CenterPoint Properties Has the Power

Inventive projects and a focus on industrial development pump up the Chicago area
May 2003

by Craig Barner

CenterPoint Properties Trust crackles with energy.

A stream of visitors arrives at the headquarters of the Oak Brook, Ill.-based development firm, the largest commercial developer in the Chicago area. Inside, natural light permeates the office and imparts a glow. Heels click as employees move about.

Michael Mullen, president and chief operating office of the firm, exudes vitality. He greets guests with a warm smile and compels attention by speaking with care, conviction and authority.

His colleagues, including Senior Vice President of Development Fred Reynolds and Senior Vice President of Investment Sean Maher, are similarly upbeat. And like dynamos, CenterPoint executives transmit the company's vigor and professionalism into action.

Take the stir Mullen caused a few years ago when he pitched the idea of an intermodal rail facility - a center used to transfer cargo from train to truck and vice versa - for location in Elwood, Ill. The proposal's unorthodox elements jolted his listeners from the Fort Worth, Texas-based Burlington Northern and Santa Fe Railway Co.

The site had been designated for Superfund cleanup due to contamination from the production of TNT between 1940 and 1976 when the former Joliet Arsenal occupied the land. The spot is 40 miles southwest of the city, whereas most of the approximately 20 intermodal centers in the Chicago area are inside the city or immediately outside. And, the facility was envisioned for siting inside a 2,000-acre industrial park, while most Chicago intermodal facilities are in substantially smaller environs.

"I think it was fair to say they were collegial, they were nice," Mullen said. "But it was like they were thinking, 'Who are you guys and what are you talking about?'"

Surprise over the proposal's unconventionality melted into interest. BNSF chewed over the plan and became intrigued by some of the site's advantages that Mullen underlined in his presentation.

The property's gigantic size, for instance, could easily accommodate freight-hauling trains, many of which exceed a mile in length. The relative remoteness from the city promised less congestion for trucks receiving or delivering cargo. Transportation efficiencies could be realized because a BNSF mainline between Chicago and Los Angeles is adjacent to the property, and interstates 55 and 80 are also nearby.

Most significantly, intermodal traffic had been growing rapidly in the Chicago area - reportedly the world's third busiest intermodal port - and was expected to increase.

Piqued, BNSF officials invited Mullen and his colleagues to return to Texas a few months later to discuss the proposal further. The scheme was also presented to Omaha, Neb.-based Union Pacific Corp., another major railroad operator.

"They both had the need," Mullen said. And, they both liked what they heard.

In November, construction was completed in Elwood on the $243 million BNSF Logistics Park-Chicago. Work on the $28 million phase one of the Union Pacific Rochelle Global III Intermodal Facility about 80 miles west of Chicago in Rochelle also was done in 2002, and the entire $181 million project is expected to come fully online later this year.

A dividend is that these facilities, already noteworthy in themselves, will likely drive other development. The BNSF center, for instance, is next to CenterPoint Intermodal Center, a 1,100-acre industrial park for distribution, warehousing and light manufacturing facilities. Two warehouses were completed in 2002.

The foresight and ingenuity these projects embody are just a few reasons why CenterPoint enjoys a reputation as a top developer. And the drive it took to create them helps explain why the firm is the commercial development leader in the Chicago area.

"They have terrific vision as you can tell by the nature of some of the developments they've done recently, specifically the intermodal centers," said Dan Witte, senior vice president of Chicago-based LaSalle Investment Management, the investment advisory unit of Jones Lang LaSalle, a global real estate services firm. "In hindsight, those projects might seem obvious, but they didn't seem obvious to anyone else."

Moving Along

CenterPoint is on a roll with inventive projects, including:

The $58 million Chicago International Produce Market, which was completed last year, has replaced the 77-year-old South Water Market, an outmoded wholesale facility originally designed for horses and buggies. The replacement market, which provides space for 18 vendors who serve restaurants, supermarkets and other institutions, was the first development in the Pilsen Tax Increment Financing district.

"It's a loaf of bread sliced into slices," Reynolds said. "Each vendor has his product in a flow-through pattern [that leads] to an open-outcry market."

More than 1,000 tons of cooling equipment were installed to keep fruits and vegetables fresh, he added.

The $82 million Chicago Manufacturing Campus, which is still under construction on the city's Southeast Side, will reportedly be the first collection of buildings in North America that bring together about a dozen different manufacturers of automotive parts. The facility, which was jointly developed with Dearborn, Mich.-based Ford Land Development, comprises five buildings that will supply Ford Motor Co.'s nearby Chicago Assembly Plant with parts.

