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Property management in transition.

Years from now, when the next generation of real estate professionals comes into its own, the overindulgences of the 1980s will probably be considered a textbook case in greed and hubris. What the textbooks may not point out is that by the early 1990s the real estate industry had practically re-invented itself.

It had to. In the late 1980s and early 1990s, developers watched helplessly as demand for speculative buildings withered away and the value of existing properties plummeted to a fraction of their replacement costs.

Thanks to the recession, waves of corporate and industrial layoffs produced shrinking space requirements, adding millions more vacant square feet to the nation's already bloated commercial inventory.

As legions of owners defaulted, the troubled loan portfolios of insurance companies, banks, pension funds, and other institutional investors swelled. The federal government became America's largest landlord through the RTC and FDIC.

Property and asset management became the field of choice in real estate. For many developers and investors, it seemed the only choice if they wanted to stay in the business.

Meanwhile, managers already in the business found their jobs changing dramatically. The shift toward institutional ownership meant higher standards of financial reporting, operating procedures, training, and client relations, with a major emphasis on value enhancement.

The property management industry was changing, too. Firms were consolidating, merging, or forming regional or nationwide networks in order to position themselves for institutional business. Smaller firms were finding it more difficult to compete unless they established a strong local presence.

Meanwhile, large institutions, which had been providing management only for their own holdings, decided to branch out into third-party fee management.

And if these trends were not enough, corporations began "outsourcing" the property and facilities management functions previously performed in house. Some of these corporations even became investment partners in the property management companies they hired, contributing needed capital and general business expertise.

All of these changes will soon become history to the property professionals of tomorrow--studied for clues on how to survive in future real estate cycles. Perhaps the biggest lesson from the real estate revolution of the 1990s is that those who are willing and able to adapt will not only be considered the survivors of a difficult era, but the innovators and industry leaders of the future.

Joint venturing corporate management

It has long been an accepted principle of commercial property management that major corporations preferred to have their in-house staffs handle lease negotiations, excess property dispositions, and of course, internal facilities management.

But in an era when cost-cutting is the new religion, corporations with large real estate holdings nationwide have begun to "outsource" their real estate functions at an unprecedented rate.

Among the dozen or so top companies to farm out their real estate work is Exxon Corporation, which signed with Trammell Crow Company of Dallas to dispose of 500 retail gas station sites and to manage another 3,300 Exxon properties around the country.

Likewise, Kraft General Foods hired the combined team of Cushman & Wakefield and Grubb & Ellis to buy, sell, and lease the corporation's properties. According to a June 4, 1992, article in the Wall Street Journal, 116 of these transactions were underway in early June.

Perhaps the most significant of these "outsourcing" assignments was the deal ironed out between IBM Corporation and Grubb & Ellis, one of the country's largest commercial property management and brokerage concerns. Under this arrangement, IBM and Grubb & Ellis are joint-venture partners in a new, as-yet-unnamed property management firm to be based in Pittsburgh, headquarters of Grubb & Ellis' current property management division.

The new firm will provide property management, corporate facilities management, engineering, maintenance, and other related building services for 17.5 million square feet of IBM's 100-million-square-foot portfolio of owned and/or occupied space, as well as 65 million square feet of space now under management by Grubb & Ellis.

According to Mark Flynt, Dallas regional vice president for Grubb & Ellis, a significant portion of IBM's current in-house facilities management staff will be invited to join the new firm, with many of the on-site personnel remaining in place. Surplus IBM employees will be offered early retirement or severance packages, be relocated within IBM, or be outsourced to other positions.

"This is the wave of the future," says Flynt. "Corporations are continuing to seek ways to reduce their operating costs, overhead, and staff, but still keep people employed.

"Arrangements like ours also give corporations the opportunity to concentrate on their core business and positively impact bottom-line profitability."

Merging to create a regional powerhouse

Because most real estate companies are primarily entrepreneurial in nature, mergers between them have been uncommon. But now, when business is slow and competition is growing, mergers between complementary companies have become increasingly popular. The recently announced merger plans of California's Koll Management Services with Tishman West Management Corp.'s property management division is just one example of this growing trend.

In addition, in mid-1992 two of Chicago's top commercial real estate firms joined to create the third-largest commercial property management firm in the city. Under the terms of the agreement, Frain Camins Swartchild (FC&S), one of Chicago's largest independently owned real estate firms, acquired the property management, leasing, and construction assets of Fifield Companies, Ltd., a large development and property management concern.

