For nearly 20 years, Sam Zell, the grave dancing, yet eternally optimistic public and private entrepreneurial investor, has issued hard hitting prognostications. In typical, creative, Zell fashion, he delivers his predictions for the year ahead in the form of year end gifts – bronze encased music boxes. Redesigned each year with a new look and feel, their one commonality is that all of the boxes share one feature – when you press a button, you are rewarded with the music of a popular tune, accompanied by lyrics, written (but not sung) by Zell, wherein he expresses his current view of the world.

On the heels of a difficult 1994, Zell’s music box theme was “Staying Alive,” which, perhaps, would have been equally apropos in any of the last 3 years.  The music in 2005 was set to Burt Bacharach’s “Raindrops” classic, which included such lyrics as “Capital is raining on my head…”  But my all time favorite was his 1999 edition, the theme of which was “The Emperor Has No Clothes,” where Zell played off of the similarly titled Hans Christian Anderson story, suggesting, with remarkable accuracy, that the valuations of the technology companies of the day were way out of whack – without balance sheets, earnings, and in some cases, revenue.  Interestingly, and consistent with his 1994 theme, the lyrics could be applied to later, more contemporary controversies, such as the over-valued commercial real estate market of a few years ago.

Like him or not, find him combative or just succinct and to the point, today’s post is not intended to exalt Sam Zell, but rather to steer you to a powerful collection of Zellesque music boxes:   The folks at www.CRE-Advice.com have assembled the first ever, free and online Commercial Real Estate Leadership Summit, which features industry insights, market overviews, and prognostications from close to one dozen of the commercial real estate industry’s thought leaders…it’s like having unfettered access to some of the most influential leaders in CRE on your time and in a setting of your choosing…or like pressing play on a dozen of Sam Zell’s music boxes.

I was a participant, and my video contribution appears in the video above.  You can gain access to the free summit by registering here: CRE-Advice Leadership Summit

So my question is this – which CRE brokerage business model is better, brick & mortar or franchise/network? The current prevailing strategy associated with M&A transactions is for buyers and investors to disenfranchise independently owned, network member, CRE brokerages and covert them to wholly owned, corporate store entities, which are often dubbed “brick & mortar” brands.  The parties on the buy-side of these “deals” cite greater control and therefore better client service as two of their reasons for buying.

From my perspective, the current thinking outlined above incorrectly implies that “corporate store” CRE brands are better suited to service their clients than franchises and networks.  In today’s post, I will share with you why the CRE, brick & mortar brand model of old is broken, uncreative and non-scalable, while franchises and strong networks foster innovation, creativity, scalability and are positioned to deliver greater results for their clients.

There currently exist some great CRE brokerage brands.  Talented leaders stand atop sharp, seasoned, and knowledgeable industry experts who collectively make-up some well run brick & mortar brokerage brands.  It is the model in which these firms operate that is broken, and not necessarily the firms themselves.

Brick & mortar brands employ a model that operates with high fixed costs in a cyclical and unpredictable commercial real estate market.  Brokers who work for these firms often feel that they are giving too much (in commission split) for what they are receiving in return, the firm’s management team’s struggle to eke out profits in poor and mediocre markets, management’s focus steers toward survivability and earnings vs. client’s interests, and all stakeholders suffer – even the client.  CRE franchise organizations, and well run networks, by contrast, are not boot strapped by high fixed costs, can turn profits with regularity in varying market conditions, and this allows their focus and energy to be heavily weighted towards the client.  Additional benefits afforded to CRE networks and franchises, as compared to brick & mortar brands are as follows:

