Property Management in Transition

By White, Janet | Journal of Property Management, September-October 1992 | Go to article overview

Property Management in Transition

White, Janet, Journal of Property Management

Years from now, when the next generation of real estate professionals comes into its own, the overindulgences of the 1980s will probably be considered a textbook case in greed and hubris. What the textbooks may not point out is that by the early 1990s the real estate industry had practically re-invented itself.

It had to. In the late 1980s and early 1990s, developers watched helplessly as demand for speculative buildings withered away and the value of existing properties plummeted to a fraction of their replacement costs.

Thanks to the recession, waves of corporate and industrial layoffs produced shrinking space requirements, adding millions more vacant square feet to the nation's already bloated commercial inventory.

As legions of owners defaulted, the troubled loan portfolios of insurance companies, banks, pension funds, and other institutional investors swelled. The federal government became America's largest landlord through the RTC and FDIC.

Property and asset management became the field of choice in real estate. For many developers and investors, it seemed the only choice if they wanted to stay in the business.

Meanwhile, managers already in the business found their jobs changing dramatically. The shift toward institutional ownership meant higher standards of financial reporting, operating procedures, training, and client relations, with a major emphasis on value enhancement.

The property management industry was changing, too. Firms were consolidating, merging, or forming regional or nationwide networks in order to position themselves for institutional business. Smaller firms were finding it more difficult to compete unless they established a strong local presence.

Meanwhile, large institutions, which had been providing management only for their own holdings, decided to branch out into third-party fee management.

And if these trends were not enough, corporations began "outsourcing" the property and facilities management functions previously performed in house. Some of these corporations even became investment partners in the property management companies they hired, contributing needed capital and general business expertise.

All of these changes will soon become history to the property professionals of tomorrow--studied for clues on how to survive in future real estate cycles. Perhaps the biggest lesson from the real estate revolution of the 1990s is that those who are willing and able to adapt will not only be considered the survivors of a difficult era, but the innovators and industry leaders of the future.

Joint venturing corporate management

It has long been an accepted principle of commercial property management that major corporations preferred to have their in-house staffs handle lease negotiations, excess property dispositions, and of course, internal facilities management.

But in an era when cost-cutting is the new religion, corporations with large real estate holdings nationwide have begun to "outsource" their real estate functions at an unprecedented rate.

Among the dozen or so top companies to farm out their real estate work is Exxon Corporation, which signed with Trammell Crow Company of Dallas to dispose of 500 retail gas station sites and to manage another 3,300 Exxon properties around the country.

Likewise, Kraft General Foods hired the combined team of Cushman & Wakefield and Grubb & Ellis to buy, sell, and lease the corporation's properties. According to a June 4, 1992, article in the Wall Street Journal, 116 of these transactions were underway in early June.

Perhaps the most significant of these "outsourcing" assignments was the deal ironed out between IBM Corporation and Grubb & Ellis, one of the country's largest commercial property management and brokerage concerns. Under this arrangement, IBM and Grubb & Ellis are joint-venture partners in a new, as-yet-unnamed property management firm to be based in Pittsburgh, headquarters of Grubb & Ellis' current property management division. …

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