Stuart Scott thinks globally. As chairman and CEO of Chicago-based Jones Lang LaSalle, one of the largest full-service real estate firms around thanks to the recent merger of LaSalle Partners and Jones Lang Wootton, he saw the future coming and knew he had to preparefor it.
"More and more of our clients who are users of real estate and real estate services have global operations, and they want either a single-source provider or a limited number of service providers who can offer innovative and consistent real estate services at competitive prices everywhere they are located," says Scott. "As the world continues to 'shrink,' having a truly global operation in real estate services is key to these clients and, therefore, to Jones Lang LaSalle."
Scott had other reasons for globalizing. "Uniquely we had a second mandate for becoming global. One of our key businesses is real estate investment management. This business provides superior investment returns to our institutional clients in part by using the market knowledge we obtain through our affiliated operations. Our investor clients have long been global investors in publicly traded securities and wish to do the same now as opportunities in real estate present themselves throughout the world. These clients who have confined themselves largely to North American real estate in the past are anxious to look abroad. Now that we are present in almost every important commercial center, we can offer them the same penetrating market knowledge throughout the world that we have had in the U.S.," says Scott.
As an example of globalization's impact, recently JLL represented a Canadian multinational company that wanted to build a project in the Middle East. The capital for the development was scheduled to be raised in Europe. Prior to the merger of LaSalle and Jones Lang, the company would not have been able to handle such a, says Earl E. Webb, CEO of the Americas for Jones Lang LaSalle.
"LaSalle Partners would have been hard-pressed to deliver, because they were in North America and weren't on the ground in some overseas markets," he explains. "It would have been difficult for Jones Lang Wootton, which had people on the ground and access to capital, but was missing the North American access to the client. But with the merger of LaSalle and Jones, everything worked like a charm."
The new full-service real estate The dawning of expanded full-service real estate firms has arrived. As some clients go global, others downsize to gear up for increased competition while others struggle to deal with seemingly limitless growth thanks to electronic commerce. The real estate industry is transforming.
"The times have certainly changed," says Jim Leslie, president and CEO of The Staubach Co., Dallas. "Real estate firms have come a long way from the time when they were only hired to lease space, and - when markets were soft - find 15 to 20 alternatives, run the spread sheets and select the spot."
Leslie and others say major changes for full-service real estate firms include the broadening of services and the globalization of real estate operations. The metamorphosis is not totally driven by clients, he adds, because there are still many customers and companies that only do business in North America.
While many firms handle a myriad projects for customers around the globe, "clients haven't said to go out and acquire offices on every continent," says Leslie. "Corporate America has been on a big push to outsource a lot of non-core functions. The breadth of services they are asking real estate firms to provide them is broader. For instance, at Staubach, we have added facilities management, lease administration and disposition services, and have expanded our offices. It's all predicated on clients' desires and needs to have more service capabilities."
Recently, he says, a major telecommunications company approached Staubach to talk about outsourcing its real estate operations. A large component of the transaction was lease administration. "We had the willingness to take the work on and the capabilities to take it on, but we didn't have the complete infrastructure to take it on," explains Leslie. "So we created the infrastructure and did a world-class job for them."
Another major global player, Los Angeles-based CB Richard Ellis, is the combination of CBCommercial and UK-based Richard Ellis. And while it has added offices and grown in scale thanks to last year's merger, adding offices is not enough. "It's not like McDonalds, which builds the same operation in cities and they all make money," says Whitley Collins, senior vice president of CB's downtown Los Angeles office. "In real estate, the needs in South America are different from the needs in Europe. Real estate companies need to offer different services in different markets. How do you staff them? Do you have a big investment group? A big landlord section? A big valuation group? That's the challenge."
Many other real estate firms, though much smaller in scale, are creating their own infrastructures to suit clients. Barry M. Saywitz, president of The Saywitz Co., in Newport Beach, Calif., notes that his company began by exclusively representing tenant and corporate clients. However, as clients' businesses and service demand grew, the firm also expanded.
"We have offices throughout the state of California," he explains. "As clients and our business has increased, we have tried to adapt to their requests, be more competitive and provide more variety of services. We wanted not only to grow the business but to serve clients the best way we possibly can."
The Saywitz Co. now provides a full-service approach with additional knowledge in other areas. "What we've tried to do is bring in personnel with dual expertise," he says. "We have an attorney on staff who also doesand transactional work. We have a CPA on staff as well as a general contractor, an individual who used to be developer, and a person who was in the mortgage business. We involve them in construction, development, financing, financial analysis and other areas. We can provide assistance or input to our clients in-house rather than bringing in an outside person."
