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Strategic planning: revamping your company.

Strategic business planning is nothing new to corporate America. To cope with shifting political and social conditions, fickle consumer tastes, ever-changing customer needs, and an uncertain economy, most publicly held companies continually re-asses their situations, and re-evaluate and reposition themselves in the marketplace.

But for many real estate companies, most of which are privately held, local in operation, and run by their entrepreneur-founders, such thinking is difficult at best.

In a nationwide study of real estate companies conducted in 1989 by Laventhol & Horwath, the now defunct real estate accounting firm, the lack of internal planning was a major contribution to the firms' pessimism about their ability to do business in the future.

While 81 percent of the real estate companies surveyed said they had a corporate plan that they updated annually, only 59 percent had a three-to-five-year plan. The two most frequent problems identified were an inability to develop goals and plans which were sufficiently challenging, and an inability to agree on desired results.

Out of nowhere, it seems, a combination of factors has led to one of the worst economic climates for real estate in decades, and property executives are now faced with problems they had never dreamed of just a few years ago.

A nationwide overbuilding spurred by the go-go years of the early to mid-1980s has resulted in a lack of demand for new projects. The S & L and banking crisis and the insurance industry's shaky stance have resulted in a dearth of mortgage funds.

Foreign investment in U.S. real estate, meanwhile, has slowed to a trickle, and the continuing instability in the Persian Gulf has put many plans on hold for U.S. investment and development activity in Europe.

On top of it all, the national recession continues to put more people out of work--in the office and the factory--and out of the market for new homes and everything that goes into them.

Rather than bemoaning their woes, however, many real estate companies have begun to strategically rethink and reshape their business in order to meet the challenges of the '90s.

Speculative developers (now considered an endangered species) are becoming property and asset managers of the buildings they once owned, and where possible, are pursuing build-to-suit work.

Wall street real estate firms, which are still reeling from the Crash of 1987, are eschewing large investment sales and real estate investment banking in favor of tenant rep and consulting assignments.

But the changes are perhaps most visible in the large, multi-dimensional brokerage firms, most of which provide a wide range of consulting services, including portfolio analysis; property and asset management; appraisals, feasibility, and marketability studies; and other technical services; and workouts and dispositions.

For example, CB (formerly Coldwell Banker) Commercial is closing four regional offices throughout the Midwest and plans to centralize operations in 18 midwestern states from a new divisional office in Dallas. It also plans to reorganize its East and West Coast operations by opening similar divisional offices in Washington, D.C. and Los Angeles and realigning its personnel and services there.

Grubb & Ellis plans to cut its operating costs by $28 million for 1991, primarily by closing, selling, or franchising six commercial offices, five residential offices, and four management offices, and by laying off 400 employees out of its workforce of 5,400.

For these and other companies, major changes in the way they do business will be a necessity not only to stay in business, but to succeed.

The question remains, "What is involved in making such decisions?" Often, they result from intensive corporate "soul-searching" and a willingness by top management to do whatever must be done.

Formulating a long-term plan

Larger firms, both in and out of the real estate business, often retain professional management consultants to guide them through a long-term realignment process. For the smaller companies, recognizing the need to change is the first challenge, says Debra McMahon, manager of corporate marketing for Strategic Planning Associates, a management consulting firm based in Washington, D.C.

"Many developers are essentially entrepreneurs, who know how to line up the capital, understand how to be in the right place at the right time, and have a good nose for the market. Unfortunately, very often they are not good managers. There is a big difference between being a good leader and being a good manager."

McMahon notes that being a good manager involves coordinating many complex activities and making sure a project comes in on time, on budget, and on target. Those skills generally are not found in someone who has a vision and a charismatic personality which inspires other people to follow him.

"If these entrepreneurs are going to do well it's because at a certain level, either the entrepreneur happens also to be a good manager, or alternatively, he or she happens to have good managers in support," she says.

Strategic planning is an on-going process, McMahon says, and its precepts should be part of regular management activities. "Top management should be spending at least 40 percent of its time thinking about 'Where are going, what are we doing, what are our goals, and how are we going to achieve them?"

