FEATURE ARTICLE, JULY 2009

Q&A On Topic
Jonathan Epstein, president of Hackman Capital Partners, answers our questions about the industrial sector.

Epstein

During the ups and downs of any cycle, the industrial market seems to remain the steadiest of all of the commercial real estate sectors. Northeast Real Estate Business sat down with Jonathan Epstein, president of Hackman Capital Partners, to get his take on the state of the industrial market.

Hackman Capital Partners (HCP) is a private real estate investment firm specializing in the acquisition, management, development and adaptive reuse of industrial and commercial real estate. Founded in 1987, HCP pursues value-added and opportunistic investments nationwide. The company focuses on undervalued or distressed real estate, financial restructurings and other unique opportunities that allow them to navigate complex processes to create value.

NREB: Is the company still in the acquisition mode right now?

HCP: We have been very disciplined over the last 2 years and only recently began to look at acquisitions again. We recently completed a new deal in January in which we purchased the debt on a large industrial complex. We are starting to look at deals again, but the bid-ask spreads between sellers and buyers are still wide, although, we are starting to see sellers becoming more realistic as of late. In the current environment, our increasing focus is purchasing debt. As the level of commercial real estate debt maturities continues to increase year-over-year, we expect that there will be a growing opportunity to purchase assets as well as provide what I call “gap or rescue” financing.  

NREB: Any particular markets that you are focusing on?

HCP: Massachusetts. Myself and several partners are from the Boston area, so we have a great market knowledge in New England. We try to focus more on larger urban population centers, and certainly for industrial, we are looking for areas that have a great intersection of intermodal transportation.

NREB: How is the economic downturn affecting your business?
HCP: We are certainly not immune to it, but we have been surprised by the lack of tenant issues. New England has held up a little bit better than some other areas of the country, mainly because it never rose to the heights that a lot of other areas did. So consequently, it has not had the tremendous pull back that other areas have experienced, and historically, it tends to be less volatile and more stable.

NREB: How are you working to retain existing tenants and attract new tenants?
HCP: We have been much more aggressive on the marketing front. We have been working throughout the country with economic development agencies at the state, county and city levels. We have really ramped up our focus in New England. We are helping state and local economic development agencies attract new tenants that support local job creation and we are also working with these agencies to help market the programs they have. Sometimes these programs are not marketed widely, so we adopt them and help promote them in the regions we work in.

In addition, we recently worked closely with two alternative energy companies that have applied for a portion of the economic stimulus programs from the department of energy. We assisted each company in the application process, so we have become experienced in our understanding of the federal guidelines. We have also been contacting representatives from individual congressional districts where our properties are located to try to get them involved in the process. We are trying to educate them about what we are trying to do in their district and why it is important. Overall, we have been aggressively trying to build public/private partnerships to drive business or help to assist businesses looking to come into these areas. 

NREB: Can you characterize the demand for industrial space in New England?

HCP: The way we are positioned is a little different. We have what would be called Class B buildings, but they are in Class A locations. By definition, our rents are more affordable than traditional Class A properties. We have the same building functionality, they may be slightly older, but they have the same clear height, the same dock doors and the same access. It may not look as beautiful as a very expensive Class A building, but it can still meet the tenant’s need and is highly functional.

Over the years as the economy was doing well, many people moved into Class A buildings, but now in an effort to cut costs, many large companies are moving more away from worrying about the company image and are thinking more about dropping their occupancy costs by going into a Class B building that is in a location that works for them but may have lower rent by 10 to 50 percent.

Our portfolio has always been positioned as a very economically defensive portfolio. That is why we have seen more inbound demand. We have been the beneficiary of people moving out of the much more expensive buildings because they realize that having beautiful landscaping does not really matter to their business. That is why I think we have held up and been more stable than some. It was quiet at the end of the year, but in the last 6 to 8 weeks we have had very good foot traffic. I think the reason for that is because our rent levels are proportionally lower than brand new Class A buildings, and whatever tenants need we have it. It just may be a building that is 20 years old instead of building that is 2 years old. 

NREB: As a landlord, are you being forced to rethink rental rates?
HCP: Certainly every single landlord in the U.S., no matter what property type they have, is under pressure from a rent perspective. Many tenants are asking for relief in some form or fashion on a go forward basis. If there is a lease renewal coming up and tenants want to stay, I think they are trying to be smart about their occupancy costs. Given the infill locations  and the tenancy that we have in New England it has been very stable. We have not had a major lease maturity yet this year, but we have some coming up so we are in discussions with those tenants.  As a rule we talk with our tenants early and often.

Tenants understand the situation that everyone is in and they are trying to be proactive as are we. In terms of the annual increases, people are coming back and asking to lower those or maybe hold them flat for one year so they can see how things will go in their business. But, there have not been any dramatic shifts and I think that is because of the nature of the New England market. It has not had the major volatility that other markets had, and it did not have the huge increase in rents, so consequently, we are not seeing it come down as fast.

NREB: Any other trends or issues in the industrial sector?

HCP: On the positive side, because of the federal stimulus there has been more activity from large alternative energy companies — wind energy, solar and alternative battery manufacturers. We have had several firms looking for space, especially around dense areas that have a large research or university basis. Certainly New England has been great for that because so many companies come out of MIT labs, BU, Harvard, etc.,  as well as any of the other firms that people have created in the Boston and New York corridor. We have several buildings in Connecticut and Massachusetts, so we have had a fair amount of foot traffic. In our national portfolio, some of our brand new big leases were in the wind power industry in other areas of the country.

Another trend that I have seen in the other states is a re-focus on manufacturing. I have not seen as much of a focus in New England, but it is starting to gain more momentum. Since the financial services industry was such a strong component in the Northeast for so many years there was less of a focus on manufacturing jobs, and consequently, many other states in the Southeastern U.S. and Southwestern U.S. were very aggressive over the last several years and very smart about the use of different types of state and local tax and cash credits and other support mechanisms to attract manufacturing jobs.

With the decline of the financial services industry, we are just starting to see some of the economic development agencies in the Northeast turning the focus on bringing some of those manufacturing and higher tech jobs back into those states. We have a great  research corridor with all of these wonderful universities, as well as a highly skilled workforce. Labor costs and the cost of living is re-setting now with the issues in the economy, so I think many Northeastern states are starting to look at where the job creation is going to come from as financial services continues to drag. We are starting to see that and are working in partnership with some of the states now, which we think will bear fruit long term.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.