Real estate firms in Chicago have been juggling personnel and reformulating strategies to position themselves for a new order in the 1990s. For some, it is just fine-tuning. For others, it involves branching into different areas of the industry. And for a few, it means abandoning unprofitable or unmanageable segments of the business.
For all, the moves may be a matter of survival.
”Real estate is an industry in distress, an industry in search of a mission and an industry in search of new capital,” said Kathleen Connell, a partner in the financial analysis firm of Roberts/Connell in Los Angeles.
”There are changes coming in the 1990s and not many in this industry are equipped to deal with them,” Connell told members of the Urban Land Institute at the group`s recent spring meeting in Seattle.
”The `90s will not be a disaster . . . but it will be tough to make money,” said Larry Chimerine, president of Radnor Consulting Services, senior economic counselor for Data Resources and fellow at the Economic Strategy Institute in Wayne, Pa.
”The fundamentals for real estate and construction are not terrific, with slow absorption and weak demand. Other than parts of the single-family market, I don`t see any significant opportunity in real estate and
construction for the next three or four years,” Chimerine said.
”What are we going to be doing in the `90s? Financing has evaporated and equity as we knew it is non-existent. So we have to package our real estate services,” said Todd Lillibridge, president of Chicago-based Murdoch, Coll & Lillibridge, which reorganized last year as it was selling off its real estate to strengthen its position.
”Long term we are looking to go back to an ownership role. But as with many developers, we are in a survival mode,” Lillibridge said.
Connell predicted the real estate industry will take on more of an hourglass shape, with bigger community builders and smaller entrepreneurial firms making up the bulk of the companies involved in development. It is a trend that is also occurring in most areas of business.
”Bigger is better. We will still have the small firms, but the big will eat up those in the middle,” said Marvin Cetron, president of Forecasting International in Arlington, Va.
Stein & Co., the Chicago developer of such notable projects as the AT&T Corporate Center, is one of the local firms seeking to remain a big fish by enhancing its asset management to complement its development and brokerage services.
N. Thomson Bard Jr. joined Stein & Co. March 1 as a senior vice president/asset management with the responsibility for overseeing the firm`s 6.1-million-square-foot portfolio of real estate. Bard is a 20-year real estate veteran who came to Stein after four years as a regional director for Cushman & Wakefield`s management services group.
Asset management is a term that has become popular in real estate in the last few years to differentiate the kind of property management done in the commercial realm from its counterpart in the residential area. Although asset managers are still responsible for seeing that the heat works and the light bulbs are changed, they must also contribute to the financial health of a project.
”The concept of asset managment is part of the culture at Stein & Co., it just hasn`t been coined as such yet,” Bard said. ”We have to communicate to the rest of the world that we can do that for them, that we can add value throughout the life of the building.”
Bringing in asset management business is a key for Stein & Co., as it is for many other real estate firms that built their reputation on development and now find little development to do.
”Hiring somebody with national credentials wasn`t a casual thing, it wasn`t accidental,” said Stein vice president/marketing Connie Dickenson. ”A lot of firms grow people from the inside. We`ve done just the opposite.”
Bard`s experience, which also includes a limited partnership in a 536,000-square-foot mixed-use project in Portland, Ore., will come in handy for Stein`s latest assignment: the management of the new federal building at Clark and Jackson that Stein also developed after winning a government competition.
”That is an example of the kind of business we`d like to do with third-party clients. It`s a competitive arena, but the government is looking for high performance. It will be a new ballgame because that office environment incorporates the best stuff we have these days,” Bard said.
Companies that receive property management assignments from outside building owners are paid a fee for their services, sometimes a flat rate and sometimes a percentage of the per-square-foot operating costs of a property.
These days there are asset managers who will also work for a piece of any increase in value they can bring to a property through their leasing or management efforts.
”In the 1980s, we didn`t understand who our client was. Today, when we have third-party management accounts, the accountability has been brought back,” Lillibridge said.
Corporate Realty Advisors Inc., also seeking to strengthen its asset management capabilities, has brought in William Norwell, a former principal in the Hawthorn Realty Group, to become chief operating officer and director of property management.
”Two clear messages this year are that someone with asset management is still in demand and that suburban office development, along with hotels, is at the bottom of the list for opportunity,” Norwell said. ”That was the biggest impetus for my change.
”In residential management for years tenant retention has been the number one concern because of the costs associated with a changeover, such as repainting,” Norwell said. ”That thinking has only really started to come into commercial property management in the last couple of years.”
For CRA, a firm with four close-knit partners, bringing in Norwell as chief operating officer was a significant step in positioning the company for the remainder of the decade.
”The demand today is for asset management and tenant retention,” said Lynn Kunde, a CRA principal. ”Our surveys say that tenants want someone to pay attention to their building.