The Fifield portfolio, including both space owned by the company and by institutional clients, comprised 3.3 million square feet of office and mixed-use space in 19 new, Class-A commercial buildings.

However, Fifield, which was founded by Steve Fifield in 1983, was seeing many of its buildings rapidly lose value over the past few years, while demand for its third-party property and asset management functions grew.

Because development was no longer a viable business, "we needed to capitalize on the value of the property management accounts for our own buildings as well as for other owners," explained Robert E. Smietana, formerly Fifield's chief operating officer and head of its property management division and now executive vice president at FC&S.

FC&S, meanwhile, was well known for its expertise in managing and leasing downtown and suburban, primarily second-generation, office buildings as a third-party manager. It brought 20 buildings totalling 3.7 million square feet to the deal.

Fifield's search for a partner began in the fall of 1991 and was finalized on March 1, 1992. "We looked locally for a group that we knew, that we could trust, that had similar values to ours, common clients, and several other things," says Smietana. The two portfolios also complemented each other, with Fifield's emphasis on newer, Class-A buildings downtown and in the East-West corridor and FC&S's focus on suburban buildings and renovated office buildings outside the Loop.

The combination of the firms created few conflicts over existing management contracts. Since the merger became official, the consolidated firm has gained an additional 1.5 million square feet of industrial and retail space.

While nearly all of Fifield's 95 employees were retained, one that did not make the transition was the firm's founder, Steve Fifield. Fifield will consult during the transition and then pursue other investment activities.

Consolidation to become a national presence

One of the more significant events fueling the evolution of the property management industry over the past five years has been the shift in ownership from private individuals to institutions. No one knows that better than Lan Bentsen, chairman of Sovereign National Management, an institutionally oriented management company based in Houston.

"In the 1980s, 80 percent of investment real estate was controlled by individuals," says Bentsen. "But in the 1990s, 80 percent is controlled by institutions, either by choice or default.

"Although the institution became the owner and asset manager, it did not want to be the property manager. This created a dramatic opportunity, and, frankly, the management industry really didn't shift to accommodate the needs of these new owners."

Recognizing that small, local firms usually lacked the financial reporting and training required by institutions, Bentsen, a former developer and broker, opened Sovereign in 1987. The firm's intent was to form a consolidated national property management company by acquiring regional companies in all parts of the country.

Bentsen's plan required that the owner of a top local management company sell his or her firm to Sovereign, then agree to stay on and operate it on a revised basis. More than 7,500 property management firms were contacted nationwide before the five acquired were selected. The result of these acquisitions is a unified company serving institutions in the South, Southwest, and West.

"We chose multifamily management because we thought that was the area where we could add the most value," Bentsen says. "Apartments are more intensive from a marketing and management perspective. In a typical 300-unit project, 50 leases may be up for renewal each month, compared to one lease every six months in an office building." Sovereign's portfolio of 30,000 units requires a team of 1,000 professionals and staffers.

A strategy of creating a national company through the combination of existing, geographically diverse fee management companies is also working for Charles Harty, CPM[R], president of Dallas-based Network Management Group.

Like Sovereign, Network sought to create a one-stop resource for institutional clients by developing an interconnected group of independent companies. However, unlike Bentsen's operation, the Network partners retain ownership of their companies and rely on the central office primarily for financial reporting and marketing.

Sovereign's focus on the specific needs of institutional owners and asset managers has resulted in significant growth; during 1991, the firm added 9,000 units from current clients and through referrals to new clients.

"The marketplace is saying that we're headed in the right direction," Bentsen says. "The package of services we are offering is getting a thumbs-up from our clients."

Adding on third-party management

Back in the 1980s, most institutional investors limited their real estate activity to funding billions of dollars of new development across the country. By the 1990s, investors from Wall Street to Main Street felt the pinch. As a result, several large institutions not only are becoming adept at managing their huge troubled property portfolios, but are aggressively marketing their services to other owners.

Premisys Real Estate Services was formed in early 1989 by The Prudential Insurance Co. to provide property and facilities management for its own portfolio and on a third-party basis. By mid-year 1992, Premisys had 51 million square feet under contract, of which 15 percent was on a third-party basis.

