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No money for "spec" space: "build-to-suit" is the byword of Indiana developers.

Although developers in Indiana aren't beset by the problems they are faced with elsewhere in the country, according to those in the know, the development industry in Indiana is changing, nonetheless.

"Speculative development has slowed," says Thomas L. Hefner, COO of Indianapolis-based Duke Associates, one of Indiana's largest developers. Duke leases and manages approximately 25 million square feet in properties in Ohio, Michigan and Tennessee as well as in Indiana--its properties include First Indiana Plaza in downtown Indianapolis, Ameritrust Center near Fountain Square in Cincinnati and Lakeview Place in Nashville, Tenn.

Jim McKinney, general partner of Regency Associates in Evansville, concurs. Regency used to develop shopping centers on spec" that were anchored by units of Wal Mart Stores Inc. "What we're doing now is build-to-suit, where it can be 100 percent occupied. It's the only thing for which you can reasonably expect to receive financing or equity investment."

Cornelius M. Alig, president of Mansur Development Corp in Indianapolis, takes this one step further. "Financing for spec space is nearly non-existent. It is too risky now," he says. Indeed, build-to-suit seems to be the byword in the industry right now. It's a term Alig uses to describe a turnkey project his company is involved in at present. Mansur is renovating the old Indianapolis Rubber Co. building on the near-south side of Indianapolis, which is to be the new headquarters for Farm Bureau Insurance.

"The trend in the industry today," says Steve Ferguson, president of CFC Inc. in Bloomington, "is to build whatever the financing industry wants. Most developers don't have cash, so they do what financial institutions tell them."

"Banks like build-to-suit because the income stream is locked in," adds Chris Davey, president of Cressy and Everett Commercial in Mishawaka.

The reason that capital markets for development have dried up, according to Duke's Hefner, is that financial institutions have not gotten an adequate return on their investments. It's a phenomenon that will be with us, he anticipates, until returns improve or until earnings on other investments fall to meet the level of earnings on real estate. Today, space has to be 75 percent preleased, Hefner says, in order to get bank financing.

"Financing depends on the project," says Ferguson. Hotels, for example, are having trouble because they have acquired a bad name as an investment due to poor design, poor management and overbuilding.

"Generally speaking, it will have to loosen a little," says Davey. He doesn't see the financial picture changing quickly, but thinks that within 12 to 18 months, money will be easier to obtain. In the meantime, he believes, government will keep interest rates down because it overreacted to the banking and thrift crises.

Thomas J. Eckrich, president of Northill Corp. in Fort Wayne, agrees. "Since the government and financial analysts want to downgrade banks, lending to construction, developers and consumers is down because the supply is down," he says. The demand is still there, he feels. "This is healthy for the industry, though," he says, "because it will get rid of a lot of the funny stuff that's been going on."

In Evansville, the market for office space is relatively hot. In Indianapolis, it's not.

Says Regency Associates' McKinney: "In Evansville, there is not a great excess of office space available." Consequently, Regency is turning its attention to commercial space, such as that in its 183-acre Cross Pointe Commerce Center, a $55 million multiuse development it expects to take 20 years to complete.

"We have not had the overbuilding that Indianapolis has had," says Davey, noting that in St. Joseph County, the supply and demand have been held in check. Demand for industrial space has been soft. "I would like to see it come back," he says. And he believes it will. Already, smaller companies are relocating in the area, because it is accessible to major markets, such as Detroit and Chicago.

"The simple fact is that office space has a bad name," maintains Duke's Hefner. To this he adds the retail and hospitality industries. The trend in Indianapolis is toward the development of industrial and apartment property.

But Mansur's Alig is confident the market for office space in Indianapolis will rebound, as is Northill's Eckrich. "Frankly, I'm embarrassed we're not involved in Marion County," Eckrich admits.

Says Alig: "We may even do some spec building in the foreseeable future." It would come during development of the third phase of Mansur Center in downtown Indianapolis and might come on line as early as 1993. "By that time, we anticipate there being a demand again for downtown space."

In the meantime, Mansur is focusing most of its attention on a planned community in Hamilton County called Hamilton Proper, which is a 900-acre residential development with a golf course and a country club. The residential market is fairly strong, he notes, interest rates are good and the area is not overbuilt residentially. "We're fortunate to have a project so well-located. But," he makes clear, "we're not building houses--we're developing land."

Geographically, what are the areas in Indiana that will see a lot of development action in the future? "In the long-term, Merrillville has to do well," says Eckrich.

In Bloomington, there will be a tremendous growth in retirement housing, predicts Ferguson. Lake Monroe is a drawing card, but more than that, it's the city of Bloomington itself, which people perceive as a safe, clean, active community that's driven by Indiana University.

The corridor along the Indiana Toll Road will see a lot of development action in the future, forecasts Davey. There also will be development opportunities in the Lafayette and Muncie markets because they are not oversaturated.

Looking back over the past 25 years, Ferguson, who's been with CFC since its inception, identifies a few of the changes he's seen occur in the development business. One he identifies is the greater speed with which projects are put together today. People also are much more price-conscious. "And there's much more government involvement today," he says, "as tenants, in public housing and financing."

"It's a lot harder today," says Jeff Brant, vice president of Brant Companies, a 35-year-old full-service development and construction firm in Griffith. "Environmental restrictions make it tougher all the way around," he says, noting that developers in Lake County are particularly aware of these because of the wetlands abutting Lake Michigan.

And, looking ahead, there will be less development and fewer companies in business than there are now, says Duke's Hefner. Ten years from now, many smaller companies will have fallen by the wayside, he predicts. "The fallout is just beginning. The down market will be with us for years."

Northill, Eckrich says, is downsizing already in order to be a survivor. "With 50 percent of the nation's wealth in real estate, the real-estate industry won't go away," he says. We will work hard to out-service the competition. We plan to wind up one of the winners."
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Author:Hughes, Ann
Publication:Indiana Business Magazine
Date:Jun 1, 1991
Words:1148
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