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WALNUT CREEK, CA—The major areas of interest in the commercial real estate industry are on the ownership side with transactions (sale, finance or lease), investment returns and investment strategy as the most important. The focus on the ownership and management side of CRE is important because these areas are considered the sexiest and of most interest to developers, fund sponsors and investors. Two of the prime measures of success in the CRE industry are: how much property an investor owns or the amount of assets under management; and what is the track record of the investor with its investment program.

There are numerous firms in the property or investment side of the business including: private equity firms, public and private REITs, insurance companies, sovereign wealth funds, high net worth investors, pension funds, developers and local syndicators. These firms derive their fees and profits by acquiring CRE property at low prices and selling at high prices. The most successful of these firms, such as the Blackstone Group, Starwood Capital, Colony Capital and others, typically receive fawning praise from the real estate media on their investment prowess and are considered pinnacles of the CRE industry.

However, there is a whole other service sector side of the CRE industry that is just as essential as the investment side and in some cases more important. The service sector includes two broad areas: sales, finance and leasing brokerage; and real estate research and data analytics. This service side of the business is very crucial to the success of the entire CRE industry, as the industry continues to evolve into an efficient and institutionally dominated business.

Greater efficiency and institutionalization requires a fast paced and knowledgeable brokerage function, and prescient research and data analytics. The investment side of the industry would not thrive without high quality brokerage services, market research and investment metrics provided by brokerage and consulting firms. Since the investment side of the industry receives most of the accolades, I was wondering: which side of the business has been more profitable and is it more lucrative to own CRE assets or provide the services?

There are a large number of firms on the service side of the CRE industry, and below are the three main service provides that are publicly traded, with financial information and stock returns that are readily available.

Public Brokerage Firms:

• CBRE Group Inc.

• Jones Lang LaSalle Inc.

Public Research, Data and Analytics Firm:

• CoStar Group Inc.

To analyze which side of the CRE industry has been more lucrative, in terms of investor returns, we will compare the equity returns of CRE private equity firms and publicly traded REITs to the above three service side firms over the last 10 years. The returns for the three service firms was derived from web-based public stock return calculators. The returns for real estate private investment will be derived from both Cambridge Associates, a financial consulting firm that compiles returns on private real estate equity funds, and NCREIF, a CRE research firm that provides returns on a portfolio of institutional quality real estate. The returns for public REITs will be provided by NAREIT. All returns include dividends, income and capital appreciation. The table below shows the investment and service sector returns and then an average return for each sector.

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As shown above, the average annual return from CRE property investment was 7.75% as compared to 14.53% for property service firms. Although this is a simple comparison analysis and not statistically based, is does indicate that historical investment returns have been higher from the service side as compared to the investment side of the CRE industry.

Given these higher returns, it would make sense for individual and institutional investors to allocate a portion of investable funds to invest in service side firms. It also may be profitable for an investment organization, especially the large real estate private equity firms, to create their own brokerage and research/data analytics operation.

A captive service firm could operate as a separate entity and provide services to the investment firm and its various investment funds as well as independent third parties. This structure would create another revenue stream and increase the firm's enterprise value, while also expanding the firm's product and service offerings, when soliciting new business.

Joseph Ori is executive managing director of Paramount Capital Corp. The views expressed in this column are the author's own.