storm damage to the One Indiana Square tower have on that building and the downtown market as a whole?
CURLESS: That seems like a freak of nature. I don't know that we are going to have a lot of storms like that zipping through the middle of downtown. From what I read, the landlords are doing everything they can to relocate a thousand people, and I think they are doing what they are supposed to do per the lease and, hopefully, more than that.
My hope would be this would not have a long-term effect. Our law firm, Wooden & McLaughlin, didn't miss a beat; they were responsive the very next day, and if that's any indication of the [rest of the tenants] and making do, that is a testament to the tenants and the landlords. I would be disappointed if it had a longterm negative effect in that building.
WELLS: I don't think it will have a long-term impact at all, and I think that the owners have done a great job to relocate people into other space. I think the biggest impact for the lawyers in the room is when we get to the interruptionof-services clause [during lease negotiations]. We usually tell people, "Don't worry because it is not going to happen." I don't think that's going to go as well anymore, and we may have to negotiate those a little bit harder in the future.
IBJ: Mike [Curless], I know Lauth is actively developing in other markets. I'm talking about Phoenix and other markets that you are involved in. What weaknesses in Indianapolis motivate Lauth to develop elsewhere, or is it not a case of weakness here?
CURLESS: Let's keep a positive tone here. A couple things are important to point out. Lauth's perspective has always been bullish on Indianapolis. We have been in business almost 29 years here and, in the last couple years, we have done more than we have ever done. And, at the same time, we ramped up our efforts to work in approximately 25 other markets around the country. I would say it's more a function of us trying to focus on the strengths that are out there in other markets, and there are a whole bunch of them.
As far as weaknesses in Indianapolis-and there are a few-it would just be kind of general economic malaise here in Indianapolis. A real measurable component would be virtually no substantial population growth-white-collar job growth is pretty weak. When there are weak numbers in that category, it really hits one category really hard, and that's the officespace absorption numbers. We've had a few years here in Indianapolis that have had negative absorption.
Last year, I think [the city] did 400,000 square feet [in office absorption], and everybody was high-fiving each other like that was a great thing because it wasn't negative. In reality, you look at a market like Phoenix, which might be twice the size of Indianapolis, but will bang out six or seven times the absorption.
It's not all bad news; there is a silver lining in Indy. The good news is that there has not been an oversupply of new space; supply and demand are in relative check.
Let me try to give you a little sense of what is going on in a market like Phoenix. Last year, 125,000 people moved to Phoenix. There were 130,000 new jobs. Similar thing for Charlotte [N.C.] and [Las] Vegas, as well. Those are all top-10 markets in terms of job growth and population growth. Those are the types of things we've really got to look for. That's what's helping Lauth expand across the country.
IBJ: OK. I want to jump into the question for Katie after that answer. I wonder what the state's more aggressive approach to economic development is having on the central Indiana real estate market.
CULP: I think confidence is up. I think that you have some really well-intended people who have taken the helm of the new Indiana Economic Development Corp. They have made a lot of progress in eliminating the bureaucracy that comes with government. It's more businessfriendly. I think that they have targeted industries such as insurance and life sciences, which were not necessarily in a place of prominence before.
On the other side of the coin, though, central Indiana tends to be pretty middleof-the-road in terms of incentive programs that we focus on. We have done a number of projects in the Phoenix market from an incentive-procurement and location-analysis standpoint, and they tend to have pretty aggressive, entrepreneurial and innovative incentive programs, whereas we have kind of the standard array of tax credits, training grants, that type of thing. So that is making the difference.
IBJ: Does anybody else have anything to add about incentives?
WRITT: I don't think companies make their business decisions based on incentives. They make them on operational needs and business reasons to affect their bottom line. A lot of transportation people who are coming in here are going to come to our state anyway. The incentives are used as a tiebreaker when they narrow their search down to a couple of cities. I would like to see the incentives go more toward infrastructure versus a specific building or a specific company.
Look at two of the biggest impacts on [area] development, i.e. the Six Points interchange at the airport and County Line Road interchange at I-65 on the south side. They opened up eight corners for development on both sides of that interchange when that road was built. So the communities as a whole will benefit from that infrastructure money that was put into that area. So rather than one company, I think if you could pick particular areas for growth that you needed to build a tax base, you should focus your dollars in infrastructure in those areas.