Although hiring consultants can be expensive (a typical strategic plan can start at $25,000), most companies can develop and implement their own business plans at a fraction of the cost.

Gary Nielson, a vice president in the Organization Design Practice of Booz Allen Hamilton in New York City, says the "vision" that successful entrepreneurs have about their businesses should form the basis for any kind of strategic plan.

"That vision defines what your business is, how it will achieve a competitive advantage, and how it derives an economic return--which, in effect, is exactly what strategic planning is all about," he says.

"Everything you do as a businessperson should relate to that vision. And if there are things that are outside of that definition, the only reason you should be doing them is because it can either help you get to your vision, or because there's absolutely nothing available to do within your vision."

One of the first things executives should do in developing a plan, Nielson and other management experts note, is to physically separate themselves from the company's day-to-day activities for a brief time. In this way, executives can be somewhat objective in planning a strategy for the short and long term, which can be from six months to three years or longer.

Some basic planning assumptions

But before any forward thinking can be done, it is essential to have an accurate picture of the business as it has been and is right now. In a 1990 Laventhol & Horwath report, "Real Estate velopment: From Entrepreneurial Growth to Strategic Consolidation," co-author James Noteware points out several common characteristics among successful firms:

* A realistic assessment of the firm's market position and an honest recognition of its strengths and its weaknesses.

* An unwavering commitment to a simple strategy, often under control of a strong leader. The most effective strategies seem to revolve around value-added activity, or tenant focus, or both.

In all cases, successful strategies are built around what a company or its key individuals do best, and substantially better than the marketplace. The key to implementing these strategies is often knowing what not to do--not being afraid to walk away from a transaction unless these conditions are met.

* Having financing discipline, by continually asking: How does this activity make the most money--for my tenants, my partners, and me?

At base, successful real estate leaders ask: "Who is the beneficiary of our company's talents and efforts? In light of that contribution, at what risks, and in what priority?"

* An understanding of business fundamentals, with a consistent orientation to customer or tenant service, a respect for staff and continuity of the organization, the desire to build net worth consistently over time, in either projects or organization, and a consistent adherence to cost controls at all levels.

* A willingness to utilize entrepreneurial flexibility to reduce operations so as to adjust to the new market realities, take advantage of unique opportunities, be positioned and ready when the opportunities present themselves, and move aggressively when the opportunity is structured to fit the firm's strategy and its business basics.

"An understanding of the market and competitive forces are going to frame some of the critical issues for you," McMahon says," and given those critical issues, you have to decide what you are going to do about them. "You are trying to ensure the survival of the company, which means to make sure there's enough cash around to do whatever it is you need to do. But beyond that, you need to position yourself to take advantage of things going on in the market that you want to be participating in.

"Think about what ancillary businesses you want to be in and the relative attractiveness of these businesses at every stage of the business cycle.

The hard decisions

"Presumably, some kind of a plan is going to come out of the in-depth analysis which you can use to set realistic financial targets for yourself and which can give you an indication of some of the hard decisions you need to make," she says.

Making these hard decisions may be the toughest part of all. According to Noteware, who is now national director of real estate advisory services for Price Waterhouse in New York City, many real estate executives during the 1980s never felt the need to do so.

"For many organizations in real estate, life was pretty easy--they could make money just because the market was rising. But by the late '80s, it became harder to lease and because of that, harder to finance, projects.

"The same old formulas didn't work any more. People were trying harder and not getting anywhere, and found that it was more than just market changes going on," he says.

"There were some fundamental managerial issues that most of these companies needed to address, such as how people are managed and compensated and how many employees they really needed to operate efficiently.

"Toward the late 1980s, most organizations thought that bigger was better, so they kept adding people. Now, many are turning around and getting small again, and are not being bashful about it."

Case Study: Hall Financial Group

The birth, near death, and resurrection of Dallas-based Hall Financial Group, Inc. has given it a perspective on corporate survival few companies in any industry can claim.

