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Property management 2000.

Property Management 2000 The 1980s proved a turbulent decade for property managers, as the real estate industry was thrust into the national spotlight and came under much closer scrutiny by legislators, lenders, and the general public. The litany of problems is familiar: savings and loans in crisis, near depression in the Oil Patch, extreme overbuilding in numerous markets, and keen competition for prime properties by aggressive--and often savvy--foreign investors.

Will the 1990s bring more of the same? According to leading experts we interviewed, the answer is a resounding "yes and no."

To be sure, the next 10 years will present continuing challenges. The S&L fiasco will continue to play itself out under the direction of the newly formed Resolution Trust Corporation (RTC). Slow economic growth may lead to a lower rate of industrial expansion, fewer new business tenants, and tough competition for the best ones that remain. Slow demographic growth means trouble locating and hiring enough competent new employees, a further brake to your industrial clients' progress, as well as a hindrance to your own company's expansion.

But there are bright spots on the horizon, too. As foreign investment wanes, U.S. institutions, particularly pension funds and big insurers, are expected to more than compensate, backing well-planned projects with patient, long-term money. The Big Boys will demand and appreciate professional management and offer handsome compensation to those who can provide it.

Indeed many experts believe that the 1990s will be the decade when the property manager becomes the "king." He or she will be asked to manage new--and often complex--types of properties, from warehouse space to small-business "incubators" to groups of single-family homes for rental.

Some experts predict a big jump in on-site provisions of day care, medical, and recreation centers within both office buildings and industrial compounds. And the futuristic "multiuse complex," in which families live, work, shop, worship, go to school, and are entertained within the same high-density building or group of buildings, may finally become a reality by the year 2000.

Who will supervise these exotic hybrid structures? Who will have to deal with tenants, subcontractors, government officials, and various other, still undefined constituencies. Why, the property manager, of course!

Below, we highlight trends that a national sampling of futurists and other experts believe will have a major impact on property management in the 1990-2000 decade.

The big picture

Institutions will

become major players

At present, U.S. institutional investors allocate on average less than 5 percent of their total assets to real estate holdings. "That is greatly out of sync with the rest of the industrialized world," comments Ivan Faggen, worldwide director of the real estate services group of Arthur Andersen & Company in Los Angeles.

Far Eastern and European institutions now keep 20 percent of their assets, on average, in real property. And Faggen is one of several experts who think U.S. institutions will attempt to do some catching up. "Many pension fund administrators have announced their intentions to raise their real estate portfolios to 10 percent or even 15 percent of assets within the decade," he says. "Projecting that out, using the conservative 10-percent figure, it could mean an extra $300 billion in domestic institutional money chasing real property by the year 2000."

What this means for property managers: While few institutions will choose to be more than passive investors in the projects they back, they will expect careful documentation of progress, costs, occupancy rates, and the like.

On the up side, there may be job opportunities. "Pension funds and other institutions may bring experienced property managers on staff as asset managers," says Faggen.

"Entity financing"

will come to the fore

Institutions hold a vast amount of prime raw land, as do some of the big national property companies. "But often, they are averse to developing that land and subsequent projects on their own," comments Stan Ross, co-managing partner of Kenneth Leventhal & Company in Los Angeles.

"In the next decade, leading syndicators, insurers, and pension funds will become major sources of continually scarcer and more expensive land for local and regional developers. Together, institutions and developers will control land in joint ventures and develop it through 'entity financing' techniques."

"Entity financing" may be a term with which the majority of property managers are unfamiliar today. "It is similar to relationship financing," says Ross. "Instead of backing developers on a project-by-project basis, institutions will increasingly provide developers with a pool of both money and land to fund an entire portfolio of development projects over a number of years. Sometimes, the local developer will contribute the land, while the institution or syndicator provides the capital. In either case, you will generally see a new joint venture 'entity' formed for the stated purpose of completing certain projects."

What this means for property managers: Some property managers will be hired directly by joint ventures, rather than by developers or institutions alone. This means they will be, in effect, "reporting to two or more masters," sometimes playing the role of mediator in disputes between joint venture partners.

