The changing face of asset management.

Property Manager. Asset Manager. Close your eyes and visualize the pair.

A property manager ensures the roofs don't leak and the parking lot is sans potholes, you're thinking; an exit strategy is merely a way to leave the building in case of an emergency.

An asset manager? The brains behind the brawn. If the property manager views a project from 100 feet, then the asset manager observes it from 10,000 feet, guarding the owner's interests with an eye toward the future.

Open your eyes to the 1990s. The days when property managers merely were caretakers of properties are passe. The sinks still are repaired and the carpeting replaced, but the property manager is now taking on added responsibilities. Annual budgets that used to be detailed on one sheet with general numbers -- and little explanation -- are now 50-page books with detailed backup for each individual account. Long range planning has entered the picture as property managers are having more frequent contact with owners.

The ball game for the asset manager has changed too. No longer merely the silent strategic thinker and market watcher intent on forecasting the best time to sell, buy or hold, asset managers are becoming more intimately involved in day-to-day operations and are branching out into uncharted territory. Increased competition, impatient owners and a constantly changing financial landscape all have contributed to a sea of uncertainty for asset managers. Always proactive and keenly cognizant of the Boy Scout motto: "Be Prepared," asset managers are scrambling today more than ever. Some are offering new services while others are branching out and seeking outside investors to purchase properties for their own management funds.

"There is no question the roles of the asset manager and the property manager are being redefined," explains Jeff DuFresne, vice president and senior investment manager for DIHC (Dutch Institutional Holding Co.) Management Corp., based in Atlanta. "Historically, the property manager was the eyes and ears while the asset manager was more financially oriented, a more big picture approach. Such a rigid definition no longer applies."

Past management styles

Up until a few years ago, the property owner had well-defined responsibilities, and owners relied heavily on the asset manager for the strategic decision-making process, explains Mitch Roschelle, partner in Real Estate Advisory Services of Coopers & Lybrand. "But as more and more pension funds and other institutions felt the pain of non-performing assets, they began taking a proctive role in that process," Roschelle continues. "That means changes for the property manager and the asset manager."

Because of rapid realignments in the real estate industry, property managers are taking on a more complex role in the drama while the asset manager is moving to redefine his position. To some observers, as both fields evolve, it's getting harder and harder to tell the two apart.

Malcolm W. Bates, president of the Institute of Real Estate Management, notes that there is less and less of a distinction between many of the functions required of property managers and those performed by an asset manager, and "where the dividing line comes is not clear at all."

Cross training

Thus, as the real estate investment industry enters the last half of the 1990s, the once defined roles of the two disciplines are blurring. B.K. Allen, incoming president elect of Commercial Investment Real Estate Institute of Chicago and president of B.K. Allen in Vienna, Va., notes that as more property managers are striving to become familiar with the numbers side of the business, asset managers are slowing learning about the bricks and sticks of the real estate business. "We're seeing a trend now developing of cross training between the two," she adds. "In large corporations such as Mobil where they have asset managers and property managers, they are cross training in some situations. We're seeing CCIMs taking CPM classes and vice versa to be better prepared for the future."

Not only that, but the days of the large asset management fees based solely on some arbitrary value -- where managers have no incentive to sell assets -- are changing, according to a survey by the national Association of Real Estate Investment Managers. This comes at a time when pension funds, burned by bad investments in the 1980s and early 1990s, are expressing renewed interest in real estate. In other words, the good news is that pension funds and institutions are beginning to look again carefully at real estate as an asset class, thereby requiring the services of qualified asset managers. The bad news is to get the business, managers are going to have to work harder for the money.

More is being expected from managers, says Eugene Grace, president of Grace Management Inc., a Minneapolis-based full-service residential property management firm that specializes in senior housing. "Asset and property managers are being asked to take more risks -- to invest themselves in the properties they manage. They are required to be more knowledgeable, more specialized and more hands-on."

The future of management

"The successful management firm of the future will offer a specific, well-defined investment strategy, provide access to key executives on a continuing basis, have sufficient capitalization to participate in co-investing and be cognizant of the diversity among plan sponsors," says Michael A. Pollack, president of Pollack Financial Corp., Mesa, Ariz., and an asset and property manager who eschews fees in favor of an equity participation. "Pension funds are interested in getting the maximum amount of performance from their assets. It's been very disappointing in the past when there have been such rosy predictions made, and advisers haven't been able to come through."

Many note that the industry will likely experience a shake out as more players enter the arena, resulting in a pressure on fees. Indeed, a restructuring of fees is likely, say observers, since investors will not be able to pay property, asset and portfolio management fees.

