Pinnacle reaches for new heights

When the majority of your business is on a 30-day notice arrangement, service and performance become big deals.

So it is with Seattle-based Pinnacle Realty Management Co., which today is the third-party manager for some 80,000 apartment units and 9 million sq. ft. of commercial real estate across the United States. According to the most recent ranking by the National Multi Housing Council, that ranks Pinnacle as No. 4 on the list of top-50 apartment managers.

"We don't own the amount of units that Insignia owns or Trammell owns or Lincoln owns, so service is a big deal for us because we have to," says CEO John Goodman.

Pinnacle's outspoken president, Stan Harrelson, believes being customer-service driven is a good thing.

"The nature of the business has always been a 30-day world," says Harrelson. "There are two kinds of real estate management companies. There are those that manage predominantly for their own account and they may or may not supplement that with work for third parties. And there are those that are predominantly third-party. We're predominantly third-party. That means that every month hopefully we get a unspoken vote of confidence by the fact that we continue to have this group of clients. Certainly if we weren't doing something right, or if we weren't keeping our role in perspective relative to the client's interest, we'd be out of there. It's a volatile world in terms of the fee-property management business, but it's one that we think we've excelled in really more than anyone else out there, having built the company the size that we have basically on an arms' length third-party basis."

"What it boils down to is choice. Our mission is to be a superior customer-service organization and not withstanding the real estate management venue we think it's all about customer service. We want to be good enough to be chosen, not only by potential clients, but by potential partners, vendors, residents, employees. It's a mindset that goes from top to bottom through our organization," says Harrelson.

And it has led to some interesting clients. "Our customers run the gamut. In general terms, 40% of our customers are institutional - pension funds, insurance companies. We do very little bank REO work. We do a lot of work for private partnerships and syndications, about 20%. A full 20% of our business is in representing foreign clients. We have a substantial Asian core of investors that work with us as well as European investors. And then still 10% represented in the areas of government and public housing initiatives, and then another 10% in the `Ma and Pa' sole owners, wealthy individuals, that are still a factor out there," says Harrelson.

Over time, Pinnacle has moved with client needs and expectations.

"When John started the company it was a client's company," says Harrelson. "John was set up to do what the client needed. What the company has become really is an extension of that. In the past property management was our mainstay, but today it's a lot more. Property management is one part of the process of an investor's relationship with an asset, and as we became more well known and we developed more trust with our core clientele, we found that they were asking us not only to find projects for them to acquire but to manage it through the process and ultimately dispose of it. Along the way we did everything from construction management to helping with financing. That's borne on the basic that John started the company on. Property management is the most obvious and noteworthy thing that we do, but we've always been doing these other things behind the scenes."

So today, Pinnacle derives about 85% of its fees from property management, about 8% from brokerage, 3% from construction management and 4% from commercial leasing.

New commercial emphasis

Going forward, Pinnacle is pinning much of its growth in the commercial management arena.

"Our company has been primarily residential in the past. One of our growth areas for 1997 beyond is really to build the commercial side of our company to the same national stature as the residential side of our company, where we're fourth overall in size. So I would expect as a result of that commercial leasing, construction management is going to play an increasing role," says Harrelson.

The company is hoping that its residential management business compliments its move to the commercial side of the fence.

"We believe that the residential side in many ways provides us with the skillsets, the backroom support systems, and so forth to enter into the commercial side in a big way," says Harrelson. "As it relates to why do it, there are a couple of reasons. Certainly diversification and expansion of our appeal to potential customers. But that's led in large part by the fact that our potential customers being institutions have diversified their portfolios. So we're really responding to what the customers are out there looking for.

The company's track record shows a propensity for slow and steady growth. So rather than many major acquisitions, you can look for Pinnacle to take smaller bites from quality players.

"We didn't go from being a Seattle company to buying up a bunch of companies. We basically bought two companies in the past two years. We've built our national presence really one customer at a time. Customers and their trust in us have enabled us to go into markets as far afield as Boca Raton and West Palm Beach from here in Seattle. Not because there weren't operators there, but because we developed the relationships and we had their confidence. It was the same as getting into commercial management. We had built a delivery system that satisfied a number of our clients. Our first foray into commercial property management was 3.5 million sq. ft. from a customer," says Harrelson.

"It's a perfect complimentary business and our growth plan is we look at our regions and we look at those that are primarily residential oriented and if they have a component of commercial, we're trying to get that equivalent to the residential side. If there is no commercial expertise in a given area, then we're certainly looking for acquisition targets to bring that expertise to the table.

"We've always recognized that you take advantage of opportunities. More often than not if you don't adapt ... if you try to stay the course in this business you're shipwrecked. You've got to be fast on your feet. You've got to be a little bit free-form, but with an overriding mentality. Our overriding thought is that we want to be a significant player. To me to be in the residential management business and not be in the top five would be a disaster. To be in the commercial management business and not be in the top five would be a disaster. Our objective is clearly that," says Harrelson.

Most recently, Pinnacle closed on the purchase of Zuckerman Krondstandt Inc., a Bethesda, Md.-based firm with 3.5 million sq. ft. of comnercial space and 1,500 apartment units under management.

