REAL ESTATE MANAGEMENT: 1990s AND BEYOND

BY

WILLIAM T. HUNT

TABLE OF CONTENTS

1.Introduction

2.Expansion and Diversity

3.Human Resources Management

4.Conclusion

5.References

REAL ESTATE MANAGEMENT: 1990s AND BEYOND

BY WILLIAM T. HUNT

INTRODUCTION

The Journal of Property Management (1998) reports that real estate has been freed up by certain laws in the 1990s, most importantly, the

relaxation of the Glass-Steagall Act of 1933, allowing market access to real estate by banking institutions; the Taxpayer Relief Act of 1997,

allowing property owners indefinite tax deferral on the sale of property (an estimated $91 billion to reinvest in real estate); and the 1998

appropriations bill which cuts housing costs by introducing "mark-to-market" rents (Anonymous, 1998, p. P6S). All of these translate into

financial advantages for real estate companies. Interestingly, the 1990s have already seen changes that complement these changes. Most real

estate companies have become management companies. Much like an investment portfolio, they not only list and sell property, but also

manage and invest in a number of properties. In addition, they are taking advantage of mergers and agreements.

As if this were not enough change in a single decade, many real estate companies are changing the way they do business internally. Although

they have always operated on a contractual basis with agents, stakeholding and entrepreneurship have new meaning in the 1990s (Davies, 1995,

p. 54). In addition, cultural demographics are changing quickly. This means changes in organizational structures within real estate offices.

This paper will address these changes in the context of the ethical considerations for which real estate has always been accountable.

EXPANSION AND DIVERSITY

Among other things, real estate brokerage services in the 1990s includes understanding and complying with federal and state real estate laws;

surveying real estate; evaluating real estate according to specific criteria; ethically representing buyers and sellers and seeing that all agents

do likewise' performing marketing analyses, cycles and trends; establishing public relations and advertising campaigns; conducting business

according to corporate management; operating within cooperative ownership agreements; determining investment areas, and analyzing

financial procedures of both the company and its agents. Of equal importance is the new financial structure of the real estate management

brokerage, which includes financial investment on a large scale. These may include listing, investment in, and sale of private, public and

commercial properties; forming alliances, acquiring or merging with trusts, construction companies, security companies, and other vendors.

The structure of these alliances, acquisitions and mergers will operate like a financial portfolio, used to both diversify the real estate

management company and to reduce costs of operation at the same time.

Real estate laws vary from state to state, therefore, they will not be addressed except to note that laws govern real estate as well as business

operations. However, real estate ethics have a great deal to do with laws. Some of the laws that affect ethical conduct include human

resource/vendor payment and relationships, property valuation, appraisal, property inspections, and business management practices. Ethics

for real estate agents and management require fair treatment of both the buyers and sellers of real estate whom the company represents.

Property management ethics include such issues as security, safety, nontraditional services, and related concerns. Vendor ethics include all of

these issues. For this reason, legal contracts between the management company and these resources are answerable to various sets of laws.

Modern real estate management firms, like other companies, must continuously conduct marketing analyses, be aware of cycles and trends,

establish public relations and advertising campaigns. Corporate management concerns will most likely include creating an entrepreneurial

environment where managers, contractors and personnel will serve all of the brokerage's interests as team members on specific investment

and administrative projects. (This is discussed in more detail in the following section.) Corporate finance will not only include setup,

accounting and ledger practices, but property and network investments, divestiture and balancing a number of diverse financial interests.

For example, Melcher & Forest (1997) report that the biggest growing megacorporations are real estate management firms. They

write:

Until the early 1990s, most real estate was owned by private, family-owned companies that relied entirely on borrowed money and

generated returns by flipping properties. The 1990s bust, though, caused private financing to evaporate. The mortgage-backed

security market emerged to provide debt financing. And as industrial corporations had done decades earlier, real estate firms

started tapping the public market, via initial public offerings, for equity capital. The vehicle was the real estate investment trust,

or REIT, which was created by Congress in 1960 but that had never attracted much interest… (Melcher & Forest, 1997).

It didn't attract much interest until the 1990 bust, but it is now the basis of most management firms.. Property management is concerned with

a number of areas, particularly mergers, acquisitions and management of property in addition to traditional services.

