What do the stars hold for the consortiums?

It seemed like a really cool, almost revolutionary, idea: Commercial real estate — that last bastion of inefficient hand-to-hand transaction combat, big egos and guarded market information — would finally embrace technology. The industry would be changed forever, overnight.

That was until about April 2000, when the now infamous stock market bubble burst and a lot of the tech ideas were exposed as nothing more than get-rich-quick schemes once the door to the public markets abruptly — and surprisingly — closed.

Nowadays, you hear the words “strategic,” “slow” and even “long-term” when firms discuss technology plans.

And what about those great big real estate consortiums? You know, the ones that would revolutionize the industry and create one standard transaction platform that everyone could share and that would make the industry so much more efficient?

Clearly, the standard has not materialized just yet, and it's probably not likely to happen anytime soon, because a dose of reality finally set in for the players involved. Now, in the summer of 2001, the landscape is vastly changed, with a much less cluttered playing field.

Only two big consortiums remain — Octane Ventures LLC and Constellation Real Technologies. And with them still rests the idea that competing firms can work together and incubate technology ideas and companies that will revolutionize commercial real estate — except now the plan is to change the industry in the long term, not overnight.

“Octane has been very deliberative in developing its strategy, business model and financing, rather than rushing to market merely for the sake of doing so.”
— Joe Fitzpatrick
CB Richard Ellis/Octane

“The goal of both consortia is to drive standards,” said Mark Rose, chief innovation officer with Chicago-based Jones Lang LaSalle. “Standards are the ‘Holy Grail’ of the real estate technology push. We are a highly fragmented and biased industry. With data standards, common data definitions, standard use of raw property data, and smaller standard acquisition and lease documents, we could reach our goals of cost compression and productivity gains,” Rose added.

Both groups are working with the Data Consortium, an organization that promotes universal communication protocols for the commercial equity real estate industry, according to Rose. In addition, Octane is working with both an investor and corporate advisory board to achieve the initial standards.

With this in mind, NREI set out to find how these two consortiums are faring. Much has happened since their founding nearly two years ago. Both recently named new CEOs. Constellation tapped Glen Barnard, former president of e.KB Inc., the e-business division of KB Home, and Octane appointed Jim Huser, former head of Cupertino, Calif.-based Internet consultant US Interactive.

Octane powers up

Octane Ventures, temporarily based in Orange County, Calif., until it establishes a permanent home, is the combination of Jones Lang LaSalle, Los Angeles-based CB Richard Ellis, Dallas-based Trammell Crow Co., and New York-based Insignia/ESG. Founded in late 1999, its basic premise is to create an online transaction platform for the entire industry, initially leveraging off the vast real estate portfolios of its founding members but eventually opening up to other brokers, property owners and investors, landlords, tenants and other professionals, including architects and attorneys.

“Octane endeavors to create a de facto transaction platform for the entire commercial real estate industry,” said Octane spokesperson Joe Fitzpatrick of CB Richard Ellis. “In addition to creating a critical mass of industry professionals committed to adoption of the platform, the Octane standards are being developed so that it will make sense for all players in the industry to adopt them, from process management to data collection and reporting.”

Fitzpatrick reiterates that all brokerage firms will be invited to participate. Marketing Octane will be a major step toward industry adoption on a large scale, but even more critical will be the implementation of the platform. “Once it is up and running and people can see for themselves how it can save them time and money, that will be the best marketing technique of all,” Fitzpatrick said.

What the platform actually does is still a bit up in the air, and industry observers have started asking tough questions about its strategic plan.

“The platform would address all aspects of real estate leasing and sales, with the goal of streamlining processes and reducing time to occupancy/close, which will provide increased efficiencies and cost savings that benefit all parties,” Fitzpatrick said. He pointed out that a beta version of the Octane transaction platform will be implemented for testing in select brokerage offices of the Octane partner firms by fourth-quarter 2001, with a full roll out to the industry in early 2002.

