BIG CHALLENGES On the down side, consolidation poses a number of challenges. First, what happens if the leader of an acquired firm decides not to stay with the newly merged company? Owners often choose management firms based on who runs a firm and won’t necessarily stick with a company if the management team changes, says Harrelson.
“If all of a sudden Steve [Heimler] wasn’t there with Stratus, someone might say, ‘I have Bill down the street with XYZ company calling me all the time, and he has always been my second favorite guy in town, so why don’t I go with Bill rather than get introduced to these new guys?’” says Harrelson. “You run the risk that some of your clients just aren’t going to follow along, and with 30-day cancelable contracts, that is a risky proposition.”
There’s also the danger of simply becoming too big. “There are certainly economies of scale, but there is also such thing as ‘diseconomies’ of scale,” says Woodward. “Sometimes you become so huge that you become slow-moving, you can’t be as nimble, and you can’t respond.”
It’s no different than any other business model, adds David Kim, managing director of The Bascom Group, an Irvine, Calif.-based owner with a 34,000-unit national portfolio. Companies can only consolidate to a certain degree before they become ineffective at the regional level, allowing smaller players to capture market share, he says. To succeed, large national companies must maintain a strong local presence and prove to their clients that they have local expertise.
Plus, some property owners demand a great deal of personal attention that they might not be able to get from a mega-sized company. “You have owners that have egos and think they are the king of their own little territory,” says Kim. “If they are going to outsource their units, they may not be in tune to being one of many on a client list.”
INDUSTRY IMPACT It’s difficult to predict whether more firms will jump on the consolidation bandwagon, but there’s certainly a possibility that others will follow in Riverstone’s footsteps. Christy Freeland, co-CEO of Riverstone, expects to see continued consolidation within the next three to five years. “I don’t think we will do it as quickly as some of the other industries, like banking, because we are a slower-moving industry, but I think you will see it whether it’s 10 percent or 15 percent or 30 percent,” she says.
If such merger activity does continue, Heimler expects smaller players in the 20,000- to 25,000-unit range will be at a real disadvantage as they won’t be able to compete with larger companies offering strong practices and procedures at a less expensive price tag. “Some people will be put out of business,” says Heimler, particularly owners who offer third-party management to support their ownership business. “Customers are going to realize there is more competitive or better pricing offered by a [strictly] third-party management firm.”
But owners and managers alike agree that no matter how much consolidation actually occurs in the industry, there will always be a need for smaller, regional fee managers, especially in third- and fourth-tier cities with plenty of successful mom-and-pop shops. “I don’t always find these bigger companies to be better,” says Neil Rosen, principle of Virginia Beach, Va.-based NJR Real Estate Consulting Services. “When I make recommendations on management agents, I always look for a small regional company because they know the area and they don’t always have as much transience in their personnel.” Maybe bigger isn’t always better.
Watchful Eye Is your fee-management firm on CAS Riverstone’s radar?
CAS Riverstone is certainly getting big fast, but the company’s growth is carefully managed. The firm chooses its acquisition targets based on a variety of factors. The most important item on that checklist: a similar company culture and operating platform to ensure that the blended firms will work well together. Riverstone typically keeps the acquired company’s management team in place while consolidating back office operations.
“We want to keep the people; the clients need that,” says Terry Danner, co-CEO of Riverstone. And the potential targets must share a similar belief in the need for consolidation in the fee-management business. “We say to people, ‘Are you in this with us? Do you believe in the mission we are trying to accomplish?’” Danner adds.
Riverstone also looks for firms with clients in geographic areas the company hopes to enter or where it wants to expand its presence. Its recent acquisition of Woodland Hills, Calif.-based Stratus Real Estate helped the firm grow its already strong national footprint in three major markets: California, Arizona, and Hawaii, where Stratus manages approximately 23,000 units.
Industry leaders agree that a well planned, highly directed growth strategy is critical to Riverstone’s success. “Riverstone has a strong institutional mind-set born of years of being Trammell Crow and for their opportunity for success, I would certainly give them a notch above somebody else trying to execute the same strategy,” says Stan Harrelson, president and CEO of Pinnacle, an American Management Services Co. “They’ve got a culture, and they know who they are.”