KINGSLEY INSIGHT
>> July 2005
INSIDE THIS ISSUE
Incentives a Larger Slice of Advisors' Revenues
As asset appreciation has come to account for an increasing portion of investors' returns in recent years, so too has the portion of real estate investment managers' revenues received from incentive fees. In 2004, investment managers received an average 16% of their revenues from incentive fees, up from 7% in 2001. For a typical manager, this increase could translate into a $3-6 million top-line difference.
With a record $51 billion projected to flow from domestic tax-exempt investors to real estate in 2005, the peak in pricing and transactions volume should be sustained for months to come. Accordingly, real estate investment advisors will continue looking to incentive fees as a significant, and perhaps even larger, source of revenue in 2005.
Knowing your Tenants: Implications in the Investment Sales Market
The buyer was clearly interested, and about to make a non-refundable deposit. During the tour, the party had a brief conversation with the CFO of the building’s sole tenant, a desirable tenant with long-term potential whose presence added great value to the property. In the course of this interview, the CFO casually mentioned that the company would not be renewing its lease at the property, a fact which neither the broker nor the seller had known. Predictably, the buyer walked away from the deal and the property’s value had to be re-estimated.
The moral of the story? Tenants are still a building’s number one asset, and it pays to know what they are thinking, regardless of where you happen to find yourself in the transactional life cycle. If you don’t, it might just cost you a hefty profit.
Should You Outsource Property Management?
One of the real estate industry’s longest-running debates is the question of which is better: vertically-integrated property management or 3rd party fee management. There are many ways to approach that question, but a good starting point is to understand whether tenant perceptions are different based on management structure.
To examine this question, Kingsley Associates looked at tenant renewal intentions during the most recent 36-month period among tenants in Class A office properties. In buildings with vertically-integrated management, 68% of tenants indicated that they “definitely” or “probably” would renew their lease. For 3rd party-managed buildings, the number was 67%. Statistically, there is no difference at all.
So what can we glean from this data? One inference is that it is not the structural orientation of a firm that makes the difference, but the delivery of management services. If management is communicating proactively, responding promptly, and resolving problems in a timely manner, then the name on the letterhead is largely irrelevant from the tenant’s perspective. Put another way, the findings suggest that owners and investment managers should base the decision of whether to outsource property management on factors like competency, cost, and culture, because both approaches can lead to an operationally excellent management team.