As an ongoing business model, Octane has not been concerned about making bucketloads of money right away — the stock market crash saw to that. But it has tried to stick to its guns in developing a sound strategic plan.

From the beginning, Octane Ventures has solicited input from the broker, tenant and landlord/investor communities, ensuring that all parties' interests are considered, Fitzpatrick said. “Octane has been very deliberative in developing its strategy, business model and financing, rather than rushing to market merely for the sake of doing so,” he said.

“If you look at each of their investments — SiteStuff and FacilityPro — you could say the winning consortium would be the one whose first investment creates a sustainable, survivable company.”
— Laurence Hall

That methodical approach has enabled Octane to address the business needs of all participants in the real estate transaction lifecycle, as well as learn from the mistakes of others that attempted to enter the market without doing the necessary research and planning, explained Fitzpatrick. Octane's ownership structure permits the development of the platform at its own pace, without undue pressures from the venture capital markets demanding quick returns on investment, Fitzpatrick believes. “As a result, Octane is being engineered for the long haul and long-term success,” he said.

So far, Octane has a lively investment history, first doling out $30 million to Austin, Texas-based SiteStuff.com, then rescuing New York-based listings firm RealtyIQ in April. It also recently invested $10 million ($2.5 million per founding member) in Waltham, Mass.-based software developer WorkplaceIQ.

Fitzpatrick admits that the proof will be in the results. “As Octane's functionality is established within the marketplace and its benefits become known, the industry at large will scrutinize the platform and be hard-pressed not to seriously consider its adoption,” Fitzpatrick predicts. “If people see the value in using the Octane platform, they will use it. If they do not, they won't. It's that simple.”

Constellation aims for the stars

Denver has now become the new home of Constellation, thanks to the appointment of new CEO Glen Barnard in June. The consortium also collected a new round of $25.6 million in funding and underwent a major membership change. Six REITs joined, including Englewood, Colo.-based Archstone Communities Trust, Alexandria Va.-based AvalonBay Communities, Houston-based Camden Property Trust, Santa Monica, Calif.-based The Macerich Co., Bloomfield Hills, Mich.-based Taubman Centers, and White Plains, N.Y.-based Starwood Hotels & Resorts Worldwide.

At the same time, three of Constellation's original members — Chicago-based Equity Office Properties Trust, CB Richard Ellis, Jones Lang LaSalle and Trammell Crow Co. — announced they would pull back from further participation in the consortium, but retained their original ownership stakes.

To date, Constellation has invested in only one company, Atlanta-based e-procurement firm FacilityPro.com, but it was to the hefty tune of $25 million. In retrospect, the investment in FacilityPro occurred at a healthy pace, said Laurence Hall, FacilityPro's CEO. Hall said that as market conditions changed for every company in the dot-com/e-commerce New Economy space in April and May of last year, so too did Constellation's focus.

“The Constellation charter became more focused, and they brought in a new CEO just recently,” Hall recounted. “It has finally come around to where Constellation as an investor is adding tremendous value to FacilityPro, and we're adding great value to Constellation.”

Hall admits that the consortiums initially were focused on an immediate return on their investments, primarily through an initial public offering (IPO), and therefore return on investment was critical.

What's impressed Hall most about Constellation is that the consortium has matured in its investment outlook and is focused on the long-term value that FacilityPro brings to the members of Constellation. Still, Hall said a “liquidating event” or IPO should take place in the future to create a return for FacilityPro's shareholders.

Asked which consortium will succeed, Hall observed, “If you look at each of their largest investments — SiteStuff and FacilityPro — you could say the winning consortium would be the one whose first investment creates a sustainable, survivable company. Not that much time is going to be needed to flush that out.”

Hall did venture a prediction, suggesting that Constellation is better positioned to be successful in the long run.

Winners and losers?

