Henry D. "Greg" Gregory Jr. does not give himself enough credit. Now president and CEO of Atlanta-based Industrial Developments International (IDI), Gregory founded the company at his kitchen table with a group of his former L.J. Hooker Corp. associates in 1989.
In the past 11 years, IDI's assets have grown from $89 million to $880 million, as revenues have grown from $3.2 million in that first year to $285 million. In 1999, IDI developed 15.5 million sq. ft., placing it among the top developers on NREI's Top Industrial Developers survey (see page 148).
Timing is everything Gregory served as executive vice president of Australia-based Hooker's U.S. industrial development division. As industrial opportunities kept popping up and a sagging Hooker could not - or would not - put forth the capital for them, Gregory considered other options. He persuaded six of his cohorts - Tim Gunter, Mike Schwarz, David Hardie, Mike Cushing, Mike McLoad and Steve Nelson - to join him in forming IDI. Gregory and company never looked back.
"We were absolutely blind lucky," Gregory recalls. "We ended up with money at the right time. The real estate market was going into the toilet. We had a lot of money, and we spent it.
"In those early years, when a lot of other developers were retracting, we were expanding," Gregory continues. "In hindsight, the recession actually helped us. We were able to get market share that probably would have been more difficult for us to obtain in a robust market."
IDI started out with friends in high places. Gregory had an established relationship with the Atlanta office of Charlotte, N.C.-based First Union, so, at the very least, he had a lender's ear. At Hooker, Gregory's industrial division had worked on joint ventures with Japanese development and construction giant Kajima International Inc. Kajima had expressed concern about doing any more deals with a floundering Hooker, but indicated to Gregory and his colleagues that a subsidiary might be an option, especially with the synergies between industrial development and Kajima's Construction Services Group.
Again proving that sometimes who you know is just as - if not more - important than what you know, Gregory discussed his business plan with a neighbor, Chris Sawyer, who was an attorney at Atlanta-based Alston & Bird, one of the South's most formidable law firms. Alston & Bird agreed to represent IDI on a speculative basis, and the firm continues to counsel IDI to this day.
IDI began with a $35 million commitment from Kajima and a bridge loan from First Union for the $60 million acquisition of Hooker's industrial holdings. In 1989, the U.S. real estate market was starting to head south, so IDI was definitely in the right place at the right time.
A three-part plan IDI started off with a three-pronged plan - industrial development, of course; primarily merchant-builder development; and national scope. At the outset, IDI was one of few companies looking at industrial development from a national vs. a city or regional point of view.
"Those three things were unique when we put this together," says Gregory. "The realization in the early and mid-1980s that there was a revolution in distribution going on was behind that. Consequently, the requirements for providing shelter as a developer were changing, which meant that there were going to be opportunities if one understood those users' needs."
IDI initiated that three-part plan with its first offices in Atlanta; Chicago; Memphis, Tenn.; and Cincinnati, later opening regional offices in Southern California, Dallas and south Florida. To maintain a strong presence, IDI holds approximately 1,600 acres of developable land across the United States. In each market, the company also tries to have one or two speculative buildings available in each product type so as to meet immediate demand but not have too much space sitting vacant, says Tim Gunter, COO of IDI.
"We try to make sure that when the brokers come to us with a tenant, we've got space to put those tenants in, and we can maximize those opportunities," says Gunter. "We've also tried to focus on the quality of construction and development. We may not be the least expensive alternative in the industrial market - and many times we're not - but we try to be on the upper end of the quality side.
"That's served us well," Gunter concludes.
With its national scope, teams in IDI's regional offices focus on local development, while the corporate office in Atlanta handles accounting, financing and investment sales and the typical centralized corporate functions. This structure allows the regional offices to focus on entrepreneurial development and not have to worry about financing, etc.
At the corporate office, though, each project must pass muster with IDI's asset allocation committee, which consists of the company's executives and regional heads.
The asset allocation committee provides a challenging environment where every facet of a new development is reviewed, and the project either proceeds or is nixed. Once approved, if a project falters, first it goes on a "warning" list and then may be placed on a "watch" list if it does not rebound and perform to expectations. Before even proceeding with new development, IDI attempts to rectify problems with properties on the watch and warning list, Gregory says.
"We want to be loose enough to instill teamwork, entrepreneurial spirit and to think outside the box, but we undergird that with some pretty tough disciplines, especially on the financial side," says Gregory. "While we nurture the entrepreneurial spirit, we underpin it with strong financial knowledge and discipline and caress that entrepreneurship in a not-too-strenuous cocoon."
Even though IDI has remained true to its original operating strategy and procedures, the company has deviated slightly from the original plan. As a subsidiary of Kajima, a publicly traded company on Japan's Nikkei index, IDI was - and still is - faced with certain earnings goals. Profits from IDI's role as a merchant developer met those earnings goals, but once the company had sufficient mass, it was prepared for a new role as owner or partial owner in its developments.
A prime example of IDI's expanded role is Industrial Properties America (IPA), the company's partnership with New York-based J.P. Morgan. Formed last year, IPA is a 50-50 partnership that manages and leases 6 million sq. ft. of industrial space in a 26-building, $260 million portfolio. During the next two to three years IDI will develop, on a fee basis, 2 million sq. ft. of industrial space for IPA valued at $100 million.
"What the J.P. Morgan relationship does is really allow us a close relationship with one of the top investment companies, and, on a portfolio basis, we really tap into its management capabilities," says Gunter. "We built the portfolio, and that's really our expertise - development and building these portfolios. Their expertise is managing long-term assets, so it's a nice marriage.
"We've got a long-term asset, and we've got one of the best in the business to help us manage that long-term portfolio to maximize returns," Gunter adds.
Facing down the gorilla Gregory often refers to e-commerce, industrial development's latest challenge - and darling - as a gorilla coming down the tracks. Whether it is the 800-pound gorilla, no one's really sure, he says.
Already, IDI has jumped on the gorilla's back to begin taking advantage of the opportunities e-commerce and the Internet provide. The simpler way: signing stable, third-party logistics providers as tenants. The tricky part: signing the actual dot.coms as tenants. With the dot.coms, IDI frequently asks for enough of a credit enhancement to reduce risk to a comfortable level. As another option, the company also asks potential start-up tenants to pay for most of or all tenant improvements, or pay above-standard TI.
"We've been fortunate in that, when we do that underwriting, the deal makes sense because we end up witha building that may be below market in total cost, so the institutional investor is interested in buying it from that standpoint," says Gunter. "Or, where there's a really tight real estate market, the deal can stand on its own based on the fact that the investor wants to buy or finance that real estate because it's in a great location."
Despite an increasingly efficient supply chain, IDI expects e-commerce and the growth in third-party logistics providers to continue to push demand for industrial space. IDI fully expects to meet the heightened demand and maintain its customer focus, whether that customer is a traditional industrial tenant, a dot.com or an institutional investor.
"If we are to understand our user, if we make sure the facilities we build are helping our user to be more efficient, then we are going to succeed because we are customer-driven," says Gregory.
1999 Revenues: $285 million
Sq. Ft. Developed 1989-'99: 60M Sq. Ft.
Sq. Ft. Owned: 12.4 Million Sq. Ft.
As Of End 1999