Infrastructure may become part

of the development package

The buzzword among Florida developers lately is something called "concurrency." And while it is not yet part of the national vocabulary, it may well be by the year 2000.

Concurrency refers to state or local government requirements that builders provide the most basic forms of infrastructure--roads, sewers, water, electric lines--as a quid pro quo for development permits. Some local governments have gone further, asking that developers provide such exotic "infrastructure" as playgrounds, school buildings, recreation centers, and cable TV.

What this means for property managers: If concurrent infrastructure is required, on-site property managers will surely be involved, perhaps during the development and construction stages and certainly after the project is in place. Managers may well become the "point" men or women in dealings with municipal authorities, subcontractors, and inspectors. If your undergraduate degree is in civil engineering, with a minor in political science, consider yourself lucky.


The end of location?

Economist David Shulman, director of real estate research at Salomon Brothers, New York City, makes perhaps the most startling prediction about the coming decade. "Location will cease to be the relevant factor in a building's success," he says.

To real estate pros steeped nearly from the cradle in the "location, location, location" ethic, this is tantamount to heresy. But actually, asserts Shulman, "location has been diminishing as an important factor for quite some time, especially in large metropolitan areas. Urban markets are becoming more and more diverse. At the same time, even prosperous companies and individuals are becoming more cost-conscious."

In other words, once "prestigious" central city addresses are no longer perceived by many tenants as worth the higher rents they ask. The metropolitan model of the near future may be a city like Los Angeles, with its 10 or 15 "downtowns." "Suburban edge" areas, such as the northern New Jersey waterfront, where many Manhattan financial services companies have flocked in recent years, are now perceived to have many advantages of their own, from easier commutes and parking to lower crime rates and better infrastructure.

What this means for property managers: Shulman thinks the primary effects of decentralization will be "downward pressure on rents and an emphasis on value." Pickier tenants, no longer tied to particular neighborhoods, will clamor to receive a fair share of amenities for their dollars. Repairs left undone or poorly functioning services like elevators or air-conditioning will no longer be tolerated. Even very popular buildings may now have to be marketed more aggressively.

The "micromarket" will become

the new field of operations

With the uniform, homogeneous metropolitan marketplace a thing of the past, the emphasis will shift to subsectors or "micromarkets," even within the biggest cities.

"We have already seen this happening in Texas," says Dr. Ted C. Jones, senior research economist at the Rizal Estate Center, Texas A&M University in College Station. "For example, the overall picture for industrial, retail, and office space in Houston has been dismal the past several years. But several micromarkets in Houston and its suburbs have not only weathered the storm, they have been booming."

What this means for property managers: If your previous image has been "big-city sophisticate," it is a good idea to change it to "gregarious, local businessperson." In order to succeed in a micromarket environment, property, managers will have to act more like savvy small-town businesspeople, participating more in local civic associations and Chambers of Commerce, joining lodges and Rotaries, and seeking a higher local profile in general.

Minority markets will soar

Like geographic micromarkets, ethnic submarkets will also zoom in importance by the year 2000. Dr. Jones predicts that up to 40 percent of the growth in Texas over the next decade will occur in the Hispanic marketplace. Nationwide, Salomon Brothers maintains that close to 30 percent of the growth in the U.S. labor force from 1990 to 2000 will come from Hispanic workers, many of them new immigrants.

Black Americans are expected to account for 17 percent of the labor force growth, meaning that the combined share of black and Hispanic workers will equal nearly half of labor force expansion in the 1990s. More minority workers, in turn, will likely mean more minority managers, more minority-owned businesses, and more minority tenants.

Note, too, the federal support of enterprise zones, most of which will be located in heavily minority-populated, inner-city areas, is expected to explode in the next decade. President Bush recently stated that he wants "at least 50 new enterprise zones" formed by 1993. Developers may be especially interested in building, buying, and managing properties in these zones because of the various economic "goodies" they have been promised. The president has proposed that:

* All federal agencies will be required to provide special assistance to businesses located in the zones.

* Employers will receive up to 10 percent in tax credits for wages paid out.

* Property owners will garner a 10-percent investment tax credit, plus special exemptions on capital gains.

* Investors will be granted an annual deduction of up to $100,000 on stock newly issued in the zones.