The goal is to help clients design better transactions. For example, if a firm wants to open a number of locations over a 12-month period, the process must be systematic and standardized or the goal will not be achieved, he says.
"If a company tells us they have a portfolio of real estate with leases expiring at various times, we want to make sure they are getting the best lease rates," continues Saywitz. "So we benchmark to make sure the client is getting the best rates and is not overpaying. I'm a firm believer that the market never applies to a particular situation. It's only a guideline to structure a deal around."
Diane S. Tucker, executive vice president of national accounts for Dallas-based Trammell Crow Co., says clients today want real estate providers to adapt and change to meet their individual client needs. "A few years ago, we saw clients changing their behavior, really starting to talk about consolidation of service providers so operations could be more efficient," she explains. "For many institutional customers, the largest desire was to not have any surprises. They also wanted providers to be more efficient and have instant communication, fast accounting and rapid reporting. They also needed professionals who could help them create increased value, either by redeveloping properties to take advantage of the market or reducing costs."
Compression was also a major factor. "Companies want to consolidate and use five service providers instead of 50," continues Tucker. "But they are also looking for a higher level of service. They want a point-person nationally to handle business, to communicate about routine issues every office should know about, whether it is a change in the lease form, or a new location for lock boxes. If they worked with Trammell Crow in 17 cities, they don't want to have to make 17 calls. They want to make one."
In addition, a number of investor clients also want to streamline investment procedures. "Our development deal flow is a huge advantage for us because a lot of clients want to develop a program and structure a deal quickly," says Tucker. "When we have an industrial development project that fits the investment needs of one of our clients, we approach them first. If they are not interested in the deal, then we go to other capital sources."
Tucker and others also say they are seeing continued consolidation from clients, who want service providers across multiple service categories with national coordination. "Even software is moving that way," says Tucker. "MRI for Windows, for instance, makes it much easier to have a centralized system that service providers [can] dial into rather than have one system in every city. We can do a lot more of our reporting electronically. Typically, a small local service provider isn't able to make such a capital investment for equipment and software, but we are."
David M. Gialanella, executive managing director for New York-based Cushman & Wakefield, adds that the real estate market is changing, as is the base of clients. Full-service real estate providers have always counted on a base of Fortune 500 clients, but now, thanks to the impact of the Internet and e-commerce, there are a number of fast-growing high-tech firms.
"These companies are looking not at individual transactions as distinct, unique or separate," says Gialanella. "They are looking at real estate as a compendium. It is not based solely on how you do a deal. Companies are valuing service providers on their strategic portfolio approach to real estate - a client's demands and a provider's ability to service those needs."
In effect, real estate has become a globally managed business, and that is a new phenomenon for the industry. "You can't operate as a series of local offices," says Gialanella. "You have to operate from a consistent service delivery approach, and decide how you utilize your resources, where you deploy them and so forth. Consulting or accounting firms on the service side have been operating in that world for many years, but it's new to the real estate industry."
A significant corporate account may have dozens or hundreds of locations around the world, and a client wants to deal with only a small team of real estate professionals, Gialanella says. The client wants the provider to bring some rationality to an irrational process. "The provider looks at real estate not as individual locations but in light of a bigger long-term strategy that may be driven by objectives such as extracting capital or whatever," says Gialanella.
The art of the deal, he continues, is being superseded by the importance of strategy. "The art of the deal is key to the deal, but it doesn't mean the strategy has been achieved," says Gialanella. "A company may have to do a real estate deal that is not economical because it wants to be in a particular location, building or access a certain customer base."
Today's corporate client may have six or seven points of decision - one in India, another in South America, a third in Europe, and so forth - and a consensus may have to be determined before any activity can occur. "When you are dealing with different time zones and you can't use the phone, you have to be linked in a group-ware, collaborative setting, sharing information in real time with managers during their natural course of business," says Gialanella.
A corporate account management team, which may include a broker, an administrator, a research professional and others, is not simply put together just for one assignment, but for a global delivery of services to clients. "The team may be looking at 35 to 40 markets to provide that corporate client with five-year insight where rental rates are going or looking at bench marking occupancy costs," notes Gialanella. "Corporate strategy is the driving force."
Paring down the machine For many firms today, that corporate strategy means getting leaner. Steven D. Scruggs, president of Grubb & Ellis' corporate services group based in Chicago, says his firm sees continued downsizing pressure on corporate real estate staffs, resulting in more services obtained from outside service providers.
"Even though we're in a strong economic situation, there is tremendous pressure on cost," says Scruggs. "Global competition hasn't gone away - it is as strong as it ever was. So we're doing a lot of the work they used to do. If a company is trying to reduce occupancy costs, they assign the real estate department some performance objectives and sometimes tie the individual's bonus to reductions in total costs. The client, in turn, asks us to prepare a financial analysis, calculate the savings and report back to senior management."
