Commercial Real Estate's Upbeat Outlook

By Ross, Stan | Mortgage Banking, January 1998 | Go to article overview

Commercial Real Estate's Upbeat Outlook


Ross, Stan, Mortgage Banking


The future still looks very positive for the commercial real estate business. Some trends call for business owners to rethink their strategies and corporate organization to capitalize on emerging opportunities.

It seems to be the best of times in the real estate industry - the moon, planets and stars must be aligned right. Supply and demand are in equilibrium, vacancy rates generally are declining, rental rates are increasing and real estate capital is readily available. Overbuilding is a concern, but more development companies today are publicly held and have access to more data; and strong organizations are subject to market discipline - companies that build indiscriminately may see their stock prices decline.

This is an opportune time, then, to evaluate your organization, its position in the real estate industry and its strategic objectives. The following are some of the trends to consider in your strategic planning:

The integrated real estate company

As real estate companies become larger and public, and corporate America moves to more actively manage its real estate assets, some real estate companies may need to restructure to meet the needs and expectations of the corporate market. For example, the largest corporations may prefer to deal with a single buyer or a small number of buyers in negotiating sales of large portfolios of corporate assets located in various markets. Only the largest real estate companies, real estate investment trusts (REITs), pension funds and other investors may meet this corporate criteria. Similarly, only large national brokers and property management companies and other service providers may have the capabilities and resources to service the corporate market. The advantages of size are a key reason for the continuing wave of mergers and acquisitions in the real estate industry and the emergence of more large national real estate organizations.

In the future, as the real estate industry continues to consolidate, a new model will emerge: the integrated real estate company. Thus far, mergers in the real estate industry generally have been among organizations in similar lines of business; for example, large owners of investment properties have merged with other such owners, commercial brokers with other such brokers and so on. Some organizations have begun to diversify; for example, by expanding from the residential into the commercial sector or by launching non-real estate services. But this is only the beginning. As the real estate market continues to evolve, large, fully integrated companies will be formed to provide a full range of real estate services to corporate and other clients, both in the United States and international markets.

The fully integrated company will include an owner of operating real estate assets (which could be structured as a REIT), a development company (structured as a "C" or "S" corporation or Limited Liability Company), a "pipeline" company that will acquire portfolios of properties (and will be structured like the development entity), a services company, a finance entity and a subsidiary or strategic partner that operates in international markets. Despite the trend toward large, integrated companies, small real estate companies will continue to find niche opportunities in providing services to companies, businesses and other organizations.

With the continuing evolution of the real estate market and the growing opportunities in the corporate sector, real estate companies need to do strategic planning. This planning should include deciding on their goals and objectives, their form of organization, their target markets and other strategic issues. With planning and foresight, companies can adapt and grow in a fast-changing market.

Entity financing

Real estate companies today have more flexibility in the use of financing, through entity financing, traditional project financing or hybrids of the two. …

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