The commercial real estate community is feeling the need for speed. Second only to achieving the highest possible price in today's frothy investment sales market, the ability to act quickly is the new necessity for sellers.
In the rush to close moreexpeditiously, technology is finally playing an important role in streamlining the commercial real estate sales process nearly a decade after the invention of now everyday tech tools that include e-mail, portable document format (PDF) files, and compressed images known as JPEGs.
But while virtual “war rooms” and online transaction platforms are replacing physical document rooms on a broader scale, a salient question has emerged: Will the rush to close deals come at the expense of proper due diligence? For now, the industry seems to recognize that adding cost-effective digital efficiencies must be married to the tradition of relationships and old-fashioned property tours.
Duke Realty Corp.'s $1 billion sale of flex-warehouse properties in September 2005 to a joint venture of Chicago-based First Industrial Realty Trust and the California State Teachers Retirement System (CalSTRS) provides some insight into howare using an array of tools at their disposal.
Initially, Indianapolis-based Duke engaged CB Richard Ellis' Atlanta-based brokerage team to market the 14 million sq. ft. portfolio of 212 properties in seven cities. Like many sales brokers today, CBRE uses a variety of online and traditional marketing strategies to attract potential buyers. In this case, digital proved key to getting the deal closed quickly and efficiently.
“We like to fully market our assets, and to be able to put all of that online was a huge advantage. It cut out two to three months of the process,” explains Nick Anthony, senior vice president of dispositions and sales at Duke. In fact, it took only 63 days from the signed letter of intent to the deal closing. “There's no way we could have done that five years ago.”
Back when e-mail was not so widely accepted, the traditional marketing strategy for a property sale included mailing or faxing a printed property fact sheet, followed by a printed confidentiality agreement, followed by another mailing of massive offering memorandums. In fact, a packet's weight was often used as a measure of a property's potential pricing, if not value.
“Speed is critical, especially as assets get bigger and portfolios are included in this mix,” says Earl Webb, CEO of the capital markets group at Chicago-based Jones Lang LaSalle.
Webb, who has helped JLL achieve some $7.7 billion in property sales through the first 10 months of this year, appreciates the once-daunting task of assembling offering memorandums on large portfolios, which could then be distributed in bulk to the buying community. “Now, much of that information is Web accessed. That way, if buyers are not interested, they're not burdened with having to sift through a bunch of property data to get to the one asset they want to look at,” says Webb.
The art of creating a buzz
Typically, the first step in the investment sales process is to create an e-mail “teaser,” which includes basic property information and plenty of color photos. That is followed by an e-mailed confidentiality agreement and a link to either a brokerage firm's microsite for a specific property, or to one of many online Web sites that showcase a variety of properties in an electronic billboard fashion.
Getting to this point has taken the better part of a decade, primarily due to a slow industry-wide adoption rate. “We've had to drag people kicking and screaming,” says Stephen Alter, co-founder of Real Capital Markets (RCM). The Carlsbad, Calif.-based company was formed in 1999 by Alter and partner Gary Allen to facilitate transactions via use of its Web site.
Owners and brokers list their properties on realcapitalmarkets.com and have access to RCM's database of qualified principals, as well as services to create on-line war rooms and e-mail teasers. “What worked in our favor was we were full-service. We'll do as much of the work as the broker needs us to do depending on that specific assignment,” says Alter.
But it's sellers who ultimately are the best judge of performance. Parker Hudson, a 30-year-plus industry veteran and managing director of dispositions for Atlanta-based Wells Real Estate Funds, likes to hire what he refers to as “relational” brokers who also use RCM's services.
“They have a list of several thousand active buyers, and they share that with any broker who uses them,” says Hudson. “That gives me comfort as a seller that I'm going to reach the local guys who are potential buyers of this property, as well as the regional and national guys.”
Wells is known for being a leading buyer of Class-A office properties, but it also sold the largest portfolio by any non-traded public REIT to date, a $786 million sale of 27 properties to New York-based Lexington Corporate Properties Trust in April 2005.
Besides RCM, a host of other companies play in the digital space, including San Francisco-based LoopNet and CoStar Group of Bethesda, Md. Both companies function primarily as listing services.
Information on demand
The drive to digital certainly has helped brokers realize efficiencies in cost as well as time. For example, offering materials used to come in the form of so-called “five-pound books” which were loose-leaf binders containing reams of demographic, leasing and property-specific information, as well as rent-roll data.
Now that material is most often condensed into secure, virtual online areas known as war rooms, which have by and large replaced the physical document rooms that brokers and sellers have typically set up in the past. “I think the electronic war rooms are absolutely valuable,” says Duke's Anthony. “In our flex transaction, it was a huge benefit.”