CULP: That's a really good point, Mark, and I think the Major Moves legislation is a positive thing from the standpoint of transportation infrastructure. But because Indiana is pretty middle of the road from a business-tax-climate perspective, I think that a lot of times, in the transportation and logistics sector, our programs are not necessarily that aggressive.
Some of the rate thresholds that the state and local municipalities have for these types of projects aren't necessarily competitive with some of the nearby states. When you get into a tiebreaker situation between here and Nashville or Memphis, sometimes the incentives don't necessarily put Indiana in an advantageous position.
WRITT: But [the government] ought to look at the size of the buildings, not just the labor cost. The fact that the jobs pay $10 or $12 [per hour] is something to be concerned about. But, when you are building 500,000 feet or 800,000 feet or a million feet of space, you've got to think a little differently.
Plainfield has grown since 1995 to 23 million square feet. I'll take that times 50 cents a foot [in property taxes] in perpetuity. There is a much bigger gain on the tax basis being built on those larger facilities for logistics that I don't think the politicians ever recognize.
WELLS: Mike brought up job growth, and that is what drives real estate. And that's how this market suffered for the last 10 or 15 years trying to turn it around. It is like a barge: It takes a long time to turn around something that big that's going in the wrong direction. Major Moves is a great step for Indiana's transportationbased economy, very positive. The bottom line is that you have an undereducated, undertrained and unhealthy work force in Indiana. You can throw all the incentives you can find at people, but if they can't find the people to work, to show up for work, who do a good job and have an education, you are not going to make any progress.
IBJ: Mark, I think we will continue with you. You mentioned Plainfield. It seems like the west and southwest sides are all we hear about in industrial development. Are those areas going to continue to soak up the new development for years to come or are there submarkets that you expect to see emerge?
WRITT: They are already emerging as we speak. Whitestown on the northwest side of I-65; Lauth Property Group has 400 acres under development with a 689,000-square-foot building at Southport at the County Line Road exits at I-65. The Plainfield area has about 300 acres on either side of Six Points Road north of Stafford that will continue to develop and give an inventory of product for the next two to three years.
Lauth has 400 acres under contract that they are pursuing at State Road 39 that will continue a west-side presence. There is also land on the south side of I-70 that people are working through trying to develop. We still have land at Ameriplex, which is a little higher-end. It is not really a bulk park, but you can go in there and still buy available land.
So the northwest side of I-65 and the southeast side of I-65 are moving, and then you still have Mount Comfort. The Precedent has an 800,000-square-foot building under construction and plans for a 450,000-square-foot building this summer that they have already pre-leased half of.
IBJ: We were talking a little bit about public involvement in economic development, and the new stadium is probably a great example of that downtown. Bill, I wonder what you think about the new stadium's potential impact on retail downtown. Will it create a whole new retail zone?
FRENCH: The new stadium is truly exciting, however, seeing how it's located south of the downtown, south of the business district and separated by the railroad tracks, I really don't see it changing the retail climate that much. The epicenter of downtown retail is Circle Centre, near the intersection of Illinois and Washington streets, with phenomenal volumes of people coming out of those restaurants. Champps and P.F. Chang's, for example, have the top lunch volumes in their respective chains.
Take a look at the old days around Market Square Arena. Who was operat ing near to Market Square? Really nobody. Conseco Fieldhouse is the same. I don't think you're going to see retailers going over near Lucas Oil Stadium. Really, I think it's going to benefit the convention business, which will ultimately bring more people that come back to the mall area.
IBJ: While we are on retail, Zionsville has been trying to limit retail growth, or at least the development of the physical structures, in a way. They have recently cited regulation to limit footprint size of retail development in Zionsville. Is that a trend that you think is going to be repeated?
FRENCH: I was referencing with Wells the circumstances there regarding some zoning issues, and I think someone mentioned maybe that it might be an extension of the Indianapolis Zoo, where the ostriches are putting their heads in the sand. To regulate the size of business of that nature, whether it is a Wal-Mart or a Target or a grocery store or local hardware store building, exceeding 60,000 square feet? I couldn't do it.
If a local hardware store attempted to do it, they couldn't afford to do it. Really, regulations like that only help the national players, which we are looking to keep out of the community. It hurts the local people. Where do all the people go who live in Zionsville then go to shop on $3 gasoline? Where do you go? Where are your dollars spent? The taxes paid? So I don't really understand what the advantage is for the community.
