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Property management's new report card In today's turbulent economic times, most bettors in the commercial real estate arena are putting their money on the property management function to cut costs and bring greater efficiencies to properties from coast to coast and around the world.

Certainly the property management world has seen its fair share of corporate mergers and acquisitions of late. Consider that in recent months, Transwestern Property Co. bought Washington, D.C.-based Carey-Winston. CB Commercial became CB Richard Ellis. Cushman & Wakefield purchased the remaining stake in London-based Healey & Baker. Grubb & Ellis has been a major acquirer, particularly out west. LaSalle bought COMPASS Management and Leasing. Trammell Crow bought Faison and CORE Resource Inc. Kennedy Wilson International bought Heitman Financial's management and leasing unit. And the list goes on.

Suddenly, a whole lot of Corporate America's real estate executives have been trying to tell the property management players without their scorecards. As one executive we talked with recently put it, "It isn't getting any easier, is it?"

So, given the recent stock market/CMBS upheavals and the ever-changing service-provider landscape, what is the present state of the property management business as we all head into 1999? What kind of job are property management service-providers doing? Are their clients (the Corporates) satisfied with their performance? How will performance measures change in times to come? And what effect have mergers and consolidations among Corporates' service-providers had on the Corporates themselves?

These are the key trends we wanted to focus on for the purposes of this survey. We also wanted to investigate how property management firms view the industry and compare their ideas with the views of their corporate clients.

What we did A total of 900 subscribers were selected from National Real Estate Investor's circulation base. These included 300 corporations, 300 pension fund/asset management companies and 300 building owners/managers. In addition, 100 real estate managers were selected from Nelson's Directory of Institutional Real Estate.

Overall, we received 262 completed surveys, which is a 26% response rate.

What we found, Part I First, we wanted to find out the scope of operations of our total respondents. We found that 38.5% of the firms operate nationally and 16% report international operations.

Respondents are comprised of two major groups - those who use property management services (56.5% of all respondents) and those who provide property management services (38.9% of all respondents). In addition, respondents are primarily high-level executives - CEO, President, Director of Real Estate, Executive Vice President, Managing Director, and Vice President.

The largest percentage of user respondents (41.3%) use a property management service firm that operates in a national scope. Providers are more likely to report the scope of their company as local or regional.

Respondents that provide property management services are less likely to report their firm as national than respondents who use their services. One explanation for this is that while providers of property management services work for national firms, the scope of their office is local or regional, so these respondents consider their firm local or regional. The users of third-party property management services, however, may only see the name and consider the firm national, rather than local or regional.

How big are these companies? Over half of the companies that use property management services have less than 100 employees, and 67.5% use a third-party service-provider. The remaining respondents use in-house staff to provide these services. Of those who use a third-party service-provider, 76.9% have more than one provider. The median number of service-providers among respondents is five.

As stated previously, many of today's property management service-providers have merged or consolidated over the last few years. But is this trend toward consolidation going to be a sustained one? Our respondents seem to think it is. When asked if they believe the trend of consolidation among property management service-providers exists, 82.8% said yes. Of those, 94.5% believe the trend will continue. Percentages of respondents who believe this trend has been good are even among service-providers (36.6%) and users of the service (38.1%). However, a higher percentage of service-providers (23.2% versus 15.1% for users of the service) view the consolidation trend as bad.

Among those respondents who thought the consolidation was "good," we gathered a few interesting explanations:

* "Better overall quality of service"

* "Bottom-line focus"

* "It will create efficiencies and enable firms to make a profit"

* "Large, more diverse companies can provide cheaper, better services"

* "More professional, can afford state-of-the-art technology"

* "More quality, sophistication, efficiency and technologically current. As long as the human aspect remains"

* "Mostly good, but local company may be better than national contract vendor"

Among those respondents who thought the consolidation was "bad," we had these types of write-ins:

* "Best provider rolling up into REITs, creating conflict of interest for direct owner."

