Wall Street Finally Meets Main Street?

By Mike Ratliff and Jack Kern

We close our year with this month’s CPE-MHN Survey of Best Practices. Many of the nation’s most successful and innovative firms participated in this year’s survey, giving us the opportunity to divide the responses between owners and firms providing services to the industry. What we learned about the firms shows that nothing is off the table when it comes to improving operations.

When asking about details on best practices, one of the areas we like to examine is company structure. The tenure for CEOs among ownership averaged about 16 years, while service companies averaged something closer to 11. Given that level of experience, it means that both industry groups have been through a number of cycles and have a good understanding of how to respond when the tea leaves send out a warning.

Changes in their workforce, however, tell a different story. The self-reported change in workforce among the survey respondents ranged from a high of 35 percent to a low of 1 percent, demonstrating that two factors appear to be at work here. The first is that as commercial real estate has expanded since last year, many otherwise under-employed professionals sought out higher level positions in other firms; and second, most of the firms reshaped their workforce to take advantage of changing market conditions.

In comparing the ownership practices, several important points came out. First, the cycles that the real estate industry is known for are undeniably moving faster. This has provided a new opportunity to delve into more rewarding strategies. The advent of a “Mark to Market” discipline has put many of the firms—most notably the public ones—under the spotlight for really determining what their assets might be worth in the current market and what their returns actually represent. As a consequence of this, transaction activity driven by larger owners has been all over the map, figuratively as well as literally. In looking at where most of the firms had business interests, many showed they were regional, while a smaller number had a national presence.

Another side of this is the level of interest and investment in multifamily, as many firms have taken a closer look at what never used to be considered investment-grade properties in what traditionally have been non-investment grade markets. Taken that this definition, first popularized by Wall Street, has had shifting emphasis over the years, the meaning of core vs. non-core, core plus, value add and one off have become more interrelated than ever.

Best practices used to mean managing risk arbitrage but now include such considerations as yields over the hold period, preferred returns in single digits and investments where reliable capital preservation and cash flows in non-traditional markets have become unfailingly acceptable. In what might be characterized as Wall Street finally meets Main Street, there is a lot of capital flowing into what were euphemistically called ‘secondary’ markets with the same kind of attention usually reserved for major metropolitan areas.

Methodology

We examined certain tangible factors, such as CEO tenure, how long the firm has been in business, changes in the number of offices, gains or losses in employment, differences in revenues over time, lines of investment by sector and changes in holdings over time, as well as other structural and organizational factors. Then we took a look at the information submitted on community and charitable activities.
We combined scores from the two separate panels to arrive at the final index.