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Who owns America and how should it be managed?

Change has become a constant in real estate. The small, local investment real estate industry of past decades has been largely replaced by a national, or even global, structure.

Yet translating this structural change into a plan for ongoing management business operations has remained difficult. Eager to respond to new market needs, the property manager has little concrete data as to where property ownership now rests and what skills and services these new owners really want.

In search of answers, the Institute of Real Estate Management and the IREM Foundation retained the accounting and consulting firm of Arthur Andersen & Company to conduct a study, "Managing the Future," which seeks to determine the value, size, and ownership of U.S. investment real estate. The study then explores what property management skills and services are most important to this ownership.

Data for this study was in part compiled by Hoyt Advisory Services in conjunction with Dr. Mike Miles of the University of North Carolina. Their methodology uses property-tax records and state-level econometric models to obtain estimates of the nation's real estate wealth (see following story).

Who owns America?

Despite the publicity given to foreign investors, the vast majority of U.S. real estate is still owned by U.S. citizens and corporations. The total value of the U.S. real estate stock in 1990 was approximately $8.777 trillion. Of this amount, individuals owned $5.088 trillion, primarily in the form of single-family homes (Figure 1).

Foreign ownership accounts for only $35.8 billion in real estate equities. (The total does not include purchases where an overseas investor is a joint-venture partner or a majority shareholder in a company operating in the U.S.)

Residential real estate represents $6.122 trillion, or 70 percent of the total U.S. real estate wealth (Figure 2). Of this amount, single-family homes account for 63 percent of the total with a value of $5.419 trillion. Multifamily units, including subsidized and public housing, have a combined value of only $552 billion.

By far the largest owners of residential property are individuals, with 83 percent of all residential units--more than 75 times as much as partnerships, which own $673 billion. Government agencies and non-profit corporations account for another $277 billion in value.

If residential real estate is dominated by individuals, commercial real estate is predominantly controlled by corporations. Corporations control $1.633 trillion of the total $2.655 trillion in commercial U.S. real estate (Figure 3). Other major owners are partnerships, with $338 billion, and not-for-profits, with $307 billion. All others, including institutional investors and financial institutions, account for the remaining 14.2 percent.

Retail constitutes the most valuable component of commercial real estate, with 42 percent, closely followed by office buildings, with 38 percent (Figure 4).

The geographic distribution of commercial real estate value roughly follows population density. Thus, the nine states that compose the Northeast contain 27 percent of the real estate value, although they account for only 16 percent of the U.S. population. The Far West has the second largest concentration of wealth (22 percent), closely followed by the Midwest (21 percent), and the Southeast (16 percent).

In the final analysis, the study reveals that only a relatively small portion of the total U.S. real estate wealth is appropriate for professional management, particularly in the residential sector. Even within the commercial area, corporate owners remain the dominant force (Figure 5).

What owners want

Having established who real estate owners are, the study goes on to explore what these owners seek in professional management--whether fee or in-house.

To obtain this data, 10,000 surveys were mailed to people identified as likely property owners. Of the 660 respondents, 21.2 percent were individual real estate owners, followed by 19.5 percent that considered themselves real estate partnerships. Corporate owners comprised 19.4 percent of the sample, and pension funds accounted for 6.7 percent.

These respondents owned an average of 347 properties, although one owner with 36,000 properties skewed the figures. Office properties comprised the largest percentage of respondents' portfolios, with 32.5 percent, followed by retail, with 22.1 percent (Figure 6).
Real Estate Portfolio Composition
 % of Current % of Portfolio
Property Type Portfolio Value Value in 5 Years
Downtown office 13.5% 14.2%
Suburban office 18.0 16.0
Medical office 1.0 1.3
Manufacturing 6.2 6.3
Warehouse 8.4 9.1
Shopping centers 17.2 18.0
Other retail 4.8 4.7
 apartments 9.9 11.4
 apartments 2.5 2.2
Single-family dwellings 1.3 1.2
Public housing 2.8 3.1
Other residential 2.2 2.5
Hotel/motel 4.0 3.7
Vacant and farm land 6.8 4.9

The first question in the survey asked owners to rank the importance of 48 characteristics when selecting a property management firm. The two traits rated most highly were integrity and reliability, scoring several percentage points above any other characteristic. (Figure 7).
Property Management Firm Characteristics
Importance Rating(*)
Characteristic Rating
Integrity 4.85
Reliability 4.83
Quality of individuals assigned 4.58
Financial responsibility 4.56
Professional competence 4.55
Tenant relations 4.48
Reputation 4.47
Timeliness of reports 4.38
Local market information 4.29
Maintenance 4.23
(*) Scale of 1 (low) to 5 (high)

Among skill-related characteristics, financial responsibilities, tenant relations ability, and timeliness in reporting were frequently mentioned by both the survey and the interview respondents.

The qualities considered of least importance on the list were size of firm, workout knowledge, specialized financing skills, and quality of government relations. Areas considered of moderate importance included education and training, length of time in business, sales capabilities, and crisis management skills.

Interviewees confirmed that reputation, integrity, and reliability were of the greatest importance when choosing a management company. Interpersonal and tenant-relations skills also scored high. As one interviewee said, "The ability to deal with tenants is key in today's marketplace because the tenant drives economic success." Cost was among the least frequently cited factors in selection decisions.