* "Brand names are not always better. Small providers can be more responsive. "

* "Centralization of services is usually unproductive."

* "It has lowered services to the tenants for the sake of short-term yield results. Those buildings will suffer in the next tenant market."

* "Loss of local focus, personnel volatility, cumbersome organizations."

* "The larger companies do not competently serve institutional and individual investors. Real estate is a local business."

* "Properties, like people, can have their own personality."

In today's customer-service driven mentality, just how satisfied are corporate service users? Our respondents rated the work of their service-providers high. More than 80% of respondents report being satisfied or very satisfied. When asked if consolidation had a good or bad effect on the property management industry, one of the factors mentioned frequently was the level of service offered by local versus national firms (local firms offering better service to clients versus national firms being more efficient). However, no significant difference in satisfaction exists between respondents whose primary service-provider operates nationally versus those whose service-provider operates on a local level.

Respondents report that third-party service-providers are doing a fairly good job in satisfying their clients. Some 65.4% of respondents who use third-party services are "satisfied." While only 17.3% of respondents indicate they are "very satisfied," none of the respondents indicated they were "not satisfied" with the service from their property management service-provider.

Compensation arrangements This is one hot topic in the industry right now, and well it should be. The thinking among many property management firms is this - if PMs have become true one-stop shops, complete with back-office research capabilities and more than brokerage services, shouldn't they be paid a regular fee plus commissions on any deals they do? This helps PMs generate a more steady revenue stream (and since many of today's PMs are publicly traded companies, this is a good thing). The thinking, too, is that PMs want to build long-term relationships, and to do so should be rewarded with a fee-plus-commission arrangement.

But many Corporates think a bit differently. Many want to pay for performance, a sort of "You're only as good as your last deal" arrangement. True, long-term relationships are important to the Corporate sector, but so too is an ongoing justification for that property management contract. In fact, our study found an interesting difference of views on the entire "relationship factor," which we will explore a bit later in this story.

As with so many things that are Darwinian in life, what has happened in recent times is a definite shift away from commission-only compensation structures and more attention to fee-plus-commission structures. This is good for the PMs (a steadier revenue stream) and good for the Corporates, who can justify their property management expense to upper management with the fee-plus-performance incentive.

On to the study. Among our respondents, the fee-plus-commission and fee-only methods of compensation are the most used methods and are most often considered by firms investigating alternatives. In all, 48.1% of firms have considered alternative compensation structures. Interestingly, only 36.5% of firms believe there is an industry shift toward fee-only compensation. What does that tell us? That Corporates and PMs alike aren't quite ready to give up trueperformance incentives?

We did accumulate some interesting write-in answers by property management service-providers about how they are compensated. They include:

* "Base fee and incentive"

* "Commission related to leasing service"

* "Cost avoidance"

* "Fee plus cost"

*"Performance, benchmark achievement"

* "Salary plus incentives"

We also gathered some interesting write-ins to the question of which alternative compensation structures Corporates have considered:

* "Benchmark performance"

* "Fee + bonus"

* "Fee + commission + incentive"

* "Hybrid"

* "Incentive"

* "Incentive fee" (2 mentions)

* "Incentive performance"

* "Initiative fees for performance"

* "Performance against comparable property management company's"

* "Performance, etc."

* "Profit participation if targets are timely"

* "Value enhancement"

Report, please! With the advent of computers and today's numerous software packages, you would think the property management industry would be on a more level par with today's corporate accounting systems than ever before. And according to our study, you would be right. Over half of our respondents report their service-provider's financial capabilities as above average or excellent. An additional 36.5% rate it as average.

A goodly number of our user respondents (43.3%) indicate their property management service-provider uses an off-the-shelf accounting package - 26% did not know or answer the question (hmmmm). Frequently mentioned packages used are MRI (15 mentions) and Skyline (12 mentions).