Chicago competed with Atlanta and Detroit for the project, Mullen said. "It was because of the lower distribution costs for cars to dealers that Chicago was selected," he added.

The four developments at O'Hare International Airport in Chicago - O'Hare West, O'Hare Express South, O'Hare Express Center and O'Hare Express North - on 117 acres of land give CenterPoint a commanding presence in the air-freight, freight-forwarding and similar businesses at the world's busiest airport.

"I believe we're the first private developer allowed inside the fence at O'Hare," Reynolds added.

The $30 million California Avenue Business Center under way on the Near West Side of Chicago will help bring an infusion of economic activity to an economically disadvantaged area.

"I saw that area completely desolate due largely to urban unrest," said Paul King, president of Chicago-based UBM Inc., a general contractor on the project. "To see major companies coming in signals a rebirth of the city."

Previous buildings were on the site, and four structures for distribution and manufacturing will replace them, said Ed Smith, alderman of Chicago's 28th Ward.

"The property had some problems," he said. "Because it was vacant and people were flopping in there, the area constantly kept us busy trying to keep it clean."

Industrial developments are CenterPoint's sole focus, Mullen said.

"We have attempted to be the 3,000-pound gorilla in one market, as opposed to getting into 22 major markets," he added.

Going Ape

CenterPoint's financial record gives reason for chest pounding.

According to a financial statement released in February and other information the firm provided, CenterPoint has a total market capitalization of $2.2 billion and portfolio of 31.3 million sq. ft. The firm possesses an additional 1,320 acres of land on which 15.7 million sq. ft. could be developed.

CenterPoint's performance is stellar. The firm has a retention rate of 92.8 percent and an occupancy rate of 91.3 percent for the 290 tenants in its 186 properties. CenterPoint's 2002 total return to shareholders was 19.4 percent, its 2002 funds-from-operations payout ratio 57 percent and its 2002 debt-to-total market capitalization 32.2 percent.

The firm's 2002 revenue went up in an economically troubled year, 2.8 percent, to $156.7 million from $152.4 million in 2001. (CenterPoint's 2002 net income rocketed a remarkable 169 percent, to $75.4 million from $28 million in 2001. The jump is mostly attributable to a $38 million asset write-down in 2001 - the first year in company history when earnings did not increase over the previous year.)

The firm stays active. CenterPoint had investments of $214 million and dispositions of $188 million in 2002. Seven build-to-suit developments valued at $99.3 million are under construction and 95 percent preleased.

"The execution of their strategy has been terrific," LaSalle's Witte said.

Core Tactics

Several elements can be discerned in CenterPoint's approach to development that help explain its triumphs.

Exploiting the transportation infrastructure of Chicago - "Player with railroads and the nation's freight handler" in the nearly century-old words of Carl Sandburg - guides the location of developments, Mullen said.

The intermodal proposals succeeded in part because each of the six remaining Class I railroads cross Illinois, he said. The Chicago Manufacturing Campus abuts the barge-navigable Calumet River, and the produce market is near the Stevenson Expressway.

"All the reasons why the original settlers came here still apply," Mullen added.

The need for vast tracts of land and the occasionally quick turnaround between project inception and delivery explain why some of its developments occur in such far-flung locales as Rochelle and Elwood, Reynolds said.

"We've had to change our development focus on establishing business parks where we control our destiny," he said. "All the predevelopment issues - and there are many - are taken off the table, and we can look a customer in the eye and say, 'Yes, we could put you in this size building, at this schedule and for this budget.'"

Yet, the inner-ring suburbs and city have the aging infrastructure, some of it of substantial size, that presents the opportunity for redevelopment, Maher said. The availability of tax increment financing and skilled labor also make these projects attractive to owners and developers alike.

A "little city of a building" in Northlake previously occupied by a joint-venture business between AT&T and GTE was acquired in 1996, partly demolished and rebuilt, he said. The site, along with other property attained nearby, now contains five buildings, one holding a Cadbury Schweppes PLC bottling operation.

"About four to five different companies came to make new business out of that old environment," Reynolds added. Similar CenterPoint projects have occurred in the city and close-by towns, such as Niles and McCook, as well as the O'Hare area.

The cleanup of environmental contamination is an issue on "virtually every" redevelopment, Mullen said. Old properties are frequently distressed because the adherence to good industrial practices was more lax in previous eras than in today's.

"We have never been averse to taking on environmental risk," he added.

CenterPoint's own headquarters, which once housed a Xerox machine-refurbishing center, was contaminated with trichloroethylene because equipment had been dipped in chemical baths.