With a stronger U.S. real estate market, Scruggs says, landlords are more vigorous in negotiations, which makes it more difficult to achieve reductions. "Many people look at space standards and other benchmarks to reduce the amount of space while growing the business, so there is some tension between the finance and operating people and real estate people," says Scruggs. "The pressure varies as to the point in the life cycle the company is. If it is a long-established cash cow, cost control is very stringent. If it's a 'gazelle' company [known for its high-bounding growth], cost controls are less important because the company needs the right type of space to attract the right type of people."
Many companies that are downsizing or seeking to reduce costs can look at alternative office strategies, such as telecommuting and virtual officing techniques - including making common-space areas smaller. Corporate downsizing will continue, Scruggs explains, and thus Grubb & Ellis is training brokers how to help clients strategize the most effective use of space. "We're asking our brokers in the field to think about the big picture," he continues. "We have more emphasis on training to make sure they understand about this area."
Companies will continue to try to operate more efficiently, agrees Stephen B. Goldstein, senior executive vice president of Julien J. Studley Inc.'s Washington, D. C., office. He notes that mergers and acquisitions are still the name of the game in American business.
"We in the real estate industry have to be prepared to meet those challenges by providing clients more services to enable them to function efficiently and expeditiously," says Goldstein. "Responsiveness is key in order to secure business. Technology is an important part of our focus. We're finding electronic communication is important because of its speed and efficiency. Having the latest client solutions and being able to communicate them quickly allows us to compete in a very competitive marketplace."
For example, Studley maintains certain types of individual, on-line chat rooms for clients with multi-office facilities. These chat rooms allow Studley personnel to communicate with clients at each location. "You may have a contractor, an architect, a client and a broker all in one chat room, so all information and documentation is shared, as well as the discussions and meetings," says Goldstein. "Any problems could be corrected on the spot. It's a very effective tool."
At the same time, Studley is seeking more experts in various disciplines. "I've been at Studley for 27 years, and the old way was if a person had some smarts and could sell, he would probably make a good broker," says Goldstein. "Now we are looking for a much greater level of sophistication."
"MBAs are still important, but we are fine-tuning specialties in finance," he continues. "We've recruited a number of chief financial officers from related industries because of the increasingly sophisticated real estate transaction. We've also recruited individuals in the architectural field, and former CPAs who can provide another perspective to a transaction."
Studley is also bringing aboard experts from many economic development offices "who can provide us with a better understanding of incentives for firms who want to relocate," says Goldstein. "The expertise of these individuals is important when putting together overall strategy. We can offer our clients a perspective, what is done elsewhere."
The client's perspective Even so, every client is unique. Jones Lang LaSalle's Webb notes that there is a difference between the needs of corporate and investor clients. On the corporate side, he says there is a large demand for corporations, particularly Fortune 1000 firms, to provide consistent service around the world in many disciplines and accomplish global tasks efficiently.
"For this reason, we are creating seamlessly integrated client-service capabilities around the world, developed by experts who were charged with disseminating the best practices of JLL to every geographic location," says Webb. "We want to provide state-of-the-art real estate services to corporate clients and our team of global service directors preach the gospel of best practices."
First and foremost, Webb says clients want a central point of contact where they can call and get service delivered in India, Europe or elsewhere. Clients seek real estate providers who can be held accountable in the United States for work done around the world. On the investor side, Webb says clients want access to global assets and the ability to move in and out of regions of the world where there are opportunities. Once their own assets are on the ground they want access to global capital and having people on the ground in each area to give prudent investment advice.
The global economy and the growth of clients around the world are also having an effect. "Businesses have grown and have real, real estate needs beyond 'rent me some space'," Webb says. "Companies have plants to build, or industrial distribution to set up. Before, a firm might have a country manager in Brazil, for instance, and if the area needed a plant, he'd call up someone up and order the plant. Now there are standards based on company specs, and the firm might want a plant delivered the same in Brazil as they would want in upstate New York. A real estate firm must be able to accomplish such goals."
He notes that, in the United States, there is still ample opportunity to create attractive investment vehicles. However, a lot of opportunistic investment avenues are fairly narrow. "Those opportunities are opening in other areas of the world, such as the Asian and European markets, where there are opportunistic plays, and we're helping many of our investment clients," says Webb.
In fact, Asia's downturn in real estate values could generate significant brokerage and investment opportunities, says Richard Mandel, president of Beverly Hills, Calif.-based Kennedy-Wilson Inc. "We're focusing on Asia and Japan," says Mandel. "We have 85 employees in Japan. They're advising investors, doing due diligence, and handling and managing a number of assets. There are billions of U. S. dollars looking to buy distressed notes and properties."
