WASHINGTON, DC—As CEO of the Americas for San Francisco-based Prologis, Eugene Reilly is a very busy man. As the 2013 chairman of NAIOP, a role he took on during the locally based association’s Development ’12: Annual Meeting for Commercial Real Estate here late last year, his days are busier than ever.
Yet he recently took time out of his schedule to chat with GlobeSt about his new role and the association overall. The first part of that interview appeared on this morning. In Part Two of the frank discussion, Reilly speaks about the biggest legislative and regulatory issues impacting the CRE industry, NAIOP’s efforts help guide its members through the downturn and what it’s doing to support young professionals in this business.
Sule Aygoren: What are some of the major issues being debated on Capitol Hill that have the most impact on your members?
Eugene Reilly: This may sound a little granular, but it ends up being very important for our members—leasehold improvements. Over time as tenants lease space and roll out, you need to fix up the office space, even tear it down and rebuild it. But you have to depreciate those improvements over 39 years and their useful life, realistically, is probably an average of five years. There’s been a 15-year leasehold improvement qualification that was pushed through a couple of years ago. It isn’t five, but at least it’s more reflective of reality. That has to get extended every year.
There’s also bonus depreciation provisions for brownfields, for example, to encourage the redevelopment of brownfields. Capital gains treatment is an issue that certainly affects our members, though I’d say it’s been pushed down the road.
There are also issues that are always on the horizon that are more regulatory in nature. For example, the Army Corps of Engineers is responsible for the approvals related to certain wetlands development. There’s been legislation put forth to broadly expand the Army Corps’ jurisdiction, which in one case would basically cover all the wetlands in the US. A proponent of such legislation might believe this might do more in protecting wetlands. But protecting wetlands has to be done on a local level, and the Army Corps of Engineers doesn’t have anywhere near the staff to take something like that on. This legislation didn’t get anywhere, but if had ever been adopted, development would almost grind to a halt in the US.
Not every piece of regulatory legislation is that draconian, but we need to have the real estate industry discussing its objectives. You’ll see the carried interest stuff in the papers all the time, but the more mundane, regulatory stuff, not so much. There are other things like energy usage—how much of that are we mandating and how much are we incentivizing, and where is that balance? It’s ongoing. It takes a lot of work to get access to the right people and politicians to make a difference. I wish the system in Washington was different, but it is what it is. And for CRE, you basically have the Real Estate Roundtable and NAIOP, and that’s it.
Aygoren: So you literally are the voice of your industry. Going broader, the general economy has been lackluster and, in turn, so has CRE. Industrial’s seen a comeback, but office is still doing poorly in a lot of areas. What sort of things is NAIOP doing to help its members get through these difficult times?
Reilly: When the market turned, one of the most important initiatives NAIOP had at that time was to launch online courses to deliver education to members without travel requirements. That lowered the bar in terms of the cost to get access to these things. These offerings have been getting better and broader. As an organization, NAIOP acted quickly in terms of cutting costs and staying ahead of the curve. Some trade organizations were really damaged or even eliminated through the downturn.
We have a National Forum program, which are separate groups of roughly 15 members in a discussion group that’ll get together for basically a day of meetings and events. The focus could be on office development, investment management, architectural design, etc. The members stay involved, they get to know each other personally, they share information. Everything that’s said in the group is subject to strict confidentiality, so it encourages candor and the sharing of sensitive information internally. It’s become a very powerful aspect of the NAIOP experience. As we went into the downturn, the most important thing for CRE practitioners was to get as much perspective as they could. So you show up at your forum and you’ve got 14 other people and they’re from six different geographic regions and in different lines of businesses, it really helps you try to make decisions on how you go forward.
Aygoren: How about initiatives for younger NAIOP members? Many organizations are taking steps to grow and cultivate their “next generation.”
Reilly: We do have a very successful Developing Leader program where professionals under the age of 35 have discounted dues and have, within their own chapters, their own subgroup of Developing Leaders, so they can interact with people their own age in addition to the rest of the membership. It’s been very successful; about a third of our new members are Developing Leaders. We have a variety of programs for the “DLs” to get them in front of that slice of our membership who’ve been in this business a while to engage them and learn from them. We aren’t trying to create a subgroup of isolated younger members, though we do want that group to feel like it’s ok to have a Developing Leader event. It’s critical because it’s the future of our organization, but it’s also very helpful because it’s also our next group of leaders—the future leaders of our companies and the industry overall.