With demanding clients forcing real estate service providers to become more diverse in their skill sets, the lines of distinction between jobs are blurring, and asset managers are positioning themselves to be a `Jack of All Trades.'
Cushman & Wakefield is best known as a real estate brokerage firm, while PM Realty boasts a good reputation as a property manager. The Yarmouth Group holds an altogether different position in the world of real estate, it's an investment manager. Yet all three companies have migrated into the field of real estate asset management. Sometimes necessity is the mother of compensation.
Julia Calabrese, senior managing director for asset services for Cushman & Wakefield in Washington, D.C., would be the first to assert that people confuse asset management with other functions such as, for example, property management, but the disciplines are entirely different. Even so, in the very next breath, Calabrese concedes, it is almost impossible to perform just one, singular discipline such as property management because clients are demanding more.
"Whereas five years ago, the property manager was pretty much an operations person," says Rick Kirk, COO of Houston-based PM Realty, "now advisers have been asked to become more diverse in their skill sets, to have significant financial expertise and to become more knowledgeable about leasing and positioning properties in the market." Five years ago, Kirk observes, PM Realty's focus was on property management, "good basic blocking and tackling, now we have evolved into a full-service real estate company."
As an investment manager, Boston-based Yarmouth Group's job is basically to recommend an appropriate investment strategy, then actualize that strategy. However, after the acquisition process and for as long as those properties are owned and held by the clients, the Yarmouth Group serves as asset manager.
A good, working definition of asset management would run something like this: managing a property for its maximum value potential, and knowing what the value is so an owner, operator, developer or investor can make the appropriate decision to hold the property or sell at what would be its optimal performance.
Operationally, what does that mean?
As Vincent Crowell, senior vice president of Equitable Real Estate Investment Management Inc. in Atlanta, notes, asset management focuses on the management of capital investments to maximize returns. "The asset manager assists in developing portfolio strategies, then implements that strategy through the property manager. In conjunction, the asset manager works with consultants, accountants, insurance representatives and attorneys to position an asset or to determine a position with the goal of preserving and, hopefully, enhancing the asset value."
Crowell adds, with real estate, the role of the asset manager has become much more focused on the financial side. This compares to property management where the issues are more strategic in nature, much more day to day.
What has happened, however, as companies began to outsource real estate services, they realized service providers could take on almost all the duties of the old real estate departments, so they began to look for those companies that could do it all, asset management, property management, facilities management, etc. To remain competitive, real estate service providers had to be a one-stop shop. Portfolio management has evolved along the same lines - one service provider doing it all. Just a decade before, the asset manager would hire out for a property manager or a facilities manager, but now one company offers a gamut of services blurring the lines of the distinction between the jobs.
"Cushman & Wakefield is a property management company," asserts Calabrese, "but with regard to our strategic alliances, over the last four years, we have expanded because it was basically what the client wanted. Corporate America is demanding more and more. It is almost impossible just to do property management."
Even through the 1980s, the property manager was pretty much an operations person, someone who kept the asset clean and well-maintained, and that was pretty much the extent of it, says PM Realty's Kirk. Now the person who was once called the property manager has to become more knowledgeable about positioning properties in the market and the need for financial expertise has become more significant. Job distinctions overlap.
Peter Bailey, a vice president with Spaulding & Slye in Boston, doesn't necessarily see the different jobs of property management, facilities management and asset management merging. Instead, he metaphorically sees each job as a separate circle that overtaps the other circles in different ways. "Property management focuses on the physical management and asset management focuses on the financial, but there are definite overlaps of varying degrees depending on which client we are managing for."
With property managers, developers and even institutional management firms all now involved in asset management, it appears the competition in the industry has picked up.
"The real estate management industry in the United States today faces a situation where there is intense, and perhaps increasing, competition at the same time that our clients are expecting and demanding more in the ways of service and performance," observes Yarmouth Group COO Daniel MacEachron. "The pressure is likely to drive firms to merge or existing firms to acquire others to get the critical mass and the economies of scale to be able to perform these services effectively."
The real estate management industry is being buffeted by two cross trends, the emigration of traditionally non-asset management into asset management, or vice versa, and the merging of different real estate companies with previously different focuses into one firm, such as JMB with Heitman Financial.
While the players in the industry change hats or add new ones, and competition continues to intensify, the news isn't really all bleakness and uncertainty. Some observers would even say there is more opportunity in the marketplace now then ever before.
"There are still many U.S. and foreign investors who are buying large assets and turning them over to asset managers," says Kenneth Wilson, a national director for Landauer Associates in Boston. "The new wave of potential asset management business is going to come in the area of investment pools, securitization management and REITs - especially in the hospitality sector."