The two consortiums have different perspectives, said Rose of Jones Lang LaSalle, whose company was an original stakeholder in each entity.

Whereas Octane was organized with a focus on redefining the supply chains and delivery systems of service providers that would benefit the real estate industry, Constellation was set up as an investment club to invest in technologies that would benefit the Constellation member companies.

According to Rose, Octane was organized with a focus on selling service providers proprietary products developed by Octane (internal rate of return or IRR), whereas Constellation was set up as an investment club to invest in technology companies (a return on investment model or ROI).

“For Octane, its investments do not have to be IPOed or have a capital event,” Rose continued. “The investment needs to take cost out of the system, and produce productivity and efficiency gains.”

Joseph Rubin, national director of financial services for New York-based Ernst & Young's real estate practice, believes both companies will be better able to measure their success over the next 12 to 26 months as the technologies are built out and adopted. “Once value is realized, sales and profits for the tech companies will follow, if they have enough cash to reach that point,” Rubin said.

As for the goal of creating new industry standards, Rubin is skeptical. “The consortia would like to believe that they are creating process standards that the industry will ultimately follow because the big boys do it,” he said. “However, Constellation's members aren't all using the tech companies they fund, so that won't work. Octane could conceivably set standards in the transaction area, but a lot of time and money would have to be invested first.”

Questions have abounded about when the consortiums will actually replace words with action when it comes to realizing their initial visions. But progress is being made, said Christopher Hartung, chief strategy officer for San Francisco-based iBuilding.

“We have serious doubts regarding a standardized transaction platform. We have found the need for more customized solutions for our clients.”
— Julien Studley
Julien J. Studley Inc.

Both consortiums have begun using procurement platforms. For example, after Constellation made an initial investment in FacilityPro, Equity Office adopted FacilityPro as its procurement solution, and Octane just decided on WorkplaceIQ as its transaction engine, according to Hartung. “I expect that with the new management teams in place at both consortiums, we would now see more activity from them,” he added.

Contrarian play

One big firm that has chosen not to hop on the consortium bandwagon is New York-based Julien J. Studley Inc. But why?

According to the firm's chairman, Julien Studley, the company prefers the freedom to select from a pool of available service providers that best serve its brokers and clients.

“Being part of a big group introduces conflicting goals, and you must make compromises when selecting a strategy, vendor or technology,” Studley said. “In turn, you may not end up with the best solution for your clients' needs. The consortiums are focusing on online procurement systems for purchasing building goods and services, an area that is not relevant to tenant rep firms like Studley.”

Another focus of the consortiums is on transaction platforms. “We have serious doubts regarding a standardized transaction platform,” Studley said. “We have found the need for more customized solutions for our clients.” Still, Studley doesn't rule out someday joining one of the consortiums.

Los Angeles-based Arden Realty Trust is also a consortium holdout. Andrew Sobel, executive vice president, said the Los Angeles-based office REIT was approached by both Octane and Constellation to sign up, but declined. Arden's biggest goal was to wire its 20 million sq. ft. portfolio of Southern California office buildings, and the company discovered that it had market presence and great economies of scale on its own.

“We listened to the whole broadband pitch, including people who were going with Broadband Office [a technology consortium that filed for bankruptcy in May 2001],” Sobel said.

“When we viewed how things were laid out in the consortiums, at least regarding broadband, it was evident to us that the plan for wiring was going to be a big political issue because you couldn't wire everything all at once. We were one of the smaller fish in this big pond. We asked ourselves why we wanted to be there if we were probably not going to get the best service,” Sobel added.

His pragmatic, wait-and-see view is that even if the consortiums are successful, other companies stand to benefit. “Technology is going to come to everybody,” Sobel predicts. “I don't think anyone's going to develop a technology platform and limit it to their three buildings. If a consortium comes up with a great plan and we see that we can get value from that, they're going to want us to join because the bigger they get, the better they get.”

Ben Johnson is an Atlanta-based writer.

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