Real Estate Industry Consortiums-National or Local-Who Will Succeed?

By Praeger, Michael | Real Estate Issues, Winter 2001 | Go to article overview

Real Estate Industry Consortiums-National or Local-Who Will Succeed?


Praeger, Michael, Real Estate Issues


The commercial real estate market has been revamping the way it does business in the last two years, through the introduction of the Internet and Web-based applications. Increasingly more commercial real estate organizations are realizing the power of streamlining purchasing, asset management, financial management, and other business processes online. Real estate organizations can realize an even bigger benefit by joining together to create one cohesive group, or consortium. Consortiums are relatively new to the real estate industry--but if formed and operated correctly, can provide real estate organizations with a powerful buying and negotiating tool. But the real question that plagues the industry today is which will succeed--national, local, or industry-specific consortiums?

While national consortiums have the operating capital to adopt all the technology available and can guarantee financial stability to its members, the disbursement of members is too large and their scope is very wide. Local consortiums, on the other hand, operate within a smaller geographic area and members are usually focused on achieving one goal at a time. The jury is still out on which consortium type will be more successful. Reports indicate that while industry segment consortiums are providing value to their members within a national framework, local consortiums, in all practicality, have the upper hand to succeed due to the common geographic market its members operate in.

CONSORTIUM BENEFITS

Two key components that provide major benefits to consortium members include the ability to implement affordable technology and collaboration. Through Web-based applications such as e-procurement, these property owners and operators are seeing a massive reduction in paperwork, time, and inventory. In fact, one real estate operator, Levine Properties, based in Charlotte, NC, saw a 15 percent decrease in controllable operating expenses once online purchasing and a bid management application was implemented in its offices.

National, regional, and local consortiums are a means for property owners to increase their competitive advantage through developing relationships with other property owners, creating one large network that can provide financial stability, additional revenue opportunities, and more leverage in negotiating contracts with suppliers. The goal of this new collaboration is the gain of additional resources and purchasing power without surrendering individual purchasing control or flexibility.

Smaller companies who join together in a consortium are able to take advantage of the economies of scale and become more competitive with larger real estate operators. In addition, these companies are realizing the revenue- and cost-focused benefits:

1. With regard to revenue, consortiums allow real estate operators to act as a united group when negotiating profit-sharing deals with third parties such as advertising or telecommunications companies-basically companies that provide services for tenants.

2. On the cost side, consortiums enable operators to act as a cohesive bargaining unit to standardize business practices and purchase software and supplies. Consortiums have more pull with suppliers than independent real estate operators, enabling negotiation for more competitive pricing and terms. The cost side can also be extended to include various costs from service contracts for landscaping or security, to purchasing janitorial supplies for restrooms.

THE DEBATE: NATIONAL VS. LOCAL

National consortiums are formed when large regional companies join together to create a virtual Fortune 500 corporation. National consortiums primarily consist of publicly traded real estate organizations, such as real estate investment trusts (REITs) or large institutional firms. Typically, publicly traded REITs are forming the national consortiums and each group has a different reason for its existence.

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