No matter who needs an asset manager - whether it is an investor user or owner - what is needed today is a more systematic process, better organization, better reporting and, through new technologies, better efficiencies and analysis. "There is much more information sharing and performance measurement than there was before," says Jeffrey Swope, a managing partner with Champion Real Estate Services in Monterey Park, Calif. There is also more accountability, more documentation and more pressure to complete the full cycle of buying an asset, maximizing a return and then developing a final disposition strategy.
While all this may be true, the main goals of the asset management business haven't changed. According to Swope, the four priorities of asset management remain:
* Strategic Vision. The formation of a general objective and a plan as to how that objective will be reached.
* Performance. Understanding and correctly initiating variables that will eventually enhance the value of the property.
* Communication. Improve communication - informatively, systematically and technologically - between all interested parties including investors, users, lenders, owners and managers. It also means being part of a team, working cooperatively with other managers, representatives and advisers, while functioning as a liaison to financial sources who are demanding more in terms of constant contact than private investors had done in the past.
* Reliability. Being able to meet the first three goals.
The basic job of asset management hasn't changed, says Sandra Mahon, senior vice president of asset management for Chicago-based Equity Properties Development. "We are representing the owners to insure that the financial goals of the property are being achieved and to find additional ways to enhance value."
Case study: One suburban retail center in a large portfolio of properties
J.E. Robert Cos., a McLean, Va.-based real estate investment and advisory firm, stays fairly busy since it asset manages over 400 properties valued at $2 billion for Goldman Sachs' Whitehall Fund. Like other portfolio managers, despite the breadth of properties bought in one acquisition, it can muster its forces to construct a business plan for hundreds of new assets in 90 days.
"We take a look at the market, we take a look at the competition and then we develop three different strategies: operations, capital expenditure and disposition," says Lawrence Corson, a vice president with J.E. Robert. "We take a look at our assets every year, re-evaluate each of those three strategies and hopefully knock out one asset at a time." Last year, J.E. Robert disposed of 200 different properties. One that it didn't sell was a 160,000 sq. ft. shopping center in Homewood, Ill.
The center was one of 25 assets in a $70 million portfolio acquired in 1993. It had never been a successful location, never was more than 80% occupied and at one time had been owned by a bank which had taken it back via a foreclosure. At the time J.E. Robert took control of the shopping center, there were two main tenants, an appliance store and a discounter, along with some smaller retailers.
"We thought the appliance store wasn't what the center needed, so we bought it out," says Corson. This move allowed J.E. Robert to sell 70,000 sq. ft. of the building area and an adjacent 10 acres of land to Menards, a regional home improvement store. As part of the deal, J.E. Robert agreed to renovate the center, spending between $200,000 and $400,000. With Menards in the fold, the smaller shops leased up, so the center is now 100% occupied. However, J.E. Robert also needed to hedge on the discounter, so as part of negotiations with that store, it agreed to lower rents in turn for an option to terminate the lease. "This is the last piece of upside to the shopping center," Corson says. "We can now go and find somebody that is interested in the 40,000 sq. ft. of space that has a better credit and is a better mix for the existing tenants."
Corson estimates that when the property was acquired it was worth about $3 million and, even with 70,000 sq. ft. and 10 acres sold to Menards for an undisclosed price, Corson thinks the remaining 90,000 sq. ft. is now worth $6 million.
Of the 25 assets of varied types in the original portfolio, only four remain, including the Homewood shopping center. "We don't think the market is quite right for selling retail yet," he says. "We would rather sell in an up cycle."
Case Study: Nonperforming loan portfolio
When Midland Loan Services L.P., a Shawnee Mission, Kan.-based financial services firm specializing in the management and disposition of real estate, agreed to asset manage a portfolio of nonperforming loans Aldrich, Eastman & Waltch L.P. (AEW) acquired from the Resolution Trust Corp., it knew it was going to have to act fast.
As Clarence Krantz, executive vice president at Midland Loan, recalls, in the 1993 deal, "460 assets valued at $1.05 billion hit our shop at once, and we had 60 days to complete due diligence on all the borrowers, investigate bankruptcies, look for missing documents, do architectural, engineering and environmental studies on each asset, plus inspect the assets and figure out underlying value. Thirty days after that, Midland Loan was to have a complete written business plan on all the assets. Both jobs were completed on time. Then the fun began.
"Our role as asset manager was to absorb the assets, get control of the assets and to resolve the assets in a manner that maximized a return to the investor," says Krantz.