”A lot of people are going into property management as a stop-gap measure to get through the downturn. But what we`re doing is the opposite. We see that clients need a long-term service. And so we`ve gone out and gotten someone who has the strategic planning background to do more than collect the rent and pay the bills,” Kunde said.
Before leaving Hawthorn Realty Group, Norwell helped that firm diversify from its suburban development activities with expanded property management and, most importantly, with the acquisition of Real Estate Research Corp., a consulting and valuation operation that also has an environmental unit.
”In the past year or two, as the world began to change, we could see that the world didn`t need any new real estate product,” said Hawthorn chairman Joseph Beale. ”What you have to have is access to capital, a consulting capability and the the ability to stand back and assess your portfolio objectively.”
Changes have been made at numerous other Chicago-area firms as well.
– Although they ran two separate real estate companies, Michael Rose has worked side by side in the same quarters with his father, Leonard, since 1982. But to get through the 1990s, the two decided to work hand in hand for the same firm.
And so Michael`s Rose & Associates, which specialized in brokerage and property management, and Leonard`s Sentinel Industrial Development Co., with its general contracting expertise, have merged to create the Rose Group.
”There is a tremendous amount of contraction underway in the real estate industry. People are taking a beating; it doesn`t matter what you are. There are few firms that are just property managers anymore. Brokers are looking to diversify, too,” said Michael Rose.
”For us it is different because we`re doing the same things we`ve been doing for 15 years. But there was a lot of overlap between the two companies. By combining, we can be a lot more efficient. Bringing in outside entities is all well and good, but then you have to rely on those outsiders to live up to your commitments.”
The Rose Group`s focus will be on purchasing and developing income properties for its own portfolio and for investment partners. The firms can also offer brokerage consulting, development, property management and contracting services.
”We`re looking for situations where we can add value, where there are vacancies or the management or leasing has been poor,” Michael Rose said.
”If we can buy it and turn it around, we know it will be worth a whole lot more.”
But the new company`s first project may be for itself at North Grove Corporate Park in north suburban Morton Grove, where two 72,000-square-foot office/service buildings were developed by the predecessor companies. Michael Rose said plans will be announced soon to complete that project with two additional 49,000-square-foot speculative buildings.
”Developers are always looking for opportunities,” he said.
One family member opted to remain independent, however. Pamela Rose, Michael`s sister, continues to head Rose & Associates Office Group Inc., which specializes in tenant brokerage.
”Any two of the three of us could get along, but not all three,”
Michael said of the possibility of a further merger.
– Joseph Development Co. of Northbrook has announced the formation of Joseph Real Estate Services, a division that will go after fee management and leasing in the commercial/industrial market.
The new division is structured with one staff member acting as both property manager and leasing agent for a particular building, a strategy that other companies are also following.
”Our approach is to create a feeling of pride of ownership for the manager,” said Cathy Conway, director of operations of Joseph Real Estate Services.
Jospeh Development Co. is best known for its development of office courts, single-story office/showroom projects that cater to smaller tenants, in the north and northwest suburbs.
– At the beginning of the year, the Taxman Corp. and Lakewest Equity Inc. consolidated parts of their businesses with the Chicago-area property management and operations functions of Lakewest moving to the Skokie offices of Taxman.
Roger ”Biff” Ruttenberg, principal in Lakewest, said that the company`s Southeast and Colorado property management business would stay put under Lakewest Equity Management Corp. in Florida and that he would remain as a general partner in several Lakewest properties around the country.
”Over the years, Taxman and Lakewest have concentrated on the same two types of business: in-fill shopping centers and build-to-suits,” Ruttenberg said. ”And we have a number of key tenant overlaps with national chains such as Walgreens, Crown Books and Trak Auto.”
Taxman said the consolidation would add to the profitability of the operations side of the business as well as add to the ability to do additional transactions.
– Benj. E Sherman & Sons has formed a mortgage brokerage division to place investment money throughout the Midwest.
”We realize that the condition of today`s marketplace is causing lenders to act cautiously and conservatively,” said Gary Richman, assistant vice president of the real estate brokerage and management firm.
”Financing has become an even more integral part of the real estate deal and we`re pleased that the new division has been successful in providing clients with the capital they need,” he said.
– Lincoln Property Co., a Dallas-based developer that built 311 S. Wacker Drive in Chicago, has formed a separate brokerage firm, Lincoln Corporate Real Estate Services, to provide tenant representation. Clients of the brokerage firm will have access to Lincoln`s development expertise.
A. Gail Sturm, previously Lincoln Property`s senior vice president in Chicago, has been named president of the new venture, which will be headquartered here.
”We recognize the importance of being able to go into the leasing marketplace free from association with a specific development,” Sturm said.
– Opus Corp., a Minneapolis-based development firm that operates in the Chicago area as Opus North Corp., has expanded the acquisitions operations of an affiliate company, Opus Investments Inc., formerly known as Kasmar Corp.
The affiliate will seek to buy distressed real estate throughout the country.