Obtaining a No Further Remediation Letter from the Illinois Environmental Protection Agency was a key step in bringing back the building, as well as others with similar cleanup needs. Leaking underground storage tanks and contamination from creosote and asbestos were encountered on other sites.

Self-funding mechanisms, such as lines of credit with banks, back these projects because distressed properties typically carry a stigma among loan officers and other issuers of debt, Mullen said. At the same time, the self-funding strategy gives CenterPoint full discretion over how dollars are spent.

"We just have to do our homework and satisfy our board that we assessed all the risks," he added.

Maintaining close ties with government and obtaining viable partnerships with public entities open doors for urban projects, Mullen said. And Reynolds added, "We'll get in a car and do windshield tours with Chicago aldermen."

Giving back to the city serves constituencies in neighborhoods where developments occur, Reynolds said. The level of minority-business-enterprise and women-business-enterprise participation in the construction of the four O'Hare centers, for instance, peaked in the last of CenterPoint's four developments at 38 percent and 12 percent, respectively. (Chicago requires 25 percent MBE and 5 percent WBE participation.)

UBM Inc., which is reportedly the city's largest African-American contractor, was a joint-venture partner in the general-contracting team with Itasca, Ill.-based FCL Builders Inc. on two of the O'Hare facilities, as well as the California Avenue Business Center, King said. Similarly, the Hispanic American Construction Industry Association provided guidance in the heavily Latino Pilsen neighborhood where the Chicago International Produce Market is located, Mullen said.

CenterPoint has also teamed with Sphere Development, an African-American developer in Chicago, on the California Avenue Business Center, said King, who is a Sphere partner. Sphere identified the property and helped obtain support from the community for the project.

"In those cases where we teamed together, there has been learning taking place by both parties," he added.

Indeed, increasing knowledge has emerged as an advantage contractors involved with CenterPoint identify. The firm "made us a better contractor," said Martyn Guimon, vice president in the Railroad Projects division of Park Ridge, Ill.-based Ragnar Benson Inc., the design-build contractor on the intermodal project in Rochelle.

Mullen, 48, has a lot to impart. He has acquired, built or leased more than 400 industrial buildings valued at about $1.5 billion in the Chicago area in his 25-year career.

Mullen has received industry accolades, such as the 2000 National Association of Industrial and Office Parks' Award for Excellence. His educational background has helped prepare him for the demanding nature of industrial development. This includes a bachelor's degree in finance from Loyola University in Chicago and completion of the Advanced Executive Program at Northwestern University's J.L. Kellogg School of Management.

Looking at Wisconsin, Indiana

CenterPoint expects to continue growing in Indiana and Wisconsin, where it also has developments.

The firm's CenterPoint Venture LLC - itself a joint venture with CalEast Industrial Investors LLC, the investment vehicle of LaSalle Investment Management and the California Public Employees' Retirement System - formed an alliance with Wispark, the development arm of Milwaukee-based Wisconsin Power, and it has borne fruit. A building was constructed for Volkswagen of America Inc., and ground is about to be broken for a plastics concern.

"We think as Chicago continues to grow, the differences between Chicago and Milwaukee become hazier," Mullen said.

CenterPoint has the energy to bring them together.

The CenterPoint Five
Oak Brook, Ill.-based CenterPoint Properties Trust completed five projects in 2002.
BNSF Logistics Park-Chicago Elwood, Ill. Intermodal rail facility 621 acres General Contractor: Harbour Contractors, Plainfield, Ill. Cost: $243 million	Chicago International Produce Market Industrial condominiums 436,000 sq. ft. General Contractor: FCL Builders, Itasca, Ill. Architect: Cornerstone Architects Ltd., Itasca, Ill. Cost: $58.4 million
Union Pacific Rochelle Global III Intermodal Facility (phase one) Rochelle, Ill. Intermodal rail facility 125 acres Design-Build Contractor: Ragnar Benson Inc., Park Ridge, Ill. Phase One Cost: $28 million	Potlatch Corp. Elwood, Ill. Warehouse/Distribution center 408,000 sq. ft. General Contractor: Harbour Contractors, Plainfield, Ill. Architect: Cornerstone Architects Ltd., Itasca, Ill. Cost: $11.8 million
Partners Warehouse Elwood, Ill. Warehouse/Distribution center 600,000 sq. ft. General Contractor: FCL Builders Inc., Itasca, Ill. Architect: Cornerstone Architects Ltd., Itasca, Ill. Cost: $18 million