I just recently came back from a trip to Florida. I was in the Bonita/Naples area-a very, very fine area, very upper end. They built a brand new Wal-Mart there, and it just looks fantastic. So what you need to concentrate on is really the aesthetics, how the project looks, and not regulate the size of the buildings.
IBJ: Do you expect to see any other communities do that to find out if it works or not?
FRENCH: There are some other communities that might be in a position to do that, and we have seen it around the country. They took a position like that recently in Nantucket. They passed an ordinance saying no more chain stores. They said that if you have more than 14 stores, you can't open a business on the island. Well, Zionsville is not an island, and they really can't do that. It's not an enforceable provision here.
And years ago, if you recall, Carmel was very difficult when it came to zoning, so Simon built its project just north of 146th Street in Westfield. They just went over to the next cornfield is all they did, and it has really turned out well for them.
IBJ: Shifting gears, let's move to some residential. Jim, new condo projects downtown are so common now that they are barely newsworthy anymore. How much residential growth can downtown soak up?
THOMAS: There is a lot of activity in terms of the number of condo [projects downtown], but, really, when you add them up, it is not a lot of units. I was joking with somebody that the reason I am on this commercial real estate panel is because our firm has absorbed 600,000 square feet of space downtown in the last few years. So this breakfast is really a free breakfast of thanks to us for taking some inventory out of the market.
If you really drill down to those numbers, there are 675,000 households in the Indianapolis metro area. We do somewhere around 15,000 permits. If you bifurcate those out between "for sale" and "multi-family," income-adjust it, and then ask the question: How many people want to live downtown?
Our friends at [Indianapolis Downtown Inc.] commissioned some studies that say 19 percent of people are interested. Being conservative, you take an 8-percent number and work the math, its gets you to about 250 units a year. That is a nobrainer.
While you see project after project after project, what you see is a lot of six-unit projects, 8-unit projects. We totaled up that there are 350 units in the marketplace right now, excluding Market Square, and a hundred of those are ours. We are just starting construction on Lockerbie Park, which we expect to be a three-year deal. So if you look at it, I think there is substantial potential there. Those numbers don't presume any internal relocation, i.e. empty-nesters from either out of town or out in the suburbs, who make the housing choice to move down closer to the fun.
IBJ: You mentioned the Market Square project. There is skepticism whether that will happen. What do you think?
THOMAS: Well, forewarned is forearmed. We were the runner-up team for Market Square Arena, so I think they have had a fair run at it. They have been out there for quite a while, and we will see if they are given any additional deadlines. I guess I personally am skeptical. They have been given extension after extension, and we will see if that will continue. I hope it gets done. It is an exciting project, and whether it has gone on so long that the market has become jaded on it, we will see.
IBJ: Mike, your company has a proposal for 1,000-room-plus hotel complex on the Courtyard by Marriott site. Of course, existing hotel operators maybe aren't too pleased with that. What do you say to owners and operators who don't think the market can absorb that many more rooms?
WELLS: Too bad; it's going to happen. Am I at my time limit?
Well, it is a kind of process. The stadium is under construction; the state has issued bonds for $25 million to expand our convention center. We have a great convention center business. With the convention center expanded, Price Waterhouse Coopers had a study done which concluded that if you don't have an additional large hotel, you are essentially wasting expansion of the convention center.
It is a done deal. Either expand an existing hotel or build a new hotel. The new Marriott was built a number of years ago, and there were concerns in the marketplace. That hotel kind of took all the hotels to another level and has done better and attracted more conventions. By doing a lot of expansion, we can attract big conventions that we lost that we need back.
Plus, everyone is very aware of the fact that the convention business is what drives your restaurants downtown, which drives your retail. If you don't have convention business, your mall fails; your restaurants start to go away. It is painful when you bring on a new hotel, but if you hang the right flag and it is done the right way, I think it will make the market just that much better.
THOMAS: I would like to add one comment. I think if you take Mark's infrastructure comment about the suburbs, I view this as nothing more than good fundamental infrastructure in our down town. It is a continuation of Dick Lugar's efforts 30 years ago, and the only reason we can sell a $400,000 or million-dollar condominium downtown is because you can talk about those dynamic places that are supported by the convention business. I have worked across the country, and everybody wants downtown housing, and a lot of people are chasing us, but we have a 30-year head start. It is going to take continuing investment in that general infrastructure like convention business and giant hotels to stay ahead of the folks.
