From his early years watching his father negotiate property deals, to his time at the helm of Maloof Commercial Real Estate—the company his dad founded in 1945—Dave Maloof has been at the forefront of Peoria’s commercial real estate sector. Maloof recently sat down with iBi to give his take on the current state of the industry, both locally and nationwide, as well as its future outlook.
Please provide some background on your career and experience in the field of commercial real estate.
As a lifelong Peorian, one of my memories was watching my dad, Mitchell J. Maloof, negotiate with Ray Kroc, the founder of McDonalds, for the purchase of property he owned near the corner of University Street and War Memorial Drive. It was one of the very first McDonalds ever built. I remember him saying after the sale, “This restaurant idea will never work.” I guess Dad had a keen eye for real estate—not so much for the fast food business.
After graduating from the Business School at Creighton University in 1972, I moved to Chicago for a year to get my feet wet in the real estate business, working for a local company making cold calls and going to night classes, taking some advanced real estate classes. I had some interest in attending law school, but decided I wanted to spend time with my father and learn the commercial brokerage and development business here in Peoria. Not only did I get my real estate start with my dad, so did my uncle, Jim Maloof, who later started his own successful residential brokerage company. Many people are not aware that the two companies are completely separate in function and ownership. We are only commercial, and they are residential, but the name Maloof has always been synonymous with real estate in Peoria.
My father was a great teacher, and he became one of the first “real estate developers” in the Peoria area. I was always fascinated, as I would watch him transform a tenant or client’s need into a new or remodeled property, at the same time growing the Peoria economy and employment base. He was responsible for brokering and developing hundreds of projects in the Peoria area.
After deciding this was the kind of career path I wanted to pursue, I obtained both my CCIM and SIOR commercial real estate designations. Both required extensive training, as well as a proven experience and transactions requirement.
After my father’s retirement due to the onset of Alzheimer’s, I took over the role of president of Maloof Commercial Real Estate. A little later, my brother Daniel Maloof joined the company as vice president. We are both principals of the company and share responsibilities with each other. A third generation of Maloofs entered the company about five years ago when my son Zachary joined us. We are fortunate to have a very dedicated and experienced staff that support us and have been with us for many years.
What services do you offer? What types of projects are you currently involved with?
Maloof Commercial Real Estate currently focuses on three major areas of our industry: commercial brokerage, development and property management. We maintain a prominent position in the commercial real estate brokerage market, with over 170 active listings of properties for sale or lease. The development arm of the company focuses on new construction and remodeling of existing properties. We continue to own and lease commercial locations to a variety of industrial, office and retail tenants.
The property management division has grown steadily over the years. We currently manage over one million square feet of commercial properties in downstate Illinois.
We currently are involved in the purchase or remodeling of properties for new and existing tenants. These projects provide more economical price points for tenants, as well as quicker occupancy turnarounds. We provide exclusive representation for many prominent national and tri-county companies for their ongoing corporate real estate needs, as well as consulting and valuation requirements.
What are some of the current trends impacting retail in Greater Peoria? What is the current vacancy rate?
Some current trends that continue to impact the retail sector of business include a broad shift in the use of technology for online shopping. Gone, for the most part, are video stores, consumer electronic stores and the like. Online access and sales have changed the landscape forever. In addition, the fight for dwindling consumer dollars has caused a consolidation of retailers. Several big-box retailers have closed, and only the largest and most innovative survived.
Green Street Advisors suggests that roughly 800 department stores, or about a fifth of all anchor space in U.S. malls, could close. For example, Sears and JCPenney would have to close over 600 stores (30-40%) to regain the sales per square foot they had in 2006. Department stores occupy two thirds of mall anchor space. Locally, we have seen Macy’s close at Northwoods Mall, as well as Kmarts in Peoria, Pekin, Washington and Galesburg. Vacancy rates for local retail average around 16 percent (11.4 percent nationally).
Retail centers with grocery anchors, restaurants and unique retailers will continue to expand in our marketplace, and the larger big boxes are being released or sold to discount retailers and other companies. One example of a good repurpose of retail space is the relocation of Methodist College to the former American TV Building that we brokered.
What about the office market and industrial properties?
The office market in Peoria is fairly soft right now. Caterpillar has pulled most of their leased space back into their corporate offices, which were made available through restructuring and early retirement. Financial institutions will also be subject to pressure to reduce their footprint due to technology and changes in the banking environment. Space requirements per employee have steadily declined over the years, and a consolidation of locations has also had a negative effect on space requirements.
The medical industry is the second-largest employer in our area, and it continues to grow and consolidate. Educational institutions and service providers are also stable influences in our market. Vacancy rates for office vary by location, but probably average 18 percent (13.5 percent nationally).
Industrial properties remain a strong underappreciated submarket for the Peoria area. Caterpillar service providers, manufacturing, warehouse and wholesale distributors are a bright spot in our local economy. They provide steady, high employment and continue to expand. Small flex space attracts many users to our area as well, and we estimate the industrial vacancy rate to be around 13 percent (9.6 percent nationally).
