Proximity to transportation hubs prime criteria for CenterPoint.
Paul Fisher, chief executive officer of real estate development company CenterPoint Properties, recalls traditionally his peers would look at a new 33-foot clear building, with trucks docked in a particular way, leased 10 years to a high quality “credit tenant,” and call it a “Class A” building.
“I tell people that we think the new Class A isn’t beautiful, it’s close,” he said in a recent interview at CenterPoint’s headquarters in the Chicago suburb of Oak Brook. “It’s proximity to a transportation node that makes product attractive to us, whether we build it, we buy it in place, or we buy something in that location that makes sense ‘transportation-ally’ that we can redevelop and make better.”
CenterPoint has long been a powerhouse in the Chicago market, where it developed the nation’s largest inland port, a 6,500-acre intermodal center on the former Joliet Arsenal adjacent to railheads for both the BNSF and Union Pacific railroads. In recent years, CenterPoint has been expanding into other markets, but always near ports or other transportation assets.
Today about 40 percent of its portfolio is outside Chicago, up from nothing four years ago. These new sites include:
- A 921-acre logistics center in Suffolk, Va., 22 miles from the docks in Hampton Roads.
- An 800-acre intermodal logistics park 35 miles southwest of Houston.
- The new inland port in Greer, S.C., that it’s developing for the South Carolina Ports Authority.
- A 250-acre planned logistics center in Manteca, Calif., an hour from Oakland.
- A 970-acre logistics park in Kansas City, adjacent to an intermodal facility that Kansas City Southern Railway is building at a former Air Force Base near Richards Geaur Airport.
“We parsed our portfolio and we decided to invest in assets that are proximate to some transportation node that a company wants to be near,” Fisher said. “Every company — big and small — they are looking at ‘how do we squeeze transportation expense out of our supply chain.’”
Patient Investors. CenterPoint is owned by the California Public Employees’ Retirement System (CalPERS).
“We’re the only company that CalPERS owns,” Fisher said. “Typically they partner with companies. They own our platform.”
CenterPoint is managed by a fiduciary, the private equity firm GI Partners, which has a small ownership-stake along with management.
The company began operations in 1984 as an investment vehicle for the U.K.-based Capital and Regional Properties, plc, whose stock was publicly traded on the London Exchange in 1986. It was the first major real estate investment trust (REIT) to focus on the industrial sector and went public in 1993, after merging with FCLS Investors Group, a Chicago-based industrial development company with 30 years local experience.
“We were the first company in the REIT world that became what we call a ‘value-added recycler’— we invented that term,” Fisher said. “Essentially we bought older property, fixed it up and then sold it. We took the profits and put the capital back into the business.” In specific, the company focused on properties within a two hour drive of its headquarters.
He said CalPERS partnered with CenterPoint and joked they imitated Victor Kiam, the chief executive of Remington Products who used to say in advertisements,“I liked the shaver so much, I bought the company.”
CalPERS paid $3.6 billion for the company in 2006.
What attracted CalPERS to CenterPoint, Fisher said, was the integrated intermodal and business park business, and in particular the property that CenterPoint developed at the former Joliet Arsenal.
“We were acquired to take that model on the road,” he said. “Since we’ve been private that’s what we’ve pursued. We’ve rebranded the company as a logistics services firm. We supply assets to companies’ supply chains.
“We’re looking at assets that have a demonstrable transportation savings. So we really focus like a laser on what’s the value proposition to the user of the facility in terms of transportation cost. That’s our business model,” he said.
He said the investment by CalPERS has worked to CenterPoint’s advantage.
“Pension funds have long-term capital. We’re not slaves to announcing quarterly results. CalPERS and the board, they are tough taskmasters, but we can work on things that are strategic that take time to mature. So it’s been great for us to be private, to reposition the company and get zeroed in on this new strategy.”
Fisher, who recently celebrated his 22nd year at the company, announced in April he will retire, but said he will remain CEO until a successor is named, then become vice chairman of the CenterPoint board.
The company has about 5,000 acres available for development and a portfolio of space that is “knocking on 50 million square feet,” Fisher said.
While the company doesn’t disclose how much money it spends annually, Fisher noted that as a public company, before it was acquired by CalPERS, it was deploying between $500 million and $1 billion annually.
“We are doing well, and we’ve had three record years,” he added.
Divestment. As CenterPoint pursues its new strategy, it has disinvested in some properties in Chicago and other Midwest cities that are not transportation-related.
For example, it liquidated a portfolio of property in Grand Rapids, Mich., and is selling properties in Milwaukee, some air freight assets, and other buildings that are on the periphery of Chicago, but have no intermodal advantage.
“These are great industrial and distribution facilities, but our strategy is that over the longer haul, assets will outperform if they save transportation expense,” Fisher explained.
“There’s an incredible amount of work being done inside companies developing the information tools to figure out how to optimize their supply chains and save money,” he said.
The company buys as well as builds facilities.