Chairman Craig Hall began his career as an owner/investor/manager of multi-family properties while in college, and by 1968, had formed Hall Real Estate Group, Inc. in Ann Arbor, Michigan, which he later moved to Dallas.

With the passage of the Economic Recovery Tax Act of 1981, the company grew geometrically in employees, investors, and apartment units owned and managed.

In 1982, Hall Financial Group had 1,016 employees, 2,168 investors, and 16,043 apartment units. By 1985, it had 2,913 employees, 7,235 investors, 60,000 apartment units, and several million square feet of office space.

By 1985, Hall was the largest private-placement real estate sponsor in the U.S., raising $320 million that year--about $1 billion in equity between 1981 and 1985. It had 13 offices nationwide, and one in Amsterdam, and its corporate revenues, not counting rents, grew to $72.3 million by 1985.

But by mid-1986, with Texas and the rest of the Southwest in the grips of a devastating regional depression, Hall faced potential ruin.

If the economic situation was not enough, the Tax Reform Act of 1986 spelled death for sponsors of private-placement limited partnerships.

Although many of its counterparts in the industry subsequently went under, Hall was determined to do whatever it took to avoid bankruptcy. And that meant going public with its problems.

"The most important thing is to face your problems head on, to be open, honest, communicate if you have investors involved, and to do what's right, as opposed to what's the easiest thing," says Ronald P. Berlin, Hall president and CEO.

"We tried to make each workout a win/win situation, as opposed to the lender taking the property back, seeing fee management come in and bring down that operating income, and then trying to sell it for a much lower price than what we were willing to work it out for," he says.

Hall's portfolio of owned and/or fee managed apartment units went from upwards of 70,000 to 45,000. Of the 70,000 units, 10,000 were lost in takeovers by general partners, and 15,000 were sold or foreclosed.

Corporately, Hall went from nearly $40 million in overhead in 1985 to less than $15 million in early 1991: 350 out of 550 employees were let go or not replaced; divisions were closed; in-house functions were contracted out; regional offices were consolidated and moved into cheaper subleased space; and routine expenses, such as overnight mail, company cars, and travel and entertainment allowances, were eliminated.

Hall Financial still maintains offices in Dallas, Atlanta, Washington, D.C., Chicago, Southfield, Michigan, Albuquerque, Phoenix, and Houston. And despite the many partnership workouts it must still complete, Hall remains one of the largest investors and managers of multifamily residential properties in the United States.

"It is a very emotional, stressful, and painful process when you shrink a company, when you deal with lenders that you were previously borrowing from, and ask for outs," Berlin says.

"It's much easier growing a company than it is shrinking it. You gain that experience over time. If you only could start out a business with that knowledge, things would be much easier for you."

Case Study: Metropolitan Structures

Nowadays, most developers do anything but develop. For Metropolitan Structures, a 32-year-old development and management concern, the decision not only stay in the development business but to thrive in it was a conscious reassessment of its history, corporate culture, and goals.

In 1981, the Chicago-based firm formed a partnership with Metropolitan Life Insurance Company; today, the partnership has a net worth of several hundred million dollars resulting from its ownership interests, and management responsibility for a portfolio valued in excess of $3 billion.

"We looked at the idea of emphasizing consulting or fee management, and while we will continue to do that to some extent, we decide that's really not where we want to focus our major effort," says Harold Jensen, Met Structures' general partner.

"However, we are talking with some banks that have troubled real estate loans, and it is quite likely that in certain instance, we will be advisors rather than principals," he added.

Projects planned or under construction include 10 million square feet of office space, 1,500 apartments, and 555,000 square feet of retail space. Its projects in Chicago, Los Angeles, and Dallas are the largest privately financed developments in their respective downtown markets.

Jensen says Met Structures wants to concentrate on areas where capital will be acquired and where the company can be a principal working for long-term asset appreciation and enhancement of value, in contrast to providing services for the owner.

