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JACKSON, MS-EastGroup Properties’ Q3 funds from operations of $19.7 million represented a decrease of 7.3% compared to the same time last year. Executives, however, focused on another facet they believed was of interest.

“I do believe the markets are at the bottom now,” said David H. Hoster II, the company’s president and CEO. He explained that the evidence for this can be seen in bump-up of activity and the relative flatness of occupancy. “Fewer of our customers are going dark, more potential customers out there are signing leases,” he added. “Some of the panic that companies started to experience a year ago hasn’t gone away totally, but has slacked off. A number of companies have decided they’ll be survivors.”

Some more glimmers of light: More activity among smaller users. “It’s why we’ll spend extra TIs to split up our larger spaces; we’re about to do that in a couple of markets,” Hoster said. It doesn’t mean, however, that potential tenants will suddenly hunger for space. “More downsizing than upsizing will continue until the recovery is really moving along,” Hoster predicted.

In the meantime, he continued, the types of tenants who are looking for space are the third-party logistics businesses, many of which are smaller freight forwarders and warehouse providers. Not only do these tenants want smaller space, they want smaller leases.

“They’ll only sign a lease as long as a contract,” Hoster remarked. “If they have a two-year contract with a firm, they don’t want to go beyond that.” In the meantime, with a liquid balance sheet, EastGroup is ready to go out and buy. The company has a bank line capacity of $125 million, no debt maturities requiring balloon payments through 2010 and net proceeds of $30 million with help from 883,000 shares issued of common stock from the beginning of the year.

But Hoster acknowledged he’s not one to jump on the distressed bandwagon. “Industrial isn’t an area where people speculated or financed with a lot of mezzanine debt or gimmicks,” he observed. “I’d like to think what’s going to happen is a lot of sellers will see that prices are fairly stable, the market won’t have some great compression in cap rates, and they’ll think it’s time to sell and move on.”

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