For example, in Houston it purchased a facility where plastic resin pellets are vacuumed out of rail hopper cars and then packaged into bags for loading into containers or trucks. It owns the building as well as rail spurs that connect to the adjacent manifest yard.
It has invested in container yards and transload centers near ports and inland facilities so that shippers can evacuate their containers quickly from terminals, avoid paying demurrage, and expeditiously return containers to liner companies.
Fisher noted CenterPoint is interested in all modes of transportation. It added a barge terminal at its Joliet facility and has its sights on the e-commerce market and developing property near FedEx and UPS facilities.
“We’re looking at bulk transload facilities on the water, things that are getting ready to go on a ship. We are looking at building unit train facilities where goods would come in on a unit train in bulk, and be transloaded to railcars or containers. But we would actually build the rail facility and lease it to somebody and lease them to operators that find the rail facility useful. The same way we built an intermodal facility (in Joliet) and then leased it to the BNSF. They since bought it, but we built warehouses around it,” he said.
“It’s that synergy between transportation infrastructure and industrial property—that’s what we’re trying to capture. If we can build the infrastructure great, but we want to own the facilities that are proximate to it. And we’re capturing the value of synergy in the form of better than average rents than our peer group,” Fisher said.
Hampton Roads. In 2009, CenterPoint was one of three groups (the others were the Carlyle Group and a Goldman Sachs/Carrix group) that made bids to lease and operate the cargo terminals of the Virginia Port Authority under the state’s Public-Private Transportation Act. The company paired up with Global Container Terminals (GCT), which would have operated the terminal.
The company was interested in investing in the venture, because it “was critical port infrastructure… Virginia has deep water, dual-rail access; it’s home to the most efficient container terminal in North America, the APM Terminal. We looked at that and we saw the opening of the Panama Canal and saw that freight was going to have to go to bigger ships and manufacturing migrating down to Vietnam and South Asia making the Suez more attractive,” Fisher said.
“We looked at all that and thought there is big growth potential in Virginia volumes. And so we thought: ‘What could we add to that equation?’ We saw the potential to redo the rail facility at the Norfolk facility. We saw that we could more efficiently redevelop the Portsmouth terminal. We saw that we could bring to the table our traditional real estate skills to increase throughput and our partner GCT could come in and work with us and redo the operations and save money there,” he said.
Virginia eventually decided not to pursue the privatization in 2010, and this year also rejected a second round of privatization proposals put forward by APM Terminals and a JP Morgan infrastructure fund.
“What we’ve learned, quite frankly, was we were right,” Fisher said. When a port is a low-cost provider of container transshipment services “you want to be invested there and you want to own facilities that are ancillary and synergistic with that port.”
He praised the South Carolina Ports Authority and Jim Newsome, its president and CEO, for the decision to develop the inland port at Greer where trains can shuttle cargo from Charleston.
“We think that’s going to be a big winner. I’ve described that Greer facility as the westernmost wharf in the Port of Charleston,” Fisher said. He noted Newsome understands his port’s customers and the need for inland connectivity and has made Charleston very attractive to manufacturers because “they can get parts in and finished goods out very efficiently.” (For more details about recent service and infrastructure developments at the Port of Charleston, see the October American Shipper, pages 56-59.)
Inventory In Motion. One interesting development in the warehouse business, Fisher said, is the disconnect between growth rates in gross domestic product and warehouse stock.
“Information is allowing more inventory to be in motion,” he observed. “It costs a lot of money to put stuff down in a warehouse and sit. What companies are trying to do is organize their supply chains so that it minimizes the need for facilities.”
As an example, he pointed to the BMW assembly building in Spartanburg, S.C., where nearly every outside wall has a truck dock.
“They essentially try to keep as much of their parts inventory in containers as possible. It means they don’t have to lease a warehouse,” he said.
In the retail world, Fisher said there’s much discussion about omnichannel distribution and forecasts that there will be deliveries to the end customer directly from the manufacturing plant. And some retailers are even talking about using stores as fulfillment centers.
“What that means is that if you’re in our business, you want to own assets, assets that are just essential because they are at locations and are types of facilities that allow the maximum realization of transportation savings,” he said.
For example, shippers want facilities where they have lots of options for trucking outward, competitive rail coming in, and a facility that’s functional for their needs and saves them money.
CenterPoint has facilities in Los Angeles, New Jersey, Seattle, Vancouver, Toronto, Dallas — markets where Fisher said there’s competitive rail and trucking and a population that’s growing and likely to attract more freight.
“We’re in very selective markets and within those markets, selected sub-markets. For example, take Los Angeles. The Inland Empire is highly volatile; the vacancy went up to 20 percent in the crash. If you’re in the port though, vacancy never climbed much above 4 percent.
“Why is that? Those buildings down there are occupied by firms that have to be next to the port. So we’re not in the Inland Empire. We own a couple of facilities next to the domestic intermodals there because domestic intermodal is growing like a weed. But just generic distribution space in Los Angeles? We’re not interested in it,” he said.