Stan Ross is telling his developer clients to keep a sharp eye on enterprise zone legislation. "It represents a great opportunity for investors," he asserts.

What this means for property managers: Not only will a greater proportion of your employees be members of minority groups, so will your tenants. You might consider joining or supporting local, minority-oriented civic groups. And a night school brush-up course in Spanish would not hurt either. Property managers who are themselves Hispanic, black, or members of other minorities should be in great demand.

Rustbelt vs. Sunbelt will no

longer be the primary match-up

In the 1970s, the big story was the ascendancy of the so-called Sunbelt states of the South and West. In the 1980s, the Rustbelt states of the North and East made their comeback, as woes in the Oil Patch and periodic slowdowns in the computer and semiconductor industries made the more economically diverse and stable. Atlantic and Great Lakes regions seem more attractive.

But many pundits believe the Rustbelt versus Sunbelt dichotomy will become almost irrelevant as the coming decade proceeds. With a tighter labor market nationwide, businesses will want to be where the best educated and best qualified workers are. And increasingly, those workers are undergoing a change in their basic value system, away from the "yuppie greed" mentality of the 1980s towards an emphasis on the "balanced life."

This means workers will be seeking out the towns and cities--in whatever region--with amenities such as good schools and nearby universities, affordable and attractive housing, diverse recreational opportunities, and accessible transportation. Salomon Brothers futurists are high on heretofore sleepy Columbus, Ohio, which Newsweek also recently featured on its cover as a "desirable" city for the 1990s. Writing in a recent issue of his newsletter, Real Estate Newsline, Stan Ross made his pick for some 1990s boom towns: Macon, Georgia; Wilkes-Barre, Pennsylvania; Charlotte, North Carolina; Albany, New York; and Sacramento, California.

What this means for property managers: Managers who gravitated to former celebrity cities because of better job opportunities may now have the chance to return to their home towns. In fact, those with local expertise or local ties to 1990s boom towns should be great demand.

If you work for a national developer or property management company, your skills in spotting future areas of growth should come in handy, too. Subscribing to demographic publications and scanning statistics on out-and and in-migration, new company formations, and the like may be worthwhile.

Advances in technology make

even remote areas attractive

Timothy Willard, director of communications for the World Future Society in Bethesda, Maryland, foresees that many businesses will move beyond the small-city boom towns and choose to relocate in rural areas, where the living is easy and land costs are low. "As long as you are within the United States, it almost does not matter where you are located anymore," says Willard.

Advanced telecommunications systems like video conferencing link even remote businesses with colleagues and clients all over the country. Computer data can now be quickly transmitted from one part of the country to another. And the ever more ubiquitous fax machine makes sending pictures, charts, and blueprints easy.

What this means for property managers: Being reassigned to Columbus, Charlotte, or Sacramento is one thing. But do you really want to be posted to International Falls, Minnesota? Willard cautions that rural locations, with all their lifestyle and cost advantages, could present some challenges to even the most high-powered property manager.

"Hiring specialized employees could be difficult," he says. "So could transportation. The nearest commercial airport may be one hundred miles or more away. And forget about some of those services city people take for granted, such as daily Federal Express pickup."


No-frills, "disposable" buildings

will become more popular

Futurists expect a phenomenon known as "bimodal distribution" to affect a wide range of industries in the 1990s. Simply put, this term means that various business sectors will experience significant growth on both the high-end and the low-End of their service and product spectrums. In terms of the real estate industry, some consumers are expected to demand highly sophisticated, luxurious space. On the low end, demand for bare bones, no-frills space should also accelerate.

Tim Willard thinks low-end, prefabricated, nearly "disposable" buildings will be used frequently by the year 2000. "Recent strides in technology have greatly improved buildings of this sort," he says. "They are far more attractive and sophisticated than the Quonset, hut-type buildings of 30 years ago. But they are still remarkably practical structures that can be put up, taken down, altered, and recycled quickly."

Willard expects such buildings to soar in popularity among companies whose own internal technologies are shifting rapidly, with consequent changing demands for manufacturing, shipping, storage, and office space.