• Cost Structure & Focus:  Take into consideration the cost of running a national brick & mortar business with multiple leasehold obligations, high labor costs, the expense of creating brand recognition at the local, regional and national level, high IT costs, etc., and one can easily draw the conclusion that a predominant focus on size, breadth and volume is a survivability requirement.  History has shown that this frequently forces some national CRE brands to focus on recapitalization for survival.  Undistracted by high fixed costs, Franchisors and networks are, more often than not, run with inexpensive, variable, scalable, but effective cost structures, and their emphasis can be placed on innovation, creativity, marketing, and delivering results for their clients.
• Client’s Interests: In light of the high fixed costs mentioned above, it becomes cost prohibitive for some brick & mortar modeled brands to encourage fee sharing with competitive brokers.  The result is a preponderance of “double-ended” investment sales transactions, where the focus of a broker is more on finding the buyer independently vs. utilizing the brokerage community to assist – the result is nothing less than an effort on the broker’s part to earn a higher fee.  Franchisees and network members, whose businesses are independently owned and operated, on the other hand, operate with higher margins, can “afford” to put the client’s interests first, engage competitive brokers to shop listings to their buyers, split fees (some as high as 50% as we do at SVN as a matter or policy), generate organized competition, and ultimately a higher price for the client.  The latter approach is clearly in the best interest of the seller or client.
• Innovation: While franchisees and network members are both tied to strict brand standards, and some with codes of ethics, both are usually afforded tremendous, healthy independence with utilizing and developing technology, and processes, testing and identifying key vendors and developing the creative edge that client’s continually demand.

Bottom line – While large brick & motor CRE business models may look dominant at first glance, when you look under the hood, some represent organizations that cannibalize themselves from the inside out. Their constant need for investment capital requires them to be focused on short-term financial objectives which doesn’t afford them the ability to focus on the creation of long-term value through an efficient, client-centric business model. When all the dust settles, it will be the well run franchisors and networks who demonstrate the consistent ability to generate profits, and the ability to scale regardless of the economy that will prove to have the better business model.

“Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases,” said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. “Those that are patient, daring and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate owned portfolios. Respondents to the Emerging Trends cite the best investor bets for 2010 which include:

•  Deal with cash – Cash is the only way to operate and only the most liquid can take advantage of the emerging opportunities.
• Patience will be rewarded - Early is the new wrong as the economic uncertainty will hamper the recovery and absence of ready refinancing in comatose debt markets adds more risks.
• Focus on quality and be selective – Seek irreplaceable Class A properties with debt maturity in places like New York, San Francisco and Washington, DC.
• Stick to global pathways where recovery will happen more quickly.
• Buy cash flow and real yield – Anticipate creating value by filling vacancy and increasing rents over time.
• Provide financing as three to five year loans can deliver low teen returns.
• Implement asset management triage – Focus capital and resources on retaining and attracting tenants in properties with better long-term value.

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So, my question is this: will you sit on the sidelines with the masses and continue to watch and wait, or will you get in the game while the best opportunities are available with the least amount of competition? The choice  is yours, choose wisely…

Disclaimer: The PWC/ULI survey while indicating a belief that a market bottom is in sight, also cuations that a sluggish economy and the potential for rising interest rates could slow a rebound even when the recovery does start to get traction. Any investment decision should only be made after careful consideration and advice from your professional advisors.

By way of background, prior to becoming an executive I had the distinct pleasure of serving as a professional advisor representing both the buy-side and the sell-side on a myriad of commercial real estate transactions. I’ve been around long enough to remember the days when proprietary transactions (deals that didn’t get shopped) were the norm. As much as many brokers want the world of proprietary transactions, and “double-ended” deals to flurish in perpetuity, the reality is that mounting pressure from commercial real estate principals and regulators will eventually change the norm for how transactions are facilitated. Following are just two reasons for what will eventually cause the changing of the guard:

1. Deal transparency: It sounds reasonable doesn’t it? It sounds like something any buyer of commercial real estate should be entitled to right? Sure it does…In a recent decision in Delaware, the court found independent directors of a company personally liable for what the court called a breech of fiduciary obligations by holding a “passive” sale. If officers and directors on the sell-side cannot get away with entertaining exclusive deals without incurring personal risk, guess what…they won’t do it. Combine this with what will most certainly be an environment of increased regulatory oversight, and enhanced investor scrutiny, and you’ll quickly arrive at the same conclusion that I have…Most deals will have to become very transparent in order for the sell-side to be comfortable in moving forward. While this example comes from the corporate investment banking world as it related to an M&A transaction, it doesn’t take a rocket scientist to see the direct linkage that could easily be applied to commercial real estate.