And in 1990, Compass Management and Leasing was launched by Equitable Real Estate Investment Management, the real estate arm of The Equitable Life Assurance Society. Compass now has a 55-million-square-foot portfolio, about 40 percent of which is managed for outside owners.

During the heyday of the real estate syndication industry in the mid-1980s, one of the most active companies investing in, lending for, and developing real estate was the Chicago-based Balcor Company, part of the American Express family of companies.

By the early 1990s, however, Balcor's portfolio was plagued by defaulted loans, foreclosed properties, and non-performing assets. Following an internal reorganization in 1990, the firm's new executives, including President of Property Management Robert Lutz, shifted Balcor from an internal to an external perspective.

Much of this repositioning concerns Balcor Property Management (BPM), which is responsible for the day-to-day supervision of Balcor's portfolio of 7.4 million square feet of office space, 5.4 million square feet of retail space, and 70,000 apartments.

American Express' plans for Balcor include disposing of and/or restructuring its $6-billion portfolio. Senior executives of both companies also agree that providing fee-based property management services has enormous potential for long-term success.

Now in the early stages of growth, BPM's third-party, fee management business is targeting institutional owners of commercial, retail, and multi-family family residential properties.

Lutz points out that through the various divisions of Balcor, BPM can provide a "soup-to-nuts" package of services to owners. Using market and property analysis as a base, BPM can recommend the best course of action to an owner, and then implement that very same program, whether it involves property redevelopment, project repositioning, leasing, sales, or refinancing.

"Institutional property owners today want service providers at all levels who go beyond the ordinary," Lutz says. "Because the on-site manager, portfolio asset manager, and owner are all on the same team, we feel it is in the best interest of the property to operate with that in mind."

A new beginning

Like any other industry, real estate management continues to reinvent itself, incorporating new technologies and changing market forces into its strategies. The property manager of the year 2000 will represent the next evolutionary step in the business of real estate.

Retaining the Entrepreneur

If the trend toward large-scale consolidated companies seems to herald the end to the individual entrepreneur, the experiences of one CPM[R] member show that it is possible to have a sophisticated financial operation and still keep the small business energy alive.

Before Robert Taylor of Santa Ana, California, founded Real Estate Marketing/Management, AMO[R], in 1978, he was vice president with a large, national real estate syndicator. What he found, however, was that decisions had to be cleared through a bureaucratic structure before being implemented.

"Successful property managers are really entrepreneurs," says Taylor. "They do not work well in a heavily structured organization. Our company's strategy was to hire experienced managers as 'partners' and then give them the freedom to use their skills to maximize profits."

The firm's property managers work as independent contractors and are compensated with a percentage of the fees from the properties under their supervision. The other part of the fee covers the costs of office space and of accounting and secretarial support.

"Because they are fee driven, our managers have the same interest in operating the building that the owner does--to maximize income," says Taylor. "Of course, our corporate staff reviews all property reports monthly and reserves the right to exert more control over a property if we do not feel it is being managed to the best advantage."

For the property managers working with Taylor, the company's structure allows them to concentrate on what they do best: manage property.

William Packard, CPM, a 20-year veteran of four national management companies, is a typical associate. "The biggest benefit I see is that it eliminates the time wasted in politics and business structure," says Packard. "Here, all the property managers are parallel. I can concentrate my energy on maximizing the success of the properties I manage."

Packard personally employs two assistants, one to coordinate day-to-day marketing and another to coordinate all maintenance. This assistance enables him to better serve his portfolio.

Packard also must devote time to managing his books and monitoring his own personal expenses. "The down side is that you are running another business," admits Packard, "and you are responsible for paying your own health insurance, professional dues, and travel expenses.

"On the other hand," he continues, "I have seen several managers double the income they received in the general marketplace."

Ultimately, though, the greatest satisfaction comes from the flexibility to do it right. "I think it is the wave of the future," concludes Packard. "You drive down the street, and our properties just glisten compared to the competition. The concept of collective entrepreneurship gives people of vision the opportunity to perfect their industry."

[Janet White is president of Dallas-based White Marketing Services, which provides public relations and writing services to commercial real estate companies nationwide.]
COPYRIGHT 1992 National Association of Realtors
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Title Annotation:the changing character of the real estate and property management industry in the 1990s
Author:White, Janet
Publication:Journal of Property Management
Article Type:Cover Story
Date:Sep 1, 1992
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