The new paradigm for risk management.

The real estate industry has changed significantly over the past several years. As an industry once driven primarily by private investors, the presence of securitized real estate has increased considerably. For example, total real estate values in the U.S. are currently $3.5 trillion, $1.45 trillion of which represents investments by institutions. Looking at REITs alone, market capitalization has increased from roughly $30 billion five years ago to $140 billion at year end 1997. The increased participation of this investor class has already caused - and will continue to cause - a more complex real estate industry to emerge.

Not unexpectedly, the influence of institutional investors on the real estate industry is formidable. For example, real estate operating companies are increasingly becoming fiduciaries, just like the more traditional asset management firms. They are beginning to experience a higher degree of scrutiny by investors, consultants and analysts, and are expected to deliver "best in class" service in all areas - from property management to risk management. To be successful in this environment, where our collective "performance bar" is being raised significantly, the real estate industry will have to dedicate more resources and develop a higher degree of operational sophistication. Out of necessity, we will have to adjust to a much more complicated industry.

Consolidation is another sign that the real estate industry is maturing. Like every other industry before it, the real estate industry is securitizing at a rapid rate. An industry that was once a multitude of small, entrepreneurial firms is now becoming characterized by large, well-capitalized public companies.

Private companies are also consolidating at a rapid rate. As these companies continue to grow through acquisition and merger, the ability to minimize their operating costs without sacrificing the level or quality of service they offer will be essential to maintaining a competitive advantage and justify their continued growth.

Crucial to the real estate industry's success will be our ability to change the way we do business. One example is the way in which we manage risk. While risk management is necessary in every business, over the past 20 years our industry has taken too narrow a view when it comes to assessing risk. We have done too little to upgrade the way in which we insure.

Most real estate companies focus only on the traditional property, casualty and other insurable exposures. As a result, insurance companies have had little incentive to make creative improvements in the products they often The problem is further compounded by a lack of understanding and an underlying suspicion of real estate in general by the insurance industry.

The result is that the real estate companies unnecessarily pay more in property and liability premiums as a percentage of revenue than any other major industry group - even the more catastrophe-prone health care industry.

Real estate is painfully vulnerable to the myriad other business risks that often represent greater exposures than those that are traditionally insurable. For example, there are regulatory and legislative risks, professional, contractual, competitive and human resource/cultural risks, reputational, strategic, customer, operational, political, legal, financial, and technological risks.

As real estate ownership becomes more complicated, investment structures shift, equity patterns change, and technology improves, the insurance industry will be even less able to effectively meet our needs. Real estate owners, managers, fiduciaries and REITs will need comprehensive risk management programs that can adapt to the rapidly changing business environment and ensure profitability, reduced costs, and increased efficiencies.

In order to meet these challenges, Boston Financial has introduced Strategic Risk, the first full-service risk management and insurance brokerage firm which focuses exclusively on real estate. Strategic Risk is unique in its ability to leverage the expertise of non-insurance professionals to best meet clients' needs. By expanding risk management services beyond the industry standard, Strategic Risk draws on an array of expert resources, including legal, engineering, environmental, and actuarial. Strategic Risk is already putting its expertise to work with a number of the country's most prominent firms.

Spaulding & Slye Services LP, a large regional owner, developer and manager, recently chose to outsource its once internal risk management operation to Strategic Risk. Besides reducing their real estate risk and its cost, Strategic Risk has enhanced and expanded insurance coverage; created operating efficiencies through the use of its proprietary technology; initiated internal loss control training across the company; and leveraged its real estate experience to enable Spaulding & Slye to expand it's development and rehab construction businesses. These are initial steps in a partnership with Spaulding & Slye focused on managing the firm's operational exposure, reducing related costs and creating opportunities in a changing and complex environment.

Historically, the ability of real estate firms to secure sound risk management advice has been difficult due to a variety of factors. But the industry is on the cusp of change. Over the next two to three years, outsourced professional risk management that is focused on the real estate industry will, out of necessity, become a common practice. Strategic Risk has positioned itself to help an industry, once considered "behind the times," become a front-runner in innovation and operational efficiency.

The structural change the real estate industry is experiencing requires lower costs, higher quality and greater service for all aspects of its business. Investors will demand it and those who do not heed the call will pay the price in the form of lower share value or fewer assets under management.