For all acquisitions or investments, Jerry Belloit (1997), a professor at Clarion University states that each company goes through an

acquisition phase that includes setting investment goals, defining constraints, establishing ownership rights, analyzing the market and

conducting feasibility studies, financing the investment, administering the acquisition, setting up administration in the investment property,

surviving an alienation phase, and creating a decision-making environment. All of this must be accomplished with a combination of in-house

personnel, contractors, and alliances formed with banks, trusts, credit unions, appraisal firms, etc.

Belloit (1997) provides that during the investment analysis portion of an acquisition alone, the management firm considers diversity in terms of

homes, apartments, condos, hotels/motels, nursing homes, retirement villages, recreational areas, land, warehouses, government buildings,

commercial real estate, malls and retail outlets, and other types of real estate. Additionally, these can all be based on speculation, developed

entities, and trade and business trends. Like others, he recommends that management companies consider all investments in terms of

long-term rather than short-term investments (Melcher & Forest, 1997), and offers the following example of a recreational/forestry site

investment consideration.

Cost $350,000, or 1,000 acres @ $350/acre.

Every 5 years, about 25% of the property can be forested for a net of $450/acre.

Replanting costs will be about $40/acre.

Property taxes (in Pennsylvania) would be about $2/acre.

Fishing rights leased for $1 5/acres.

Assume no property value change over a ten year period.

(Belloit, 1997, p. sld269.htm).

Cash flow would look something like the following. (Note: IRR=income reversion rate):

Initial: $35,000.00

Years 1-4: -500.00/annually

Year 5: +102,500.00

Years 6-9: -500.00

Year 10: 452,500.00

Indicated IRR: 6.30%

(Belloit, 1997, p. sld270.htm)

If the assumptions change, and financing is included, cash flow would look like this:

·Assume value increases 5% annually, reversion = $570,113, and Year 10 = $672,613. IRR

= 10.60%.

·Price of lumber inflates at 5% annually, and front end cut in year 5 is $143,582 and

in year 10 is $183,251, changing year 10 income to $793,364. IRR = 10.93%.

·If the property is financed with 50% loans at 10% interest for 10 years, however,

annual debt is $17,500. IRR = 11.63%. At 12% interest, annual debt is $21,00. IRR =

10.44%. (Belloit, 1997, pp. sld271-sld272).

Similar cash flow considerations must be made for any investment, with the brokerage reviewing trends in the various

industries and investment opportunities for the region. For example, new construction may be a good ten-year

investment in some areas, while reconstruction and renovation might be better considerations in another.

Besides cash flow, concerns for urban property investment include: ability to upgrade, parking, transit access,

service entrances, loading docks, ceiling height, fire safety, common areas, utilities, elevators, security, space

planning costs (Belloit, 1994, p. sld262.htm, sld265.htm).

These examples provide an overview of the type of investments in which real estate management firms are involved

today. However, when demographics are taken into consideration, Hispanics have come the largest growing minority in

the United States and are expected to account for 18% of the population by 2040, far surpassing African Americans.

Growing at an even greater rate is the Asian and Pacific Island population, which is expected to grow from 3% in 1992

to 11% in 2050. The white population is expected to have a flat growth rate, or even decline (Romano, 1995, p. 30).

These cultural changes will not only affect marketing studies, public relations, advertising and investment

considerations, but also the type of personnel hired. Each management company will want to employ or contract with

bilingual speakers. Other human resource considerations also come into play.

HUMAN RESOURCES MANAGEMENT

In real estate, human resource management is a major consideration. In the past, real estate companies employed

secretarial and office staff and contracted with individual agents for real estate services. This practice is

extremely helpful in today's corporate environment; many corporate firms are contracting almost all of their real

estate management services. This means that if property management is part of the brokerage's services, the company

can contract with a number of outside vendors for property management services, as well as offer advice on property

investment to corporate clients. However, because of the diversity of a management brokerage's interests, a constantly

changing balance must be struck between full-time employees, contractors and vendors. In addition, human

considerations must also be addressed in terms of new corporate practices such as teamwork and changing demographics.

Real estate agents have operated as independent contractors with brokerage houses for decades. They are compensated at

a percentage of sales established by the firm, generally in a range between 3 and 7.5 percent nationwide. Therefore,

commissions are one of the firm's largest expenses, and why financial diversity has become ever more important.