What is unique about the Peoria market, and how has it changed over time?
The national commercial real estate market has certainly changed over the past three decades. Obviously, we have moved away from a manufacturing-based economy to more of a service- and supply-based market. Nationwide, manufacturing industries only constitute around 10 percent of the GNP. These high-paying, once-stable jobs have migrated to cheaper-labor countries in an effort for U.S. based companies to compete with foreign industries. In contrast, 70 percent of the U.S. GNP is now service-driven, with the government component growing every year. Of the service sector, real estate, finance and insurance make up the largest percentage of that component.
Our Peoria economy has mirrored these national trends. The commercial real estate business has become very creative in its adaptive reuse of existing buildings, as well as adding new facilities for the growing service-industry providers.
How does commercial real estate differ from residential? Is there a correlation between the two in terms of overall health?
Commercial real estate development has some similarities and many differences to residential development. Both segments require demand for growth, and they are linked in unique ways. Retail requires population for success in sales, but the population (housetops) requires jobs for its growth. Most of these jobs come in the form of service-sector employment, which drives the office construction market. A strong employment base attracts industry, which allows for a healthy local economy. Caterpillar has played a key role in the stability of our local economy, and that healthy wage base attracts other supporting retail, office and industrial users in our area. We are fortunate to have the global strength of Caterpillar contributing to our economy, but Peoria is therefore not immune to the global slowdown in foreign markets. As demand for space goes down, so do sale and lease rates. Peoria is a conservative community and has not had much in the way of speculative construction, either residentially or commercially. This has contributed to more stability in occupancy rates and prices during economic downturns.
What are some of the challenges you are experiencing in the current marketplace?
Commercial real estate in the Tri-County Area has its challenges and risks. Demand for retail and office space is down, which lowers asking prices and restricts new developments. We have seen new retail construction in East Peoria due to the availability of land, access and infrastructure. To be sure, most are secondary locations for the retailers, but still a step forward for our economy. The greatest challenge we face as an economy is good-paying, stable jobs. We must do better at attracting service and industry jobs to our area, which will raise the standard of living and create demand for goods and services, which in turn causes new commercial and residential construction. We cannot afford to wait for these jobs to come to us—we must double our efforts to attract new employment and become more pro-business in our delivery if we want our community to grow.
Describe the lending market in 2016. How has it evolved since the 2008 recession?
Several years of low interest rates have helped the real estate market recover from the “Great Recession” with less pain than imagined in the wake of the 2008 credit crisis. The stresses of the world still exist, and we cannot escape the global economic slowdown. Despite these concerns, commercial real estate lending is available and competitive as lenders are more careful in their credit analysis, but at the same time, their capital is abundant and looking for lower-risk investments. The Federal Reserve is being very cautious in raising the federal funds rate too quickly due to a lack of economic growth and low inflation. This moderate growth rate is generally healthy for the economy and should make credit available and at a lower premium for some time to come. These lower interest rates help both the commercial and residential development business grow.
What is your view on current downtown development efforts?
The Central Business District in Peoria is still the strongest of any downstate city. Caterpillar’s continuing investment, as well as a strong medical and financial community, provides the most concentrated area of employment in the Tri-County Area. Even with the pause in Caterpillar’s world headquarters development, there has been new investment in this area of Peoria, including new offices, museums, hotels, residential condos and the Warehouse District. We foresee a slow but steady interest and growth continue in this part of Peoria.
What is your outlook for the Peoria market, both in the near term and the long term?
Peoria’s growth, like many other secondary markets, depends on the national economy for its expansion. Economic uncertainty has kept companies from expanding facilities and hiring new workers. As a result, we have seen many companies contract in terms of space requirements, as well as employment, due to cost-saving measures. The consolidation of office and warehouse space into more central locations has reduced demand for these spaces in smaller markets. Technology continues to play a very large role in providing goods and services without a physical location. These changes put stress on the Peoria market as we move forward, but we believe Peoria will fare much better than other similar communities. Certainly, we have challenges with a city our size, but the Peoria area is a great community with people who have a strong work ethic and the ability to cause our economy to grow. Long-term, we expect the recovery to continue with only constrained growth.
What is the biggest misconception about your industry?
Like anything in life, some people can make anything look easy. The commercial real estate development business presents some of the greatest risks, as well as highest rewards. It is a complex business comprising the economic and functional needs of tenants and owners along with the many complex parts to bringing a project to completion. Contract or lease negotiations, site acquisition, zoning, legal issues, architectural design, engineering, environmental concerns, title issues, plat approvals, financing issues, up-front capital requirements, credit risks, competition, long lead times, shortened lease terms and increasing construction costs all contribute to the complexity and risk for developers. Any one of these issues can forestall a development. This is a long-term business to be sure, and one that requires experience, capital staying power and patience to be successful. iBi