June 27, 2008 / 10:47 AM / 11 years ago

U.S. property barons yield to specialists

NEW YORK (Reuters) - Real estate magnate Sam Zell likes to say that 30 or 40 years ago, a group of about 75 men who controlled most U.S. commercial real estate did it all. Since then, commercial real estate has gone from the backroom boys to the specialists as every aspect of the sector’s sales, finance and management has become more expensive and complex.

Sam Zell speaks during the Real Estate: Where is the Bottom? panel at the 2008 Milken Institute Global Conference in Beverly Hills, California April 28, 2008. REUTERS/Phil McCarten

Commercial real estate now stands as a separate asset class, alongside stocks and bonds. The jack-of-all trades owners who made decisions by gut instinct have given way to educated specialists: property managers, financial engineers and portfolio managers who use esoteric mathematical formulas to measure risk and return.

Even the companies themselves now tend to focus on one type of real estate — Simon Property Group Inc (SPG.N) on shopping centers, SL Green Realty Corp (SLG.N) on New York office buildings, AMB Property Corp AMB.N on warehouse and distribution centers, AvalonBay Communities Inc (AVB.N) on apartments.

“I think biz has evolved,” Scott Latham, Cushman & Wakefield executive vice president of Capital Markets Group, said at the Reuters Global Real Estate Summit in New York.

The leadership changes at Macklowe Properties and Boston Properties Inc (BXP.N) underscore the changing of the guard at two of the most influential owners and operators.

Harry Macklowe, a college dropout, is considered one of the best real estate minds in Manhattan. The General Motors Building on Fifth Avenue is likely his greatest achievement as well as his biggest loss.

He bought the 50-story building in 2003 for $1.4 billion and transformed it from a lackluster performer with an empty underground concourse to a most desired building, home to a 24-hour Apple store with an iconic glass cube for an entrance.

But in June he sold it after defaulting in February on a loan used to help buy seven buildings formerly owned by Equity Office.

Also in June, Macklowe’s son William took over as chairman and chief executive of the firm his father started 40 years ago.

“I think demonstrates the skillset that Harry had, plus then some of the new tools that the younger generation has at its disposal, that the older people just don’t want to take the trouble to learn or haven’t gotten around to yet,” Latham said.

“I think you are going to see some of the next generation of players who have been schooled in the aesthetic aspects of a transaction which (Harry) Macklowe is a master at; the financial aspects of the transaction, which Macklowe was, if not a master, he was pretty darn good at it,” Latham said.

Macklowe sold the GM building for $2.8 billion to Boston Properties, whose chairman is publisher Mortimer Zuckerman and whose CEO is Edward Linde, a civil engineer with an MBA from Harvard. Last year, his son Douglas Linde, with an MBA from Harvard and a career start at Salomon Brothers, took over as president, a position formerly held by his father.

With the days of easy credit and easy profits erased by tight credit and a weak economy, real estate specialties will be even more important, said Michael Pralle, president of real estate private equity firm J.E. Robert Cos.

Property managers who can take a ho-hum building, improve it, and boost cash flow are in even more demand now.

“I think going forward, we will need people with good real estate skills because it will be all about repositioning the building, re-tenanting the building, investing in the building to improve it in the right way, figuring out the appropriate mix of tenants that you want to have in the building, maybe getting somebody to move off a certain floor to another floor, but really thinking very hard about how you actually are going to manage that asset to improve your cash flow,” Pralle said.

The need to specialize has spread from owners and financiers of real estate to brokers.

“When I first started in the business, most brokerage professionals doing what I do were lone wolves,” Latham said. “You got the information from an owner. You put together the package that you were transferring over to the purchasers. You negotiated the contract and the business terms of the deal. You went to the closing, and you collected your check.”

A view of midtown Manhattan in New York, October 24, 2007. REUTERS/Shannon Stapleton

Today, Latham is part of a team of 21.

“It takes the skills of that many different types of people to put together these transactions now, because the clients demand it, and the investors are expecting the level of scrutiny and analysis that we are now forced to do because of the way the business has evolved,” he said.

(For summit blog: summitnotebook.reuters.com/)

For more on the Reuters Global Real Estate Summit see <ID:nSP31448>

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