While the flurry of recent REIT privatizations has been a well-documented financial windfall for many brokerage firms, it also is pumping up the financial coffers of service providers thanks to boatloads of new property management assignments.
One Market Street, a 1.5 million sq. ft. office complex in downtown San Francisco, serves as a high-profile example. Chicago-based Jones Lang LaSalle (JLL) won the assignment to manage the property in early 2007 following Blackstone Group's sale of a $2.5 billion, 3.9 million sq. ft. portfolio to Morgan Stanley.
The portfolio once belonged to Chicago-based Equity Office Properties Trust (EOP), which Blackstone acquired. EOP previously had managed the property in-house. It is the largest property management assignment in San Francisco in the past 10 years, say local brokers.
Most publicly traded REITs are self-managed, meaning their property management is coordinated in-house. As these firms are taken private and individual properties and portfolios are sold off to pay for the deal, most of the new owners are contracting with third-party property managers to oversee daily operations and help owners lower operating costs to recoup their investments.
“The privatization of the REITs, on multiple fronts, for us, is absolutely increasing the size of our portfolio,” says Bill Krouch, CEO of Jones Lang LaSalle's Markets Group. “As the REITs get cycled out, all of a sudden you have new inventory coming on line, and we have an opportunity to manage and lease that product, and that's exactly what we've seen.”
Property churn causes stress
But where there is opportunity, there is risk. “Absolutely it can be an opportunity to get more business, but it's also an opportunity to lose what you have,” says Tony Long, president of asset services for the Americas with New York-based CB Richard Ellis. The global giant services provider ranks No. 1 on NREI's annual list of Top Property Managers with 1.7 billion sq. ft. under management as of Dec. 31, 2006.
Institutional investors are holding properties for shorter periods due to the run-up in values over the past three years, Long says. “The biggest challenge is to focus on the day-to-day management of these assets while we have record turnover in property sales. The stress that puts on the operations of the properties is unprecedented,” says Long.
Despite the stress, the deal volume is expected to continue at least through the rest of 2007. One potential new management assignment is EOP's 10 million sq. ft. Chicago office portfolio. Krouch says Jones Lang LaSalle is working with prospective buyers to create a financial package that works, which includes a property management assignment.
Green initiatives heat up
While REIT deals continue to churn, service providers are working on new ways to differentiate themselves to win business. Environmental impact is at the top of most agendas, and the “green” issue has taken on public policy status with many of the largest service firms, including CBRE, Jones Lang LaSalle and Houston-based Transwestern.
For example, CBRE recently announced a three-year plan to be completely carbon neutral across its property portfolio by 2010, a move the company says reflects demand from both owners and occupiers. Becoming “carbon-neutral” means that an entity has neutralized the effect of its greenhouse gas emissions. An entity is considered “carbon-neutral” when its CO2 emissions, or “carbon footprint,” have been measured, reductions have been implemented, and remaining emissions have been offset through high-quality carbon projects.
Delivering lower energy costs, which account for 20% to 40% of expenses and are the largest operating expense for owners, has become a top priority for service firms. But typically these higher costs are passed on to tenants through their triple-net lease pacts, and many owners are still waiting on the sidelines to test the level of investment needed to bring existing properties up to higher energy standards.
Krouch admits that in recent meetings with Jones Lang LaSalle's largest institutional owner/clients, the green discussion turned to what tenants would be willing to pay for higher energy efficiency. “If you want to get to the highest levels of energy efficiency, it requires capital, and our investor client base is not going to build it and see if tenants will come. They will build it when there is appropriate demand for that, and they will also modify buildings based on how serious the corporate users are.”
| Client | Description | Service Provider |
|---|---|---|
| MetLife | Wells Fargo Plaza, Houston's tallest office building, 71 stories, 1.7 million sq. ft. | CB Richard Ellis |
| Morgan Stanley | One Market Street, a 1.5 million sq. ft. office building in downtown San Francisco | Jones Lang LaSalle |
| MetLife | 100 Congress, a 411,536 sq. ft. Class-A office building in downtown Austin | CB Richard Ellis |
| Morgan Stanley | One Post Office Square in downtown Boston, a 766,000 sq. ft. office tower | Jones Lang LaSalle |