Kennedy-Wilson has assisted more than 50 Japanese corporations with real estate brokerage activities. The firm's initial Japan Fund is expected to invest more than $300 million. The fund's first investment - of more than $400 million of assets at face value - was purchased for $24 million. Two-thirds of this investment was quickly resold at a substantial gain.
Kennedy-Wilson differentiates itself from other traditional real estate companies because it puts its own money into deals. The company has allied with Los Angeles-based Colony Capital, which provided a joint venture fund for opportunistic investments in Japan. When Colony bought a $100 million office building in the Land of the Rising Sun, both Kennedy-Wilson and its own employees put up their own money.
Rick Kirk, president of Houston-based PM Realty Group LP, notes that most of PM Realty's business is related to institutional clients. "I think the trend for quite a number of years has been more to a full-service asset management type based product line," he explains. "We continue to invest in upgrading our technological capabilities and information management and are taking more of a team approach to our client's needs. Obviously we want to be involved in every aspect of clients' needs whether it is in the acquisition, operation, management, financial analysis, or ultimately disposition arenas."
Clients are not asking for more services, but "if anything, with the tightening of real estate markets, they are asking for assistance in sourcing deals, product and assistance in making acquisitions," says Kirk. "Most of the national and international real estate markets will continue to improve. There are some of them that could face problems from an oversupply, but the situation is not near the magnitude we saw in the 1980s."
Just plain vanilla? For many firms, handling deals and transactions continues. Ed Hurley, president of Dallas-based AMRESCO Capital LP, notes that the American economy has shown remarkable resilience over the past eight years, and the real estate industry has enjoyed beneficial property markets as a result of the healthy economy.
"That will continue over at least the next year or two, but we see some specific areas that may be subject to over-building or other problems," says Hurley. "Long term, I think the influence of capital markets on real estate finance is here to stay. I'm not aware of any other private market that has gone public and gone back."
He adds that during the Asian Flu, Fannie Mae and Freddie Mac remained in the residential financial market and, as a result, increased their market share. "The conduits have found it difficult to compete with Fannie and Freddie because the agencies have been pretty steady, staying when other folks pulled out," says Hurley.
Buyers were not willing to pay what sellers wanted, he continues, and the acquisition market slowed. "Our feeling is that acquisitions drive more real estate finance," he says. "You not only have folks financing purchases, but also refinancing existing properties to make new purchases. If a guy owns five projects and wants to buy six, he'll usually leverage the other five to free up cash to buy the sixth."
However, Hurley says it is harder to finance properties that are not considered mainstream. "Today everyone wants plain vanilla," he says. "Conduit lenders have to sell bonds, and if buyers are not attracted to the bonds then you have a problem. So the folks who buy conduits don't have a taste for anything that is exotic, and our world is driven by what investors have an appetite for. Investors want plain vanilla, so lenders have gone plain vanilla."
Gerald A. Porter, vice chairman of Boston-based CRESSA Partners, agrees clients are demanding a broader range of services, particularly in the project management area. "It's very specific for us," says Porter. "The portfolio and corporate clients have a number of locations where we handle the real estate requirements. They want to know their service providers are going to have cradle-to-grave responsibilities for the transactional business. Our clients want similar transactions in multiple markets. They don't want to go through managing tenant improvement processes. The corporate real estate departments themselves have fewer resources, so they've gone more and more to outsourcing, and it's simplified by having single-source providers who handle it."
At the same time, clients want information and they want it fast. Accordingly, CRESSA Partners uses technology more each day. "We have developed transaction management resources on the Internet to enable clients to access all documentation for transactions, not just status reporting," adds Porter. "Clients can access everything from surveys to financial analysis to lease commentaries, 24/7 via a browser and secure password. We think this is what the corporate market is going to demand more and more of - service providers that deliver technological infrastructure to make their lives easier."
Staubach's Leslie agrees. "There is a big push for providing services better and utilizing technology in work," he says. "With Intranets, Extranets and the Internet, we can be more efficient and have 24-hour communications with clients, working across time zones. Clients today want to have the capability of tapping into a system and know where they're standing."
Saywitz also emphasizes technology. "Typically real estate hasn't been a rocket-science profession, but to my surprise, a lot of people out there still don't use computers or don't use computers to the highest degree," he says. "They have three-by-five cards spread out on their desks, telling clients, 'this is the building, this what it costs. What do you think?' We try to utilize technology and information available to advise and assist our clients in making better transac-tions."