In fact transactional nuances are already starting to shift in favor of more deal transparency. As an example, “Go-Shop” provisions, common in the M&A world are starting to emerge in commercial real estate and are included in many of today’s letters of intent and purchase and sale agreements with potential suitors. “Stand-Still” provisions are becoming a thing of the past as they set-up the seller for third party allegations that the seller failed to fulfill their fiduciary responsibilities by agreeing to sell a property at a “low-ball’ price, and/or by signing off on measures designed to dissuade competing bidders. The offset for buyers to induce them into agreeing to a go-shop provision is the inclusion of a provision to pay a break-up fee should the seller unwind the deal due to a better competing offer. These types of provisions were simply unheard of in the market no so long ago…

2. Macro Economics: Anyone who has ever taken an economics class knows the law of supply and demand: The greater the exposure and demand for an asset, the higher the price the asset will sell for. The problem lies in the fact that the world of commercial real estate generally operates in much the same way as it has for decades upon decades…small groups of brokers marketing deals to private client lists in the hope of controlling both sides of the commission. While there is certainly nothing illegal about this, simple econmics, combined with growing regulatory scrutiny will eventually force the intermediaries in the commercial real estate world to submit themselves to the same level of deal transparency that their counterparts in the corporate investment banking world have had to do.  

So how does this tie back to auctions you ask? For the reasons noted above, the pressure being brought to bear to maximize disposition valuations will insure at some point in time that virtually all deals will get shopped (advantage sell-side). When this happens, the environment will simply play right into the strengths of the auction platform. The spoils simply go to the highest bidder on a price basis, or the highest bidder on a value add basis, but in either case (preferably a combination of the two) it usually boils to the most aggressive bid winning the transaction. As a long time proponent of deal transparency, I am particularly fond of this proliferating trend.

Bottom line…Owners of commercial real estate assets don’t need to wait for the market to shift. They can simply demand that their brokers and advisors take their assets to market via auction. The auction environment, properly managed by the right advisor can be your best friend by proving transparency and maximizing valuation.

In an upcomming post, I’ll share some thoughts about how to insure that an auction is structured properly, and that it’s just not a cheap masquerade to cover-up business as usual by brokers.

Let me begin by stating that I’m not advocating for form over substance, cherry-picking, or any other position that would support spending your time on issues not deemed significant solely because they happen to be in the public eye. Nor am I suggesting that you be anything other than genuine and transparent in your business dealings.  I am however strongly suggesting that public displays of incompetence be avoided by all ethical means.  

The simple reality is that a lack of execution or performance on highly visible matters can have devastating impact to your organization and your career. All of us have observed executives, products, services, business units, and even entire corporations  that have been served-up as sacrificial lambs for nothing less than their association with an untimely public faux pas.

However there is a silver lining here…Just as those who end-up on the wrong side of a public failure create a negative perception, those who complete initiatives that are highly visible, in spectacular form, will be greatly rewarded. Again, I want to be perfectly clear that I’m not suggesting that readers nail the visible and coast through all else, rather, I am merely pointing out that if “Something’s Gotta Give,” then it should not be the tasks, projects, deliverables, and initiatives that are visible to the masses.