Already owners are questioning the layering of the industry. Throughout the United States, organizations are moving from horizontal to vertical structure. There's no reason in the world to think that real estate is going to be immune from that process, say observers. The bottom line is that owners -- individual, corporate, fund or whatever -- are really interested in getting the maximum amount of performance of their assets. Enter creativity on the side of owners as well as asset managers.

Roschelle of Coopers & Lybrand predicts that in five years, "we're going to see more diversification of the historical role of asset managers to include more sponsorship of funds and more flexible service philosophies. Some are selling consulting service or getting into appraisal business. Owners want to play a more proactive role in key decisions, and asset managers are responding by changing some of their services to accommodate clients' input."

Jeffrey D. Rahn, vice president and director of asset management for Boston Financial Group, points out that at real estate investment trusts, "there is no defined asset manager level, like a pension adviser, but someone still acts for the owner in marking strategic decision planning, planning exit strategies and the like."

Management fees

IREM's Bates says, "When you provide asset management services for fee it adds another layer, and as more and more emphasis is placed on reducing costs and improving bottom line performance, you can only squeeze so many places."

But while there has been a heavey emphasis on fees, many owners and managers point out that paring to the bone might not always be the smart move.

Brad Hutensky, president of The Hutensky Group in Hartford, Conn., notes that there's been pressure by owners to reduce fees at all levels, which means property managers are having to do more asset management, or vice versa. In some cases, fees are very competitive. "One of the interesting things now is incentive management," he continues. "It makes a lot of sense in that someone is basically getting paid only if they perform."

Say a manager adds $1 million to the bottom line. Under a typical 2% arrangement, he would be paid $30,000, Hutensky continues. "But at 10 cap, the feat is worth $10 million to the owner. The owner asks how much incentive does the manager have for a $30,000 fee? If someone has the ability to add $1 million, the owner should be willing to pay more than $30,000. Maybe they could do some kind of sharing, say $100,000 or $500,000, instead of $30,000. That would prove to be a strong incentive."

Asset managers on their own

Asset managers also are becoming hungry. "What has happened is that as clients become more involved, they limit the role of the asset manager, causing some asset managers to expand their services," says Roschelle of Coopers & Lybrand. "They are now starting funds that they are the fund managers for, rather than having a stable of clients they had relations with, and collecting asset management fee. Some have gone out to some of their clients, raised capital -- a $100 million, $200 million, $300 million fund, and become creative."

These funds, he continues, are designed to be marketable to the institutional investor. "One of the asset management firms will raise $200 million and give each owner a seat on the board. It gives them a bigger role -- a decision making owner role -- and they have more input."

It is important for asset managers to become more entrepreneurial, says Robert L. Adair, president and COO of AMRESCO Inc., Dallas. Adair says he sees "the general trend moving away from [asset managers] being pure managers in the traditional sense ... Asset managers have got to step up and put their personal capital at work next to the company they're working for."

The industry also is consolidating. In July, MONY Real Estate, a division of Mutual of New York, was merged into ARES, a subsidiary of MONY that previously only performed property management. Vernon J. Brown, a vice president with ARES, says the asset management expertise of MONY was combined with the management services of ARES "to make it a full-service company. You can call it a merger of services. Now we'll be able to talk to third-party clients as full-service operators."

Still, the services of the asset manager will always be in demand, say those in the industry, because of the scope of their job.

Although it is true that asset and property managers' jobs are coming closer together, it is still important that the two remain separate, says Adair of AMRESCO, a company that provides asset management services. There are distinct differences between the two. It takes a different mindset and personality to make a good asset manager and the same goes for property managers, says Adair, "I still like the traditional."

Merging roles

There are positive results that emerge when the roles of asset and property managers become closer, according to Gregory J. Almquist, executive vice president for Pinnacle Realty Management Co., Atlanta, which manages residential, office, industrial and retail assets. It is good to keep the two disciplines separate, Almquist says, but some crossover "makes property managers better because they have to think like asset managers and vice versa. It heightens our level of knowledge and creates new opportunities down the line" making managers equipped to offer better quality service.

Roger H. Kahn, senior managing director of the Edward S. Gordon Co., a New York-based real estate services firm, says: "I still see the two working as a team to help set strategy for property. Both bring strengths to an assignment that can complement one another. The property manager understands his local market very well, his property operations very well and market competition very well. The asset manager understands market components well and also understands the ownership goals and directions very well. They can mesh the property strategy with owners. Everybody at the end of the day is working to provide the best value for ownership; goals are seemingly in sync with one another."

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