Two-thirds (67.6%) of property management service-providers report they use an off-the-shelf software package. Packages frequently mentioned by service-providers are Skyline (17 mentions), MRI, Timberline and Yardi (8 mentions each).

Other specific packages mentioned include Rent Roll, Argus, Quick Books, Ten Man, Quicken, AMSI and JD Edwards.

Getting closer, closer If the decade of the 1980s was best known as the "me" decade, then the decade of the 1990s may be best known as the "us" decade. Ah, relationships. They seem to mean different things to different camps. For example, respondents in our study proved that providers of property management services are more apt to view their relationship with clients as a partnership than users of property management services.

In fact, a wake-up call is now being sounded. According to our study respondents, users of third-party property management services do not believe they have established a partnership with their service-provider, with 82.7% seeing the relationship as client/vendor (ouch). Not surprisingly, service-providers are less likely to see the relationship as strictly client/vendor, with only 55.6% viewing the relationship in a client/vendor manner.

So what does this really tell us? Obviously, more work needs to be done in the old client/vendor relationship. Still today at industry conferences, it is amazing how many property management service-providers are treated as contract folk rather than true partners in a business relationship.

Is it a turf war, where Corporates are reluctant to relinquish much if any control of their internal operations to outsider vendors? Maybe that is part of it. But then as we continue to see shifts in the corporate environment and compensation structures move toward a heavier weighting on the fee-plus-commission system, then true partnerships may form. However, the last time Corporate America went through a significant downsizing in the late-1980s and early-1990s, the relationship between client and vendor became more and more strained. The same could hold true in the months ahead as Corporate America looks to shed thousands of employees from its payrolls.

And we all remember what happened to America's corporate real estate departments the last time that happened, don't we? Can you say "downsize?"

Making good hires On that gloomy note, let's look at how PMs get hired in the here and now. What makes for a good hire in the first place?

Not surprisingly, most Corporates sound like they are from the "Show-Me" state of Missouri - in other words "show me what you've done and we'll talk." When hiring a property management service-provider, the vast majority of users (85.6%) report that experience/track record is a more important determinant than price/compensation package. And 77.8% of property management service-providers agree that exper-ience/track record is the more important determinant.

Property management service-provider performance is measured primarily by bottom-line earnings (84.3% of providers and 83.7% of users report this is the method used). Over half (52.9%) of the users of third-party property management services also report that they benchmark the performance of their service-providers.

A few interesting write-in answers from property management service-providers to the performance measurement question included:

* "Asset NOI, occupancy, retention, financial reporting - timely and accurate"

* "Budget"

* "Building condition and operating costs over prior years"

* "Increased rents, NOI, value"

* "Integration with their systems and philosophies"

* "Management fee income equal to or greater than five times the manager's salary. Example: Manager earns $60,000 - must manage $300,000 of business."

* "NOI/Cashflow from operations"

* "Overall performance management and leasing"

* "Performance of property"

* "Quality preservation"

* "Relative performance"

* "Service/Communication"

* "Tenant retention"

* "Tenant satisfaction surveys"

* "Usually as compared to other firms providing similar service"

* "Value creation"

We also gathered a few write-in answers to the peformance measurement question from the Corporate users, which included:

* "Carrying out the agreed business plan"

* "Communication/Creativity"

* "Compared to market"

* "Construction management"

* "Continuity of people, do they stay with them and us?"

* "Execution of specific plans"

* "Maintenance appearance of the property and operating expense levels"

* "Management compensation per dollar of NOI"

* "Operating cost per square foot"

* "Operating expenses"

* "Oveall performance"

* "Per space revenue/expense"

* "Performance"

* "Performance against plan"

* "Performance Metrix"

* "Quality and cost control"

* "Responsiveness"

* "Tenant satisfaction"

* "Tenant satisfaction, asset investment performance"

* "Tenant survey/regular interaction/reporting/inspections"

* "Tenant retention and quality of individual property manager"

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