IBJ: Mike Curless, there have been a lot of record-breaking real estate deals in Indianapolis in the last 18 months, maybe longer. Is Indianapolis a hot market for investment properties and how does it stack up with other markets that you are active in?
CURLESS: I think it is. We are definitely seeing the West Coast influence here. People are getting frustrated they can't buy product in California and some of the other Western states. They are working their way to the Midwest, and have shown up in Indy in the last year or so. At Mark's firm, CB Richard Ellis, I heard a stat that 90 percent of their investment sales last year were to out-of-state buyers-way out-of-state buyers-and that's good for Indianapolis. That is definitely propping up prices and pushing down cap rates.
It's pretty amazing. We are doing a warehouse building in Las Vegas. We haven't even started it yet, but it's twothirds preleased and we are getting unsolicited offers in the sixes to buy it. We don't even have it on the market and haven't even started the building.
I don't think that's going on here just yet, but I think we are seeing cap rates in industrial office definitely breaking the eight barrier here, which is a big statement. Well-located retail is probably south of six. Health care development seems to be tracking with office somewhere in the sevens as well.
I do think it is unlike a lot of other development that might not otherwise have happened. It gives you a little bit more room for error. It has enabled lots of industrial developers to enter the market. Generally, net rents in industrial haven't changed since I was about in the eighth grade. $3 nets have been here for a long time; they are just slowly starting to inch above that due to some higher construction costs, but everybody has been able to make a good run of it even with flat rents for over 20 years.
And everybody gets all worried about interest rates rising, and how that will affect cap rates. They have been rising for the last several months. We are still in 40-year record-low territory in interest rates, and at the same time rates have been going up, interest rates continue to go down. So, that is a good trend for Indianapolis. And, I still think we have got some wiggle room there as well. I think we are going to look like a bargain here compared to the rest for the foreseeable future. I think that bodes well for Indianapolis.
THOMAS: Similarly on the institutional multi-family front, we have seen cap rates fall like Mike's industry's, but we have not seen speculative building. Historically, it has been capital availability, and there has not been either with the condo pressure, single-family. There have been a lot of sales, but not a lot of speculative construction.
IBJ: Jim, while we are with you, let me ask you about AMLI. I know you used to be involved with them, and that company just reported it is selling a lot of its property here. More and more [real estate investment trusts] and other real estate owners are going private. Do you think this is likely to happen to big locally based REITs? And how is this affecting local properties?
THOMAS: I would be surprised if it happens. AMLI is in the billion-dollar or 2-billion-dollar range, which sounds like a lot, but it's not for a REIT. So, I think you saw a disconnect in some sectors, where the properties were worth more unbundled than they were being rewarded on Wall Street.
So I think it is more particular to the size of the REIT, and thank God both of our big guys are much larger than that. There are smaller regional REITs, so we will see what happens with them. In fact, AMLI is selling some of its properties to another regional REIT, NTS. But I don't think we'll see wholesale privatization in that sector.
IBJ: Katie, many of the doughnut counties-I think someone mentioned Whitestown earlier-are seeing a lot of commercial development. What do you think they should be doing from a planning and zoning incentive standpoint?
CULP: I was the former director of economic development in Boone County, so it is a community close to my back yard. You know, I think the major issue for a community like Whitestown and the doughnut counties is the issue of timing and certainty. It is not so much that these communities have to make it without any barriers from a planning and zoning or incentive standpoint to do development.
It is OK to have some standards, but it is important that those standards are wellknown and well-communicated, and that a process is in place for accomplishing the goal of development.
I think one of the challenges of these growing communities is that they feel this pressure to quickly come up to speed with the demands of urban and modern development, and they are not quite there yet. So the result is that some large industrial clients may think it's too risky to go into a market like that. The best thing that a community like Whitestown or its peers in the region can do is to establish some processes and procedures that are supportive of development and really make it a certain outcome.
From an incentive standpoint, Plainfield is talked about quite a bit. I think Plainfield's mode of guaranteeing 10-year tax abatement for a certain type of project has gone very far in terms of getting that community to develop. I think it is a lesson that some of our other doughnut counties could learn from.
IBJ: There must be a lot of doughnut communities pitted against one another in that regard, and so if they have good incentives they might do better than their neighbor?
CULP: Planning their zoning is a critical component as well. Communities are well-intended but they don't necessarily have a good explanation process of what sort of outcome a developer can expect, and there are some problems that result from that.
IBJ: OK. We are going to move to the audience questions. We have a question about the Anson development in Zionsville. Someone wants to know what is the holdup with Anson? Does anyone have an answer to that question?