Survey respondents were also asked to rate the importance of 36 different property management tasks (Figure 8). Tenant relations, with the greatest emphasis on tenant retention, took top priority in this portion of the survey. In fact, the four top-rated tasks all concern aspects of tenant relations.
Property Management Tasks Importance Ratings(*)
Management Task Rating
Retain tenants 4.59
Negotiate leases 4.50
Obtain tenants 4.50
Handle tenant relations 4.39
Collections 4.30
Review/approve leases 4.27
Prepare financial reports 4.23
Make acquisition/disposition decisions 4.20
Prepare operating budgets 4.19
Monitor property performance 4.16
Negotiate tenant improvements 4.12
(*)Scale of 1 (low) to 5 (high)

Ranked next were financial tasks, including preparing and monitoring budgets and preparing financial reports. Maintenance was also highly rated.

Among the tasks considered of least importance in property management were advertising, government compliance, architectural and design control, and insurance procurement. In part these lower ratings reflect the fact that owners often obtain these services from specialists. Thus, specialized expertise alone does not make a property manager or firm particularly attractive for services in other areas.

Tenant relations was also the dominant theme of the personal interviews--"the buzz-word of the '90s" said one property owner. While emphasizing that the entire real estate business is revenue driven, owners regard retention as more efficient and less disruptive than continual re-leasing. Other frequently mentioned primary tasks include reporting, lease negotiation, and strategic planning.

In-house vs. fee management

Approximately two-thirds of the interviewees reported that virtually all their properties were managed by in-house personnel. Of those that used outside managers, the majority used them for most or all their properties. However, about 245 percent of the interviewees indicated that there were no situations in which they would prefer to use an outside manager. Other would choose an outside manager only if the property was outside their geographic area or beyond their areas of expertise.

Among the reasons given for using in-house managers were: * Owners had greater control over the property. * Outside managers focused on fees, not developing relationships with tenants. * In-house training and reporting systems give owners better information.

Among the reasons given for preferring outside managers were: * Fee managers were more experienced. * Owners did not want to be in property management. * It was easier to buy expertise than create it * Outside managers were under more competitive pressure to perform.

Survey respondents indicated that in-house managers were most likely to perform tasks such s acquisitions (90 percent), redevelopment (90 percent), and lease approval (88 percent). Tasks most frequently performed by fee managers included advertising (50 percent), maintenance (49 percent) and tenant relations (43 percent).

It is important to note, however, that insurance companies and pension plans that responded to the survey clearly indicated that they preferred to use outside managers for the many tasks involved in property management.

Projections for the future

An interesting sidelight on the priorities of management tasks was a question asking respondents to assess how the ranking of these tasks would change in the next five years. While two-thirds of respondents expected the rankings to remain unchanged, some interesting ideas emerged. * Collections. Approximately 45 percent of respondents felt that collections, which were already ranked fifth in importance, would increase in importance. Owners of hotels and garages ranked this area particularly high. * Tax monitoring. All categories of owners felt that this skill was vital because of its effect on operating costs and thus marketability. * Government compliance. Banks (42 percent), REITs (37 percent), and insurance companies (33 percent) saw this as an area of growing management need. * Environmental compliance. Office buildings (41 percent) and retail (41 percent) were more concerned about this skill in the future than were industrial owners.

The interviewees provided a variety of answers to what will be needed from property managers in the future. Phrases such as "professional" and "businesslike" were used to describe the property manager of the future Interviewees expect managers to become more financially oriented and to develop better tenant-relation skills. Keeping abreast of technical innovation and environmental issues were also cited.

Another recurring comment was that manages need to be more general in their knowledge in the years to come. While one interviewee lamented the absence of a school to teach management of a 50-story office building, others expressed concern over the narrow viewpoint that comes with specialized education.

A new future

"Change, Change, Change," not "Location, Location, Location," will be the motto of the 1990s. Just as global, economic, and demographic factors have created fundamental changes in real estate development, financing, and investment, so too will these factors alter the nature, operations, and characteristics of property management.

Along with other sectors of the real estate industry, it is expected that the number of property management firms will dwindle in size. Those that survive will do so in a fundamentally altered environment. As more and more investment properties shift to institutional investors, more management will be brought in house. Institutions believe that using in-house managers increases their control and that in-house managers have a more vested interest in the property.

Management companies will also face increased competition from financial conglomerates, insurance companies, banks, and accounting firms. Developers, repositioning themselves as full-service firms, are lengthening their participation in the real estate cycle. To counteract this trend, management companies must follow the lead of construction companies in expanding across national boundaries. Managers may also broaden their range of services, often by merger of affiliation.

Compensation will also be altered. New arrangements will directly reward managers who can fill empty space, keep tenants happy, and cut operating expenses.

What this means to the procedures used by service providers in the real estate field is a rise in the expected level of marketing capabilities, human relations skills, administrative competence, and financial expertise. Management contracts will become more complex, and companies will be held more responsible for performance, especially by institutional owners that have their own fiduciary responsibilities.

Management firms will have to change along with their clients, becoming more efficient and cost conscious. Computers and new software will allow managers to more closely monitor property performance and values.

As property management requirements become more complex, the requisite body of knowledge is also expanding. Higher levels of education and training will be required to enter the profession and to succeed in it. One outcome will be larger, better trained cadre of professionals able to deal with the real estate world of the 21st century. Ed diLuia is a manager Jared Shlaes a principal, and Joe Tapajna a partner in the Chicago office of the Arthur Andersen Real Estate Services Group. The group provides accounting and audit, tax information systems, and appraisal services to more than 6,000 real estate, hospitality, and corporate real estate clients.
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:value, size, and ownership of US investment real estate
Author:DiLuia, Ed; Shlaes, Jared; Tapajna, Joe
Publication:Journal of Property Management
Date:Jul 1, 1991
Previous Article:High security on High Street.
Next Article:A detailed look at America's real estate wealth.

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