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As Real Estate Players Focus on Core Competencies, Third Party Management Business Grows

The decision by investment management firm RREEF to award the property management contract for its retail portfolio to a consortium of professional managers underlines the trend of increasing specialization within the retail real estate industry as it continues to deal with the challenges facing the sector.

Almost every retail real estate firm is under the gun to improve bottom line results. As a common strategy, firms are focusing on core competencies and outsourcing low profit margin businesses. Doing so can help firms slash operating costs. When it comes to property management in particular, third party managers with extensive experience in navigating real estate and economic cycles and strong relationships with national tenants may be do a better job protecting asset values in a difficult market climate.

Last week, RREEF Alternative Investments, the investment management arm of Deutsche Bank, announced that it had chosen five firms—Jones Lang LaSalle, United Commercial Realty, Mid-America Asset Management Inc., Crosland and KeyPoint Partners—as property managers for its 105.5-million-square-foot U.S. retail portfolio. (The announcement came about two weeks after RREEF made a similar move with its industrial and office properties.)

Jones Lang LaSalle won the largest share of the contract and will assume management of 29 centers totaling 5.7 million square feet, most of them located on the East and West Coasts. The remaining firms each gained pieces ranging between four and 12 centers. The management transition is scheduled to take place before the end of the year.

RREEF did not return calls for comment.

The move makes sense in that it will allow RREEF to focus on its main line of business, which is developing and executing asset investment strategies, and avoid spending in-house resources on secondary services, says David J. Lynn, managing director with ING Clarion Partners, a real estate investment management firm. Property management in particular tends to be a lower margin business than asset investment management or transaction services, so some advisory firms might be tempted to outsource it to third party providers if they feel they could get an equivalent quality of service for less money.

"To get bottom line returns you have to figure out what you really do well and what you can do in-house and what you can outsource," Lynn says. "It's an economic shakeout of industry players and what they do best and that's always accelerated during a recession."

When it comes to investment management firms outsourcing property management, Lynn notes, "I think you'll see more of it, but I don't believe it's going to be a gigantic trend."

RREEF's decision to outsource property management has been a gradual one, according to Greg Maloney, CEO and president of Jones Lang LaSalle Retail, an Atlanta-based third party property manager. The company started outsourcing management of its residential real estate portfolio several years ago, was satisfied with the results and recently came to the conclusion that it would rather leave management of most of its commercial properties to management specialists, says Maloney.

The move comes at a time when savvy property management is becoming of paramount importance—in the third quarter, vacancy rates for retail properties have reached record highs, reports Reis Inc., a New York City-based real estate research firm. As more institutions realize they need experienced managers to keep their centers occupied, outsourcing is becoming a frequent phenomenon, Maloney says. The fact that using third party managers can sometimes be cheaper than employing an in-house management staff serves as an added incentive.

"I don't see it happening on the REIT side or with major private portfolios, but RREEF is really a money manager and I think it's under a lot of financial pressure now, so this is more about returns," says Bernard J. Haddigan, senior vice president and managing director of the national retail group with Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. "For advisory firms like RREEF I could see [more of that] happening."

In the second quarter of 2009, Jones Lang LaSalle, Inc. reported that its management services revenue in the Americas grew 7 percent from the second quarter of last year, to $105 million. Another commercial real estate services provider, Grubb & Ellis, posted an almost 10 percent increase in management services revenue for the same period, to $66.6 million. The CB Richard Ellis quarterly report notes that the firm's roster of outsourcing clients continues to grow, but due to factors such as corporate cost cutting and consolidations, outsourcing revenue has declined.

"I think under what are certainly difficult economic times, people are always looking for ways to improve their bottom line. If they believe that there is a way to get the same quality of business or better and save costs, they'll do it," says Maloney. "We can spread our [management] costs over a larger base of properties, we have a worldwide technology platform and we have buying powers for [various maintenance systems] that are much, much greater. On the expense side, we can generally save somewhere between 10 and 15 percent right off the bat. And then as we look at different cost structures, we can save even more."

— Elaine Misonzhnik

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