CULP: I have been involved since the beginning stages of Anson. At 1,800 acres or so, that's a huge project. Those kinds of projects face huge challenges, especially some of the challenges I was just talking about. It takes a long time to get that appropriately planned, to go through all the conversations about TIF districts and financing. That is just part of the process, and it takes a long time for a community that hasn't done something like this before.
THOMAS: I think there is also a surprising amount of what would have to be institutional grade multifamily as part of that project. A lot of the southeast portion of it is kind of their "new town" area where they wanted institutional-level, multi-family. That has been a very flat market. Frankly, there are superior alternatives that would attract capital well before the rents out there [in Anson] to support new construction given the starter housing stock that is generally in the area.
IBJ: Someone in the audience would like to know what effect, if any, public transportation, or lack thereof, is having on real estate development here.
FRENCH: It hasn't affected the retail sector yet.
THOMAS: Nor the high-end residential. And, again, high end is really where it has to be to support new construction costs.
IBJ: OK. What are the plans for downtown retail, such as grocery stores? There seems to be this disconnect between the residential market and the commercial retail market in the downtown neighborhoods.
FRENCH: I think that's probably for me. I think that the issue is density. Take Anson ... there is a great deal of that project which is retail, but there is just not the population density there.
And, although there are a lot of people in the downtown, and we have reported some statistics that are pretty amazing about how many people live in a one-mile ring, you don't necessarily have a lot of families. When you take a look at the suburbs and you go to the grocery store or discount department stores, the families are the big purchasers. It is not necessarily empty-nesters or the 20- to 30-year-old who might be single.
So you don't have as many consumers downtown who buy a whole lot of anything at one time. Think about it: The square footage they occupy is generally less than they would have in the suburbs. The refrigerator is probably not a Subzero; it's probably a much smaller capacity.
So you're going to see more; it is just a matter of time. I mean Staples opened over by IUPUI, for example. That's really the first junior-anchor type retailer that's come in the marketplace. O'Malia's has done a nice job for a number of years. But, we just need Jim to build some more quality product, and we will have more retail!
THOMAS: 600,000 feet a year, is that what you ask?
IBJ: What is your take on the retail question, Jim?
THOMAS: A lot of the downtown retail tends to be clustered over in the Lockerbie, Chatham Arch area. We have had O'Malia's. Fusek's Hardware was a nice addition. But people who live downtown still plan on driving. I have worked in much more dense cities-downtown cities-and the downtown residents still have a car. Chicago people can rely on public transportation. But as long as there is more attractive retail that they can drive to, they are not captive to that downtown market area.
WRITT: For a grocery, you need a large tract of land. And, our one-way traffic systems of Washington Street and East Street make it difficult for customers to get in and out of their grocery. Kroger's 16th Street property has that vacant lot to the west of it, and the area has accessible two-way traffic. People know where it is, it is familiar. Kroger should expand and remodel that store.
What is going to happen to the Indianapolis school-bus facility? That is the largest tract of land downtown. That would give Indianapolis an area in downtown to redevelop as a retail opportunity.
IBJ: Moving north, what impact do you expect the 146th Street extension to I-69 in Noblesville will have on development positions up there?
WELLS: I think it is significant. I think one of the things that has hampered a lot of growth in the outlying areas has been the lack of decent transportation in terms of just getting around. I mean everybody uses their car; that is how they get to where they are going. There is no good east/west [route] and 146th Street is that opportunity.
So, even though the planners didn't really think ahead enough to figure out the second ring like most major cities in the United States, 146th Street is a start, and I think it will make a big difference. We are already starting to see that. And, it is really about time.
We talked about public transportation before. Public transportation is a great thing; it's just never going to happen in Indianapolis. It's too easy to drive a car here. I live on the north side, and I can be downtown in 22 minutes, you know, and the traffic is not bad. Or, if it is, I just move one street over or one more over or one more over. You can get anywhere you want to in this community.
But, east/west up in the northern part I think is important, and I think you will see a lot. It ties right into Anson; it is going to tie back into [interstates] 70, 74, and all the way around. So, I think it's going to be major.
IBJ: What are your thoughts on Saxony at State Road 238 and I-69?
