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Harnessing the ego factor in commercial real estate

In recent years, old-fashioned property management has given way to a new style of asset management as more and more institutional owners have taken possession of extensive commercial real estate holdings. This has changed not only the requirements and pay structure for management personnel but a so the basic demands being placed on them.

As a result of this fundamental change, many institutional owners are now demanding ever-improving "same-store" results and annual increases in property NOIs (net operating incomes) from their management team. In effect, they are trying to standardize their real estate assets so they can require standardized revenue increases on a year-to-year basis. In doing so, each property is being given a same-store standardized agenda with same-store standardized leases, a same-store standardized level of maintenance, a same-store standardized income stream and so on.

What these institutional owners of the '90s should not fail to take into account is the importance of the "ego factor" in managing properties successfully in the current real estate market.

Donald J. Trump, for one, has become a millionaire by putting his ego factor to work for him in the high-powered business of commercial real estate. His developments and acquisitions have become almost legendary. The mere' mention of his headline-grabbing projects, such as the Trump Taj Mahal in Atlantic City and the Trump Tower in Manhattan, brings almost instantaneous public recognition, even among those who are not involved in real estate. While Mr. Trump has qualified his unusual style of doing business by admitting in a recent New York Times article that "ego deals" may not work for everyone, he nevertheless continues to insist that buying and building "ego properties" has brought him success "beyond any measurement."

If one reads between the lines, it is obvious that a piece of real estate is, in effect, a business and therefore a product of the creativity of the developer or manager. A highly successful developer or manager does not - and, indeed, cannot-accept the concept of same-store results, because by accepting that concept, he or she would diminish the potential of the property.

Institutional owners today are faced with the challenge of integrating the ego factor into their institutions' need for consistent results in reporting and performance. Successful integration of this key factor results in the elevation of a property's performance level from average (i.e., same-store) to above average or even superior.

What these institutions are seeking is not only same-store results, but also talented people with egos who can operate their real estate holdings as individual businesses that stand out from the pack and maximize the potential of each of those businesses through entrepreneurial expertise and creativity.

How do institutional owners go about capturing that ego factor, which has the potential of adding significant value to the property in their portfolios?

First, they have to take the view that the relationship between asset manager and property manager is a partnership - not necessarily an equity partnership but a management partnership. In the "good ole days" an asset manager typically went out and hired a property management firm and in effect, handed over the "keys to the kingdom in return for a check every month. In today's high-powered economy, it is no longer wise to follow such a simplistic course.

Instead, an asset manager and a property manager need to function as an integral team. They must build a partnership that has some same-store results and ego - ego of creativity, excellence, talent and success. Only by working as a creative team can they formulate and implement the management strategy that will not just generate same-store results but will produce above-average, value-added return over the long term. Part of their "pay" is the right to say, "I did it."

In selecting a management partner, the asset manager should look for a company that has demonstrated entrepreneurial creativity, i.e., the ego factor, in the management of its own properties or in the management of other people's properties. Finding this ego factor may not be easy. After all, the Donald Trumps of the world are few and far between. Often, they are a little bit maverick or a little bit eccentric - traits that may make more than a few people uncomfortable.

When evaluating a management company, an asset manager needs to ask its principals whether they have any ideas about how to creatively manage and market the portfolio properties more effectively, going beyond the acceptable standards of report making and rent collecting every month. This line of inquiry should include basic questions, such as What do you think of the quality of the tenancy@ What do you think about the level of maintenance What physical improvements would you suggest to remake the image of the proper type And how will you creatively communicate this to our ,customers,

In essence, these questions focus on what a prospective operating company is going to do to ensure that a particular office building, apartment/condo building or shopping center stands out from the rest of the pack. And whether that company will bring to the management team a reputation for quality - as well as the flamboyance, glitter and high visibility of a Donald Trump that will justify asking more per square foot than the competition. Those asset managers who choose to settle for competent rather than creative and competent replies to these questions are likely to end up with same-store operations that produce same-store NOIs and same-store valuations.

Granted, there is a certain amount of security in settling for same-store results because this limits the downside risk. Even Mr. Trump acknowledges that his high flying brand of real estate management and development isn't for the faint of heart. But in limiting the downside by never blending the convenience of a standardized operating procedure and predictable NOI with entrepreneurial ego, asset managers may limit a property's or portfolio's upside. The choice to go the extra mile, spend the extra dollar and do the extra things it takes to be entrepreneurial will ensure that the asset management/property management team (with ego) will get superior results as compared to the status-quo management team.

And who in today's highly competitive, high-rolling real estate market wants to settle for less?

Questions to ask when evaluating

a management company

* What do you think of the quality of the tenancy? * What do you think about the level of maintenance? * What physical improvements would you suggest to remake the image of the property? * How will you creatively communicate this to our "customers"?

Alan Hayman is co-founder of the Hayman Co., Troy, Mich., and a contributing author to The Handbook of Commercial Real Estate Finance. Peter J. Ulrich is executive vice president of the Hayman Co.

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