“We use the e-mail teaser, but we also use the online war room where we can upload much of the due diligence information in a secure manner so that qualified investors can access it,” says Gary Gabriel, executive director of Cushman & Wakefield's metro area capital markets group in East Rutherford N.J. “It eliminates the cost and hassle of disseminating these materials, and it makes the bidders much more educated prior to the offer.”
Still, brokers stress that war rooms can never completely replace property tours. “It used to be the buyer would never even bid on a property without first seeing it,” says Anthony. “That's not the case today, but it still comes down to the real estate — kicking the tires and feeling comfortable with the investment they're making.”
Tell me a story
Digital marketing has also forced sellers and brokers to improve their marketing materials. “Speed with quality is very important,” says Hudson. Brokers who quickly understand Wells' properties and put together a complete package telling a strong story get the nod in Hudson's book. “But we've also pulled our hair out with brokers who seem to take literally months to turn things around and then create a less-than-exciting offering memorandum on a property.”
Hudson says today's brokers need to possess both old-school relationships and be equipped with the latest technology to succeed. “If you're a good old boy and you know everybody, but don't know how to put together a good package quickly with cap rates where they are now, you don't want to waste time as a seller.”
Cab Grayson, a senior managing director with the institutional group at CB Richard Ellis, says telling a clear, concise story in the offering materials is a must to quickly gaining investors' interest. “It's just like a well-written English paper,” says Grayson, who is based in Washington, D.C. “In today's marketplace, you've got to tell what the story is, whether it's a value-add opportunity, a core deal, or an opportunistic deal.”
In other words, as Hudson points to several marketing samples littering his desk, presenting a good story quickly in different mediums is critical in today's frothy investment sales market. “If it's a really good looking picture from somebody who seems to know what they're doing and the first few lines you read about it seem pretty exciting or interesting, you just get a different reaction.”
So just what is the future of the old-school, five-pound paperweight? “This is a baby blanket,” says Alter of RCM. “It provides the sellers with a memento to remember their property.”
In the building-buying grab that has characterized much of the present decade, traditional commercial property investors, including equity and non-listed REITs, pension funds and institutional investors, have been joined by a seemingly endless supply of private equity funds, opportunity funds, and international buyers. Reaching those buyers requires marketing strategies that employ a broad-based multimedia approach.
“With the rush into high-quality grade real estate all over the world, there are new buyers every day,” says Hudson of Wells. “You have to be able to have some sort of a large net to catch people who have either never invested in real estate before or are changing their investment criteria.” Hudson adds, “It can't be just the old-boy network that we used to have because there are hundreds of potential investors in just about anything today. ”
While most buyers would prefer to see more direct deals avoiding the auction process and limiting the competition to a handful of serious bidders, auctions are still the predominant form of marketing, primarily because they drive the highest pricing through competitive bidding.
“Two or three years ago, you would see deals done off market reasonably frequently,” explains Webb of Jones Lang LaSalle. “Now, we advise sellers that even though they think they're getting a great price, it still wouldn't hurt to test the market with a broad distribution, because you just never know where the untapped buyer is.”
Relationships are still key
Technology is probably least effective for the largest asset sales. The pool of buyers is extremely small and sellers rely on a smaller group of sales brokers who have years of success in brokering transactions, and who rank tops in annual sales.
“Technology really has sped up a lot of the processes, but I think the fundamental relationship factor is still the driving force,” says Jason Mattox, executive vice president of Dallas-based Behringer Harvard, which invests in commercial property through real estate investment trusts, partnerships and joint ventures. The company expects to buy $1.7 billion in property this year in deals ranging from $5 million to $500 million, and recently announced a new international push.
“You know someone, you understand them, you know how they do business,” says Mattox. “And you get a comfort level on how they will behave in the transaction. I still believe that is going to guide you more than anything.”
To Craig Hall, chairman of Frisco, Texas-based Hall Financial Group, which has owned and managed more than 100,000 apartments and 4 million sq. ft. of office space since 1968, relationships are key when it comes to choosing the right broker, but brokers still have to prove their worth.
“Our goal is to have two or three brokers in each case evaluate the properties we are considering selling and give us ideas on pricing as well as their fee to handle the transaction,” says Hall. The commission percentage is one of the firm's major considerations.
The bottom line? Although technology has made great strides in adding efficiency to the marketplace, sellers and brokerages that embrace the new school and older traditions will likely come out on top.
“If all you have is previous relationships, you're going to miss those new buyers,” says Hudson of Wells. “And if all you have is electronic bells and whistles, you're going to waste a lot of time chasing after people who ultimately can't perform.”
Ben Johnson is a Dallas-based writer.