WELLS: You are going to continue to get growth moving further out, fortunately or unfortunately, depending on your urban planning perspective. But, I think it will continue to be successful. I guess the question is: If you are not adding jobs or you are not adding people to the SMSA, in general, where are they coming from? You know, somebody is going to be a loser in that situation, and I don't necessarily think that is that great! But, going back to Zionsville and going back to some of these other things, it would be helpful in this community as a whole to have decent development standards. We need to understand where we are going, and not just be taking more farm fields and stretching people out.
Taking I-69 from six lanes to eight lanes to 16 lanes-I mean where does that end at the end of the day? Where are we when we do that? Mike's been talking about other markets, Phoenix in particular. We are doing some work in Phoenix, as well. They have very strict development standards. In their infrastructure, they have six-lane roads out where there is nothing even developed yet because they are one step ahead of the curve instead of behind it. I think it has some great advantages, and I think Indiana needs to take a hard look at that.
FRENCH: There is practically 2 million square feet of retail space planned at the intersection of State Road 238 and I-69, which is where 146th Street will spill into one day. So there is a tremendous amount of activity. It is just going to take a couple more years for the entire infrastructure to get there, and it will happen.
IBJ: That kind of ties into this question: Are Carmel, Zionsville and Noblesville doing a good job with planning and providing infrastructure to support growth?
WELLS: I can't say enough about how great those communities are. Carmel is doing a good job in terms of trying to increase the circulation. U.S. 31 is com ing back now as a result of Major Moves, and some of those things, so I think they are doing a pretty decent job.
I think it gets back to urban planning. What do people want? Where do you want to live? I think that's a question a lot of these communities are struggling with, and I think Carmel really got on that first. Zionsville may be a little further, but, you know, I think their intentions are good. I think it boils down to whether the development can serve the people. The balance is the thing that is missing.
THOMAS: I would agree. I think Carmel is approaching buildout on a lot of their raw land. So the moves that you are seeing are, I think, reasonably thoughtful about how they can go back to adding new infrastructure that allows a planned increase of density in selected areas. I hate urban sprawl. It kills me to drive out and out and out past these cornfield developments. But, I think Carmel is trying to allow thoughtful density to increase because they don't have the raw land resources that a Fishers or a Noblesville has.
IBJ: Any thoughts about what the I-69 extension will mean to Indianapolis? Has anybody seen any activity on the south side in anticipation of that, or is it too far out?
WRITT: It is probably too far out. There is no immediate impact. You are still going to deal with traffic signals going to Bloomington and so forth, on [State Road] 37, if they use that, or if they use [State Road] 67. I think money would be probably better spent just improving [Interstate] 70 and [U.S.] 41, two roads that are already in place.
There is only so much retail commerce and so many service businesses that you need, so as you open up this interstate, what are you really trying to attract? And, there is no employment. You drive through southwestern Indiana, and if you don't get to Evansville, there are no people. There are only so many people in Ferdinand, Jasper and Tell City. So, I-65 to I-64, U.S. 41 to I-70, it could be a lifetime before people start filling in and growing those smaller communities between here and Evansville.
CURLESS: Depending on where the ultimate location is, it could have some real positive effects on some development west of I-70, in terms of making it a more institutional quality and a distribution corridor.
IBJ: The state Legislature has danced around property tax relief and I think there is a thought that the next session they will really dive into that in a big way. How important is the property tax situation, both residential and commercial, going to be? How important are the decisions they make next year going to be to the real estate market?
WELLS: I think it is very important. What we have done in Indiana is have total uncertainty about real estate taxes for the last 25 years. We are in the business of trying to make money, and we have to understand what our costs are going to be. I think the Legislature in the last couple of years has done a better job of not trying to shift the property taxes from the voters to the businesses.
And they have made some steps in the right direction. I think we will really know soon if we are going to end up with a system that works in the long run to be able to preserve the balance between business and personal property. Personal property gets re-evaluated every year, and in the past, real estate has been 10 years, so you always got it to the point where a business was paying more than their fair share.
I think they are moving in the right direction, and I think if they can come up with a system that really works, there will be a lot more certainty. I think this has a big impact on the office market, in terms of what those costs are. Our customers really don't understand when their taxes go up 45 cents, then they go down, and then they go back up. It creates a lot of uncertainty. I know on the residential side-downtown apartments and such-it is a major, major portion of the expenses.
THOMAS: I think it is critical. We really have a one-size-fits-all taxation system. I empathize with outside communities where they are dealing with maybe a different growth dynamic than we have in Indianapolis proper or the suburbs, or even our metro area.