Okay, back to the original questions: why a blog and why now? I happen to possess a passion for two age old disciplines: communication via the written word, and applied critical thinking. With a penchant for these two disciplines, how could I possibly pass-up blogging? It is also important for you to understand that as I assumed the role of President and CEO back in December, I committed to myself and to my board that I’d take an aggressive and active role in expanding my role within the industry, as well as broadening the reach of our voice in the marketplace. While most of my peers have yet to embrace the blogosphere, I’ve never been accused of being bashful, but more importantly, I can’t think of a better way to communicate with my stakeholders. So, after having worked with an incredible team to restructure Sperry Van Ness (we were the first of the nationals to act in Dec, 2007), turning our model into a franchise only, scalable, sustainable and healthy business, I felt it was time to issue periodic commentary and to reach out for feedback.  In my role as President & CEO, I highly value the input of our clients, advisors, lenders, investors, and partners. I therefore felt there was no better forum to communicate this message than via this inaugural blog post…

The world has a few great thinkers, and many a pontificator who thinks they’re great. I don’t really fall into either camp, but in the weeks and months ahead via this medium, I hope to simply bring you a combination of personal thoughts, professional observations, corporate announcements, pithy musings, the occasional rant, and other topical content of interest in order to challenge your thinking and to hopefully make a positive impact in your world. 

So, why the changes you ask? It is important for you to understand that all the recent corporate changes you have witnessed in this first half of 2009 have been in direct response to your feedback and input. The simple truth of the matter is that you have spoken, and unlike many service providers in the market place, we have listened. In the text that follows, I’ll provide you with three representative examples of some of the more noticeable changes, but I’ll also provide a summary of what those changes mean to you, and things you can look forward to in the months ahead:

• Our Tag Line: The bottom line is that we’ve embarked upon the path of reengineering our brand to more closely reflect our attitude, culture and brand promise. The first step in this process was introducing a new corporate tagline. While the spirit of our old tagline “Maximum Competition Equals Maximum Value” remains entrenched in our credo and our methodology, our new tagline “Your Creative Edge” sets a new tone for how we’ll communicate, collaborate, and innovate with our customers and partners moving forward. The new tagline provides a simple, and clearly communicated, direct correlation to providing our clients with a much needed edge in an increasingly tough and competitive market.  There are new buyers, sellers, rules and regulations, and thus the need to be creative and innovative in resolving complex real estate issues will be keys to success for the foreseeable future. In a business known for its self-centered competiveness, we built our business model (and brand) on a very simple premise – a total commitment to a customer centric culture, while breaking the rules of the non-cooperative broker establishment with our philosophy and process designed for clients, not our own self-interests.  This has been our consistent strategy, not one we adopt when it suits our needs, but simply because we passionately believe this is the way it should be – We believe these are the primary value propositions that our clients look for when selecting their professional advisors, and they are clearly two of our main business drivers.

• The Sperry Van Ness Asset Recovery Team: Launched late last year, this group of 65 advisors specializes in distressed asset sales and provides immediate, nationwide  underwriting and disposition solutions to financial institutions and real estate clients with distressed portfolio assets. Sperry Van Ness is the only national commercial brokerage with an integrated auction division, which will play an active, important and valuable role in the distressed asset arena for years to come.  Collaborating with 950 Sperry Van Ness “boots on the ground” the “ART” has coverage in “A” markets throughout the US, but has the most comprehensive footprint in the industry in “B” and tertiary markets, which are homes to thousands of distressed assets.  Sperry Van Ness remains unique in this regard. 
   

• The Sperry Van Ness Magazine: You’ll notice that we have released The Advisor   which is just another example of the steps we’ve taken to add value to your interactions with our firm. Here, we’re making substantial, but smart investments in expanding our efforts at providing you with market data, industry information, and timely advice to better help you manage market complexities.

I realize that today’s post was a bit lengthy given the medium, but because it was my first, I wanted to take the time to lay a solid foundation. In the weeks and months that follow I’ll continue to announce new roll-outs designed to continue our focus on improving your customer experience with Sperry Van Ness. And have no fear…I won’t hesitate to offer my thoughts, commentary and updates on industry current events. As always, I welcome your comments, input and feedback.