At the time Midland Loan took on the portfolio, the real estate market had not yet experienced much of a recovery from the recession of the late 1980s and early 1990s. To make matters worse, about 35% of the assets were bankrupt and located in California, which at the time was at the bottom of its real estate cycle.
There are a number of ways to liquidate non-performing loans, says Krantz. The most basic steps are to take a discounted pay-off from the borrower, sell the notes on a discounted basis to a third party, foreclose on the notes and then sell the real estate or add value to the real estate before selling it. Midland used all four options.
Although the value of the assets totaled over $1 billion, it's estimated AEW paid no more than $0.50 on the dollar for the portfolio, so Midland would not be hurting its client by selling the notes at a discount and, at the beginning, most of the deals were discounted pay-offs with the-borrowers. But by 1994, the country's real estate market was on the upswing, and Midland Loan's strategy shifted to foreclosure. In this way Midland Loan could take hold of the real estate and wherever possible add value to it before selling. Then in October 1995, with interest rates down, AEW took about $140 million of the notes, pooled its performing notes from CS First Boston and securitized the whole bundle in a $289 million offering.
Going into its third year as asset manager, Midland Loan boasts it has resolved about 75% of the assets from the portfolio. It expects it will take another two years to dispose of the remaining 25% because, as is often the case, the most difficult assets are the last to sell.
Was the portfolio a good investment for AEW? "Within 18 months, Midland Loan successfully recovered the proceeds to retire the acquisition debt," says Krantz. "It has been a very profitable venture."
Case Study: Former Drexel Burnham office, Beverly Hills, Calif.
In the roaring '80s, the corner of Wilshire Boulevard and Rodeo Drive was the home to the hottest of the dealmakers in the country, Drexel Bumham Lambert.
The high-flying 1980s eventually collapsed and, with them, Drexel Bumham Lambert and Michael Milken. The three-building complex that was the site of so much action went from 100% occupancy to almost zero, and Citicorp, the lender, took over the property, dumping it into the hands of its Citicorp P&al Estate subsidiary to do what was needed to make the property viable and attractive to an investor.
Oddly, most of the buildings were constructed in the 1930s as retail outlets, but when Drexel Bumham moved in it converted most of the space in the five-story buildings to office use. While the retail market was very weak at the time, says Geoffrey Sears, vice president and senior asset manager for Citicorp Real Estate Inc. in San Francisco, the location still appeared to be stronger for retail than for office. "Our strategy - and we were fearful of its success, but we made the call - was to make the property a much higher percentage retail than office, to try to shift the mix back to retail."
Historically, the typical Beverly Hills retail tenant was a very small, tony boutique that sold $3,000 handbags to a select, but wealthy clientele. This, however, was just the part of the Los Angeles retail market that had fallen flat. So Citicorp went in a slightly different direction, looking for high energy, high profile, entertainment-oriented retailers that would lease a large amount of space over multiple floors. Some of the Limited divisions like Structures had remained in the buildings but were doing poorly since there was really nothing else but vacant space. That finally ended when Nike Town came in and took 35,000 sq. ft. of multilevel space on Wilshire, Planet Hollywood leased 18,000 sq. ft. in two levels and Pace Wildenstein Gallery, a high-profile art gailery, expanded from New York taking 12,000 sq. ft. on the second floor.
With the retail prospects looking good, Citicorp turned to office and was not only able to re-sign existing office tenants but a number of them like Painewebber and United Talent Agency expanded the amount of space already under lease. In addition, new tenants such as Equity Marketing Inc., a designer and marketer of custom toys and gifts, took up the remaining office space.
"Our strategy has always been to bring the property up to the trophy status its location deserves by creating the property's entertainment-oriented theme for both retailers and office tenants, and to build value in the process," Sears says. The property, now called Wilshire Rodeo Plaza, is close to 100% leased.
The loan on the property originally carried a value in excess of $100 million, which is high but understandable considering it was 100% leased to a major financial company for 15 years. But what seemed like a secure investment collapsed with Drexel Burnham and, sitting almost completely empty in a weak real estate market, the value of the property declined precipitously. Concluding the turnaround, Citicorp at the beginning of January was able to sell the property to an institutional investor for $81 million. While it was less than the original loan, the price per square foot, well above $300, was the highest experienced by Los Angeles in a decade.
"We took a strategy to target more retailers and we had a much greater recovery than we would have had under any other scenario," Sears says. "We recovered far more than we expected."
Steve Bergsman writes about real estate issues from his Mesa, Ariz., home.