So the current inability to alter your revenue sources to fit your particular circumstances is a real hindrance on economic development in Indiana generally. And Mike's right. I have looked. I was involved in downtown housing 20 years ago and our property taxes then on a downtown community were higher than our total operating expenses at a township community that was a 12-minute drive from downtown. Until you can deal with those kind of inequities, you don't have rental housing for infrastructure. I know that is my theme of the day, but you need rental housing downtown to have a transition for new workers, and that's just very difficult. We are in the 21st century and we are dealing with a 1950s tax system. We need to be thoughtful about being more creative.
CULP: You know, one of the most pressing issues that I see with respect to property taxes is that starting next year they will be moving the administration of property tax bills and abatements to township level government, and, in a lot of cases, these individuals are part-time with minimal training. And, I know I have some real concerns. A lot of people in my industry also have concerns about how that is really going to work.
There are implications for commercial real estate. We are all paying property taxes here, and if there are errors in the calculations or tax abatements-things that we have always considered to be pretty clear-cut-there are going to be some real challenges. I think it is important to see how this is really going to play out. I don't know that there has been a lot of attention to this issue.
IBJ: Mike Wells. Someone wants to know how your hotel development-which contains a couple of different hotel flags and a water park that attracts families and kids-works as a convention hotel?
WELLS: Well, the answer to that is there are a number of conventions each year, typically about 38 to 40 major conventions. What we are trying to do is to attract people downtown and have the convention hotel, which is going to be JW Marriott, which would be 800 [rooms], and then also have a select-serve hotel so that when you don't have conventions, which is quite often, you backfill with families and others.
So, it is a real nice plus. We're not really looking for conventioneers generally to come to go down some water slides. Not that they won't do that, but that's probably not the way it is.
You guys know how it is. I drive downtown every day, and it doesn't take me 13 seconds to realize whether there is a convention in town or not. You can see it; you can feel it. So you know when conventions are here. The restaurants are full; people are here. But when they are not, it can get fairly empty.
So we think it is a nice balance, and we also think it will help support Victory Field, the Eiteljorg and Indiana State museums, the Indianapolis Zoo, and a lot of those attractions that are down there right now.
IBJ: Someone wants to know if the monorail extension from two hospitals is going to happen. I had not heard about this. I guess I think we are talking about the Clarian people mover.
WELLS: I have always heard it is costprohibitive. They did the monorail for their specific purpose, which was to connect up their hospitals. But when you start looking at the cost to expand it-again, because it is so easy to get around our downtown-trying to come up with those dollars is going to be pretty difficult to do.
You know they had talked in the past quite a bit about trying to link the mall with the zoo and everything in between, and even that was cost-prohibitive. Again, part of our blessings is that we can get around this town pretty easily, but it is also the thing that keeps us from getting the transportation system that we might want 15 years from now.
IBJ: Mike Curless, I know Lauth has a construction division, I wonder how the Gulf Coast hurricanes and the rebuilding have had an effect on construction costs or availability of materials?
CURLESS: Sure. We saw it firsthand starting about four or five months ago. Lots of price run-ups: hundred-percent increases on plywood, sheet rock and all types of things like that. We couldn't tell at first who was just piling on and who was using it because it was a convenient way to drive up prices. We had lots of subs in our Southeast projects bail on us at the last minute because they couldn't hold the prices.
That has stabilized considerably in the last few months, and I still think you are going to see that big bubble work its way through construction prices in general all over the country. You are seeing cost increases firsthand on big bulk industrial buildings. There are noticeably higher steel and concrete prices associated with those products.
THOMAS: Part of that, though, is global. Chinese economic expansion is sucking up more steel and concrete than the world can produce.
CURLESS: That's a bigger part of it.
THOMAS: Yeah, I mean it's bizarre to think-and I'm a big fan of "The World is Flat" book-and this is one of those examples of not just human capital, but natural resources. They are being deployed to the rapidly expanding economics of Asia. You can't get concrete tiles to build down in Florida for exactly that reason.
IBJ: Are we seeing any of that here? Is that really translating into higher rents?
CURLESS: As I mentioned earlier, you are seeing the trickle-up effect in bulk rents, for example. The market is absorbing some of it, but it is not any one thing. The cap rate phenomenon is kind of a grand elixir for a lot of these problems right now. If we didn't have a real positive cap-rate environment, it would be a little dicey in terms of the construction pricing right now.