Short but riveting. That best describes the history of one of the retail industry's most discussed firms, GMS Realty LLC.

GMS Realty was founded in October 1996 as a combination of Gerrity Realty Advisors, a company that acquired, managed and leased shopping centers in the Golden State, and Morgan Stanley Real Estate Fund LP II, an opportunistic investment fund. Today the company owns more than 3 million sq. ft. of retail space and manages another 1.8 million sq. ft.

"It's been an incredible two and a half years," says William W. Gerrity, president of the Carlsbad, Calif.-based company. "We've grown tremendously in a short period of time, thanks to our experienced, creative and highly skilled management team and the resources of Morgan Stanley."

The company has not only grown but also prospered. GMS' portfolio has performed very well and is in line with expectations, says David Bednar, vice president at Morgan Stanley & Co. Inc.'s San Francisco office, who notes that GMS has purchased some 20 retail assets over the past 30 months.

"We view ourselves as experts in making macro bets on real estate markets and then putting our capital to work," says Bednar. "A great deal of our success comes from partnering with highly qualified real estate operators. Bill Gerrity and his team are perfect partners."

Gerrity, who has been active in real estate ownership, development and management for 20 years, explains that Morgan Stanley sought to unite sophisticated investment capital with a hands-on operator who had intimate retail knowledge.

"We started the company in 1996 with the intention of marrying a quality management team with institutional capital," Gerrity says. "We were trying to create a firm that would operate in a highly professional corporate structure within a sector that had previously been a cottage industry. Unlike other real estate product types - office, industrial and multifamily - retail has been dominated by individual owners or small private companies."

Those retail companies typically cease growing once they reach a certain size, Gerrity says, because they generate enough income for owners to have a quality lifestyle. "If they grew beyond that, they would need a more corporate structure, and there have been few successful marriages between sophisticated capital and small shopping center owners," he notes.

On the fast track Enter GMS Realty. The company jumped into the retail market with both feet, purchasing four centers in 1996, a dozen in 1997 and four more last year. "We worked very fast and had one of the larger acquisition sprees in California," Gerrity says. "It wasn't easy. Three years ago, California was a hard sell. People on Wall Street weren't sure when it would recover. Capital was largely unavailable. The situation created opportunities for us, since our management team was among the most experienced in the Golden State."

Accordingly, the vast majority of GMS Realty's properties are in Southern California - 2.5 million sq. ft., of which about 1 million sq. ft. is in Los Angeles County - while other holdings include 311,000 sq. ft. in Northern California and 212,000 sq. ft. in Phoenix. The company's largest center is the 397,000 sq. ft. Quad in Whittier, Calif., which boasts a Ralphs, Rite Aid, Orchard Supply Hardware, Staples and T.J. Maxx. GMS Realty's smallest property is the 55,000 sq. ft. Airport Plaza in Van Nuys, Calif.

"We originally had a five-year plan. In 1997, we were early in the game and the field wasn't so crowded," Gerrity recalls. "But by 1998, other players came in, debt started to flow back into the sector, cap rates moved down, values went up, and we had slimmer pickings."

Typical of GMS Realty's operating style was its acquisition of The Marketplace, a 170,000 sq. ft. shopping center in San Ramon, Calif. "The center was a non-traditional site plan and did not have what we considered a major grocer," Gerrity says, "but it was in an outstanding trade area. We recently brought in a new major grocer, Nob Hill Foods, owned by West Sacramento, Calif.-based Raley's, and expanded the grocery store from 25,000 to 58,000 sq. ft."

In addition, GMS Realty is negotiating with a major drug chain to lease 16,000 sq. ft. in the center. "We were able to bring in a major grocer and are doing an effective job of keeping the center leased," Gerrity reports. "We like to target properties that have the ability to add value through re-positioning and strong leasing."

High-occupancy leasing strategy In fact, strong leasing is one of the key strategies for GMS. "There aren't very many companies in California that do in-house leasing for the properties they own," he says. "Most depend on leasing talent in the local brokerage community. We built and trained our own leasing staff to focus on our properties from the perspective of the owner and asset manager."

In setting up its leasing operation, GMS Realty implemented a compensation structure that rewards its staff not for doing deals but for looking after tenants. "We seek 100% occupancy, and the last 5% to 7% - oftentimes the least desirable space - is generally the most difficult to lease, particularly by outside brokers," he says. "Our leasing staff has an appreciation of how much that last incremental business means, and they're compensated in such a way to enable them to spend time to get that space leased."

The strategy appears to be working. Overall occupancy at GMS Realty centers is currently 93.7%, up from 88.5% a year ago.

At the same time, with a staff of seven acquisitions specialists, GMS continues to seek out neighborhood and community shopping centers in California, Arizona, Nevada, Oregon and Washington. Its criteria is simple. Properties must be anchored by a healthy national or regionally recognized grocery retailer, provide potential near-term yield improvement, be located in highly defensible, in-fill neighborhoods with superior access and visibility, and generate attractive returns.

In other words, the company seeks 50,000 sq. ft. or greater gross leasable areas, with upside potential created by redevelopment opportunities, expansion land, vacant space and growth in rents. An all-cash buyer, with no financing contingencies, GMS Realty prides itself in closing in 30 to 60 days.

In addition, GMS operates a third-party property management and leasing business that helps the company cultivate tenant relations, increase tenant leverage and optimize operating economies of scale. Currently, GMS manages 1.8 million sq. ft. for third parties, including K/B Retail Properties, a private REIT based in Newport Beach, Calif.

Future growth in Pacific Northwest In the months ahead, GMS Realty hopes to diversify more geographically, possibly with centers in the Pacific Northwest. One of the challenges the company is now facing is finding product. GMS uses a variety of sources in pinpointing potential acquisitions, including the traditional real estate brokerage community as well as developers and lenders who are aware of centers that an owner might be willing to sell.

"We have a property in Phoenix and we'll continue to pursue opportunities in that area," Gerrity says. "Many of our transactions in 1996 and 1997 were through an informal network, but as the market got more heated, we looked more to listed properties with major brokers."

This year will be an interesting one in the retail real estate industry, Gerrity predicts, primarily because the landscape has changed thanks to more stringent lending requirements and less aggressive posturing by REITs.

"The public REITs that were playing this market now have some capital constraints due to weaknesses in share price, so they have not been the dominate or active players they once were," he says. "As for commercial mortgage-backed securities, lenders are back in the market but underwriting is more conservative, and hence private buyers are required to contribute more equity to deals. This limits their acquisition capacity."

Although cap rates have softened, there are increasing numbers of new investors entering the market. Pension funds are the new players, Gerrity adds, so GMS expects 1999 to be a much busier year for new acquisitions. Gerrity also expects a lot of consolidation of ownership, with other companies focusing intently on asset management with the intent to stabilize occupancy and increase rents.

GMS Realty expects to announce several additional purchases in the next few months. The company also will be doing more development and redevelopment. "To date, the yields have been more attractive from acquisitions rather than new development," Gerrity says. "That is changing, however, and we will be doing ground-up development."

As for the future, industry insiders note that it will be challenging. "The market has changed," says Bednar of Morgan Stanley. "Yields have come down. But that is when having quality partners is most important. We think there are still tremendous opportunities for Bill and his team."

Gerrity agrees, noting that with his company's expertise, resources and determination, GMS will find many opportunities. "I'm not sure we can duplicate the rapid growth we have experienced over the past several years," he says, "but we intend to try."