"I think you'll see Pinnacle probably closing on six or seven deals of some significance next year," says Harrelson.

"We want their people, we don't want the business. We want the people and the business. That's critical. They've got to come with the program," says Goodman.

Harrelson agrees. "To us, the value of an acquisition isn't just the portfolio it's the people who run it."

Linking with Phoenix

To help it in its quest to be best, Goodman and Harrelson sold part of the business to Phoenix Real Advisors (PRA), an operating company of Phoenix Realty Group, which is a wholly owned subsidiary of Phoenix Home Life, based in Hartford, Conn. PRA and Pinnacle operate independently, and yet share a win-win relationship when it comes to internal capabilities and synergies of business purpose.

Currently Pinnacle manages 40% of the held assets in Pra-managed portfolios while PRA's assets constitute less than 20% of all assets managed by Pinnacle. The relationship is best described as innovative and collaborative investment management.

"It was a very important move for us because it makes us credible," says Goodman. "They are a substantial 142-year-old life insurance company that is very successful and for a life insurance company to hook up with us is a statement of their belief in us and their confidence in our abilities. They are a very progressive company."

Also on the boards is the opportunity to take the company public in the next several years.

"When John and I were sitting around two years ago, we had a company that was very successful, that had grown national notoriety, but we really wanted to go to the next step, and we ultimately saw the public markets as being one of the areas that we sought to go," says Harrelson. "Yet we knew that we lacked some of the personal disciplines to make that trip alone. From our perspective, we believe that Phoenix and we in combination make an ideal match to go to those public markets, which we anticipate doing in the next three years."

"To be successful in an IPO you have to create a stable, disciplined organization with a history of earnings," says Goodman. "And now we have a tremendous amount of resources to do a lot of things."

And you can look for Pinnacle to branch out into foreign markets as the time seems right.

"Because we've diversified and we are in a number of markets, we can weather some changes in the industry. Residential property management companies are dying on the vine. You're seeing a middle ground that's evaporated," says Harrelson.

In general, the property management business has become one of the toughest and most competitive in recent memory.

"The essence of the property management business to a degree is volume," says Harrelson. "In order to match fees with client expectations - and client expectations have gone through the roof - we're doing things that five or 10 years ago we never did before, with regard to customization of reporting systems, on-line transfer of information, detailed specialized reporting, business plans and doing full balance sheets for customers. As the institutions have seen their fees shrink, they've pushed a lot of that down to property managers. Property managers in turn have also seen a shrinking fee, but the way for us to maintain our margins and deliver that very sophisticated level of reporting and requirement is to build a pretty large infrastructure. When you talk about competition, it's got to be very difficult for a small local company, no matter how good the principals might be at knowing the real estate market, to compete for the business of an institution where they're looking for a pretty high technology investment."

Internal ducks in a row

Like a lot of companies, Pinnacle has focused on building a strong infrastructure as the foundation of its next moves.

"Ten years ago and even five years ago, you didn't need the infrastructure that you have to have today. You need a risk-management department, you need an HR department, you need an MIS department. Those things you never thought of," says Goodman.

"The real difference is that when you used to engage a property manager you looked for an individual that was trustworthy, and they were the risk manager, and they were the human resource group. They had all of the expertise. That won't hold up anymore. The issues are just so heightened, and the focus so intensified. These things are all support systems. They aren't luxury items anymore. They are absolute necessities to doing business," says Harrelson.

As its client base has become more sophisticated and institutional in nature, the importance of investing in technology has become a major focus for the firm.

According to Harrelson, Pinnacle has invested nearly a million dollars in information systems and software technology in the last 18 months, "and we expect that will be another $600,000 or $700,000 in the coming year. That's all for basically creating that delivery system so that we can communicate on the very high level that our customers are expecting us to."

How Pinnacle keeps its business isn't through the magic of power buying or economies of scale in purchasing power. Rather, its property managers look to the local level.

"Buying power is one of those things that every company uses as though there were some big warehouse that they were going to load light bulbs into and ship them all over the U.S.," says Harrelson. "The part of this business that hasn't gotten more sophisticated are the vendors that provide services. Your best deals are still local. Our people are watching the newspaper. If baseboard heaters are cheaper at Home Depot this week then that's where we're going to go get them. There's a lot of sensitivity there."

"Getting that guy who works out of his car to paint apartments at $150 versus buying that union guy at $350. You really can't compete with the Home Depots of the world," says Goodman.

Institutions also demand a certain amount of consistency, in their investments and in the performance of their third-party partners. "We've got to be consistent in delivering the same product everywhere. Institutions like that because today people own properties everywhere," says Goodman.

And more of that business is up for open bid these days through the request for proposal (RFP) process.

"More business is coming through the traditional RFP process than before," says Harrelson. "Typically property management business was gleaned from a company developing a relationship. Now you've got two different and distinctive components. You've got the technical capabilities - can the firm deliver at these various levels being required - and then there's the other part which I still think comes down to does your company have a culture that is more about delivering results to the client than about you being a big company."

"The most important thing is that we keep the role of the company in perspective. We don't let our egos get in the way of our customers' belief in what we're going to do for them. We're there for them. It's the alignment of purpose with the client that's important. You've got to match what our client wants."

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