However, diversity has its own challenges in regards to human resources management.

One of those challenges is a movement toward teamwork. Real estate agents are typically self-motivated and function

autonomously. However, recent research has indicated that in the corporate environment, teamwork leads to efficiency

and creative thinking. Bowen (1995) states that teamwork is not simply putting a group of people together.

Personalities and skills must be taken into account, and individuals must be involved in the team by way of a

commitment to the team in order for the team to be effective and efficient.

Some companies are outsourcing or contracting nearly all human resources and services today so that the number of

in-house staff on payroll and benefits is kept to a minimum. This makes team building especially reliant upon

motivational leadership and performance incentives. All of these relationships must be worked out contractually

between management and the team members.

Sinderman (1994) reports that many real estate firms accomplish this sort of service through strategic alliances with

a variety of businesses in response to downsizing. According to Minneapolis-based Tobin Real Estate Co.'s Asset

Advisor newsletter, strategic alliances are highly evolved relationships that exist between real estate firms, vendors

and corporate clients (Sinderman, 1994, p. 72). There is no pat rule governing these alliances, every brokerage house

operates differently. For example, if the brokerage has formed a property management alliance with a corporation, the

brokerage may supply that company with maintenance and cleaning services, as well as real estate advice on whether the

location or size of the business's real property is in the best interest of company goals. This is the difference

between outsourcing and strategic alliances, says Sinderman. In strategic alliances, the management company

understands the company's goals for the future and the real estate implications of those goals.

In the case of property management services, the brokerage has the choice of hiring a team of employees to cover these

"in-house" or outsourced services or contracting with outside vendors. Since the 1980s downsizing movement and the

need for providing quality services at a low cost, it is likely more profitable for brokerages to contract for these

services and operate on a "pay as you go" paradigm. The advantage to this type of arrangement to both the brokerage

and corporations is that neither is paying personnel costs and taxes, but the contractors and/or vendors supplying

services are as familiar with the corporation and its needs as if they were employees of either company.

Because the brokerage is in strategic alliance with its corporate customers, it must make a decision as to whether to

provide corporate services in-house or contract with outside vendors. It even must consider whether calls for service

and maintenance are taken by the property management team or by the vendor. If its decision is to field property

management concerns, it must decide who is part of the property management team and their specific relationship to the

customer and brokerage management.

Finally, the face of employees will be affected by cultural changes in the United States. Team members will consist of

bilingual persons with business and real estate training. For this reason, real estate management will be interested

in increasing training opportunities to team members and recruiting from various minority groups. Therefore, the real

estate manager is involved in a number of human resources areas much more far reaching than the past.

CONCLUSION

Real estate management has undergone a reconstruction of gigantic proportions during the 1990s, but restructuring will

only continue to balloon in the 21st century. While new financial strategies were the main concern of the 1990s, in the

next century, human resource and marketing strategies will require an even greater focus. Now that real estate

brokerages are becoming conglomerates, they must now begin to reconsider the human potential within their firms-�and

something else. While they are expected to be the megacorporations of tomorrow, they are also expected to retain their

ethical and cultural focus.

REFERENCES

Anonymous. (1998, Jan-Feb). Legislation Gets Off the Ground; The Real Estate Industry Awaits New Direction. Journal of

Property Management, pp. 6S(4).

Belloit, Jerry, Ph.D. (1997). Real Estate Investment. Clarion University. At:

http://www.clarion.edu/cob_web1/courses/realest/re471/index.htm, sld270.htm-274htm.

Bowen, Brayton. (1995, Apr. 3). Wanted: Workforce of the Future. Industry Week, pp. 32(1).

Davies, John R. (1995, Nov 6). Using Work Breakdown Structure in Project Planning. Plant Engineering, pp. 54(3).

Melcher, Richard A.; & Forest, Stephanie Anderson. (1997, Sept. 22). The New World of Real Estate. Business Week, p.

78.

Romano, Ellen. (1995, March-April). Opportunity in Diversity. Journal of Property Management, pp. 30(6).

Sinderman, Martin. (1994, Nov). Strategic Alliances Evolve as New Way of Doing Business. National Real Estate

Investor, pp. 72(5).