Other good candidates are businesses which are growing or shrinking or those involved in short-term projects. "As an example, there are whole new cities of contractors now setting up shop at both ends of the English-French Channel project," relates Willard. "When the project is completed, most of those buildings will be taken down and recycled."

What this means for property managers: Competent managers will play a big role at "disposable" building complexes. They may supervise the assembly, disassembly, or conversion of prefab buildings. In the case of project sites, they may also help set up and manage any necessary infrastructure for workers and their families. Property managers with engineering or architecture degrees will be especially valuable in these positions. Those who choose to specialize in managing structures of this type may build glamourous, globe-trotting careers for themselves.

Demand for limousine-class

buildings will grow

At the upper end of the distribution curve, futurists think all-frills, high-luxury buildings will also find an increasing market. All-suite and deluxe hotels have already become popular in the 1980s. The coming decade should see more demand for luxury apartments and condominiums, many catering to the increasingly affluent aged 50-plus set.

Some office buildings will also cater to the upper crust. "These buildings are likely to have a heightened sense of design," believes Tim Willard, "employing high-grade building materials such as imported marble, and perhaps borrowing features such as concierges, outdoor elevators, and doormen from luxury hotels."

What this means for property managers: If bare-bones complexes favor managers with engineering and construction skills, labor-intensive, service-oriented buildings favor those with urbane personalities and superb people skills. Those now involved in hotel management may find new opportunities managing luxury housing or office space.

Smart buildings will

become the norm

In the business sector, tenants will come to expect advanced telecommunications capability by the end of the century. "The 'guts' of older buildings may have to be completely ripped out to keep pace with continuing advances in technology," comments Tom Mandel, senior management consultant at SRI International in Menlo Park, California.

Already, says Mandel, we are beginning to see an internal shift in buildings from old-style telephone wiring to complex wide-band communications systems incorporating fiber optics. Within the decade, multimedia systems should become more the norm, as voice, video, and computer technologies merge. Eventually, there will be "universal telecommunications outlets" in every office.

All buildings--office, industrial, retail, and multifamily housing--are likely to become smarter in terms of environmental controls before 2000. "The growing concerns about the indoorr environment will be reflected in even more sophisticated, computer-based systems that monitor and control air and water quality and other elements of the internal climate," says Mandel.

What this means for property managers: Older buildings--and even some fairly modern ones--may have to undergo extensive renovations to make them "smarter." If this is done on a section-by-section basis, managers will have to find ways to accommodate and appease temporarily dislocated tenants. Managers may also be forced to hire better educated, computer-literate maintenance personnel.

More buildings will be

geared towards entrepreneurs

The slower growth expected in the 1990s will not affect all kinds of firms equally. Large and medium-sized firms will bear much of the burdne, while the small business sector will continue to look fairly healthy. "There might not be quite so many new business formations as in the 1980s," says M.I.T. professor David L. Birch, who is also president of the consulting firm Cogentics, Inc., in Cambridge, Massachusetts. "But relative to larger firms, small business will continue to gain."

This trend was already strong in the 1980s, when over 3.5 million workers were looped from the payrolls of Fortune 500 companies. In the same period, a whopping 700,000 American firms--mostly small--grew at rates of 20 percent or better. As of 1989, fully 98 percent of U.S. companies had 100 or fewer employees, while 86 percent had 20 or fewer.

Many corporations are no longer as economically strong as they once were nor are they quite as attractive as tenants. As a class, larger tenants are relinquishing space, negotiating shorter leases, and sometimes abandoning markets and locations completely. On the other hand, many business owners are seeking out strong entrepreneurial tenants, says Birch.

What this means for property managers: Small firms tend to be "lean and mean," without the internal resources to handle many activities on their own. Property managers hoping to attract the best small companies may offer services such as meeting rooms with video conferencing, courier services, and airport pickups. It will also be necessary to devise marketing campaigns geared to the small business marketplace.

Owners will hold equity stakes

in tenants' firms, and vice versa

Some relationships between property owners and small-business tenants will grow especially close, as owners choose to purchase equity in the businesses they house. "I see that happening more and more often," says Birch. "After all, who knows an entrepreneur better than his or her landlord?"

