LOS ANGELES—For many publicly traded REITs, the mandate of internal management extends all the way down to the asset level. Yet a study commissioned by CBRE finds that third-party property management warrants a closer look by REITs.

“In many cases, REITs can increase NOI and FFO under the external property management model,” writes David Fick, professor at Johns Hopkins University Carey Business School and former head of REIT research at Legg Mason Real Estate Group. Specifically, Fick found that REITs can save as much as 62% for direct labor costs, for example, or 8% for engineering and janitorial services, when outsourcing property management.

Partly that's due to the external property manager's ability to achieve scale. A large, specialized management company has the scale to spread training, development and costs across a larger portfolio for a fraction of what similar functions would cost a REIT, according to Fick's white paper.

Property management IT is a specific area in which a REIT can achieve efficiency and savings by leaving it to a third-party firm, thus focusing its energies on investment and portfolio management. CBRE, for instance, spends approximately $15 million for technology in the property management and accounting services division, a sum that dwarfs the spend of any individual REIT. Yet each of its clients gains access to the entire underlying IT infrastructure.

While nothing in the internal-management model prevents a REIT from outsourcing its property management, keeping everything under one roof is “part of the REIT industry and part of how they operate as a business,” CBRE's Andrew Genova tells GlobeSt.com. “I do know, from talking to many of the public REITs, that they have an internal property management model. They've invested a lot of money in that, and they've built it quite well.” He adds that for these REITs, it's an element of branding. “Brand is important to them, along with methodology, processes and procedures.”

Through the commissining of the white paper, as well as through one-on-one conversations, “What we're trying to achieve is letting these public REITs know that CBRE, as global property management company, does have a platform that's available to them,” says Genova, executive managing director at CBRE. “And I believe that many REITs are not aware of that. Our goal is simply to expose them to our platform and hopefully drive a value proposition that works for them within their strategic plan of how they run their real estate and their businesses.”

Already, Genova says, “we work for many public REITs in a variety of ways: leasing, some accounting, some property management. Public REITs are comfortable using us in markets where they do not have a large concentration.” He adds, however, “If you were to look out over the past five to 10 years, the platform we have today has significantly grown and matured in the sense that we're about creating value within the property management business. We're about leveraging our scale to the benefit of our clients.”

Sources outside CBRE have weighed in on Fick's study. Veteran REIT investor Ralph Block, who wrote the reference guide Investing in REITs as well as an introduction to the white paper, says it “should be required reading for every top-level REIT executive.” And John W. Guinee III, managing director, REIT equity research team at Stifel, Nicolaus & Co., observes, “In the current environment, active asset recycling is a must for any REIT. While the merits of in house vs. third party property management for economic and professional growth reasons can be debated, the asset flexibility afforded by third party property management makes it a viable option.”

Instant Insights /

The REIT Case for External Property Management

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