In a typical workout, Met Structures would either acquire a property outright or become a joint venture partner with a bank in the ownership of the property, a situation that other developers might find difficult, if not impossible, to accomplish, Jensen says.

"We think there are opportunities in properties that are not fully leased, where there might even be some construction lacking, and it's a matter of taking what is today a liability and converting it into an asset," Jensen says.

One area of potential new business for Met, however, has been put on hold. Like many other American real estate companies, Met examined possibilities for development in Western Europe, but has decided against expanding its operations overseas for now.

"There are opportunities in Europe, but our current thinking about it is not as bullish as it was a year ago," Jensen says. "We're just not sure enough how things are going to go there to be confident, relative to the time and financial investment that will be needed."

According to Jensen, build-to-suits are another new venue for Met Structures, and the company is pursuing these because of its successful past experience with build-to-suits, and the fact that they are the only new development opportunities for which financing is currently available.

Despite its long-term perspective and deep pockets, caution is the byword at Met these days, Jensen points out. "We tend to be long-term investors looking for long-term appreciation and value. This has worked well for us."

Case Study: Cushman & Wakefield

It is hard to imagine that Cushman & Wakefield, the country's second-largest real estate brokerage firm (1990 revenues: $263 million), could be described as "lean," but that is just the word chosed by CEO Arthur J. Mirante.

Cushman & Wakefield now has 2,000 employees (including 950 brokers) in 50 offices nationwide, a new Japanese investors in its corporate parent, and an even newer British partner.

The 74-year-old firm provides services ranging from brokerage, leasing, appraisal, and consulting to property and asset management and real estate investment banking.

Despite the firm's many offices and employees, there wasn't much fat to trim when the time came, thanks in part to its management style, which allowed executives to anticipate and compensate for problems well in advance.

"We were telling the regional offices last summer we thought we were on the verge of a recession," Mirante says. "We tried to warn everybody,'Let's start holding the line on expenses,' almost 12 months ago."

By eliminating such things as first-class travel, an annual meeting for its top 300 producers, and fresh flowers for the corporate offices, "we've saved significant dollars," Mirante notes.

Major cuts in expenses also came from closing or restructuring certain operations. Over the past two years, Cushman & Wakefield has closed its offices in Jacksonville, Charlotte, Greensboro, N.C., New Haven, and suburban Philadelphia, and one of two offices in Atlanta. It also downsized operations in Nashville, Memphis, and Raleigh and reduced its overall contingent of brokers nationwide by about 5 percent.

"Certain segments of our business, especially financial services and property management groups, are growing like crazy," Mirante notes, "so the net numbers are deceiving because our total complement continues to grow, albeit by less than 5 percent this year."

While the domestic brokerage business may be suffering, C&W's overall growth is being fueled by such long-range moves as its year-old relationship with Healey & Baker, a full-service property concern based in London.

Under the joint cooperation agreement, Cushman & Wakefield provides office and industrial brokerage, appraisal and consulting, and real estate investment banking services in the U.S. and Canada for Healey & Baker's clients, and Healey & Baker provides the same services for C & W's clients in the United Kingdom and Europe.

"This has been such an incredible success in such a brief period of time that it surprised all of us," Mireante remarked.

C&W recently opened an office in St. Louis, and plans to begin operations in Toronto in the near future. It also hopes to start operating in Japan through the offices of Tokyo-based Mitsubishi Estate, the corporate parent of Cushman & Wakefield and one of Japan's largest real estate companies. Janet White is a Dallas-based freelance real estate writer and is president of White Marketing Services, which provides public relations and writing services to commercial real estate owners, investors, developers, and consultants from Texas to New York. She had previously been director of public relations for Landauer Associates, Inc., a national real estate consulting firm in New York City.
COPYRIGHT 1991 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes three case studies
Author:White, Janet
Publication:Journal of Property Management
Date:Jul 1, 1991
Previous Article:Workers compensation cost reduction.
Next Article:Corporate metamorphosis - mergers, buyouts, or sales.

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