Impressed by their tenants' prospects for growth--and realizing that such growth will benefit them--an increasing number of building owners are backing their small business renters with cold, hard cash. Others are approaching the situation creatively, by offering entrepreneurs free rent in exchange for a piece of their companies.

THe opposite scenario is playing out, too. Some small business tenants are purchasing equity in companies owned by property owners, often in exchange for preferential treatment such as longer leases or structural improvements.

What this means for property managers: When your company--or the company you work for--has an equity stake in tenants' businesses, they are no longer just tenants, they are partners. The better they perform and the faster they grow, the more you will prosper, too. Managers may assist tenants by introducing them to contacts, providing special business services, and even "lending" them employees to help out with rush jobs.

As this trend progresses, it is not too farfetched to imagine certain buildings consisting of a dozen or more entrepreneurial businesses, each partially controlled by the building owners. Pulling together, with the property manager as coordinator, these businesses could each provide help to other tenants by purchasing or bartering services, sharing employees, or referring new clients to neighbors.


Managers' performance ratings

will be tied to cost controls

The buyer's market in real estate will make it difficult to cut tough deals with tenants, riase rents, or skimp on services. Accordingly, managers will be under pressure to practice cost controls elsewhere in their businesses. "Remember, every dollar saved can be worth as much as $12 or $13 if capitalized," cautions Stan Ross.

In the coming 10 years, believes Ross, property managers' performance will be judged increasingly on their success in squeezing extra cash out of their operations. Their livelihoods may depend on it, too. Compensation plans in which managers are paid only small salaries, with bonuses tied to cost savings, are becoming more common.

What this means for property managers: If raising rents sharply is taboo and increases in services, rather than cuts, are demanded, where can your cash savings come from? Ross suggests a few areas to explore: "Make sure your property tax assessments are fair. If they are not, argue them. Consolidate your various insurance policies to reap extra cash. Installing up-to-date computer systems that monitor building environments can cut your fuel and electric costs substantially."

Slower population growth will make

hiring and retention more difficult

Computers may make property management easier, but finding human help in the 1990s will be more difficult. David Shulman predicts that labor force expansion in the coming decade will equal only 60 percent of the 1980s rate. Close to half of new workers will be black or Hispanic. Some of them will be recent immigrants.

Women workers will make up five out of eight new hires in the 1990s. The good news is that there is now little difference in the education and commitment to work of first-time female and male employees. Over 50 percent of new college graduates are now female.

But Shulman points out that many new young female workers are mothers of small children (55 percent), and that the clamor for on-site day care may become overwhelming by 2000. Even the smaller office buildings, industrial complexes, and shopping centers may have to accommodate the mothers in their work force through day care vouchers.

What this means for property managers: Put personnel high on your list of priorities along with marketing, customer service, cost controls, and computerization. Keeping your salaries and benefits comparable will be necessary to avoid losing your best people.

Professional ethics

will be under scrutiny

In the last decade, insider trading, the scandals at HUD, and the S&L crisis have put the ethics of many companies, including real estate firms, under close scrutiny. Already questions have been raised about foolish loans based on inaccurate appraisals made by overeager lenders to marginal developers.

Sooner or later, these investigations may reach the managers of the unproductive properties. Often, of course, the manager will not be at fault, as making a profit from a poorly planned space may be impossible. But blameless or not, if you are involved in a property that has failed, be prepared for your day in the spotlight--or perhaps your day in court.

What this means for property managers: "When an industry has its back to the wall, upholding professional ethics becomes more important than ever," asserts Ted Jones. "That is the situation in the real estate industry now."

Try to avoid tarnishing your good name by carefully investigating the backgrounds of new employees and the financial viability of new projects for management. Protect yourself by treating vendors, employees, and tenants fairly.

Professioanl credentials can demonstrate that you take your job seriously. Continue to study, attend courses, and participate in industry groups.

Ellen Brandt, Ph.D., is a management consultant and writer based in Medford, New York.
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Title Annotation:includes related article on ten property management trends; property management forecasts
Author:Brandt, Ellen
Publication:Journal of Property Management
Date:Jan 1, 1990
Previous Article:A new era in corporate property management.
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