SAN FRANCISCO -- Their market share eroded by the insurgency of real estate investment trusts and Wall Street-sponsored opportunistic funds, traditional real estate money managers have restructured themselves to compete with the interlopers.
Two broad themes have emerged among these firms: become a full- or at least multiple-service provider or become a niche player.
CB Richard Ellis LLC, an adviser with a new name but old blood lines, has been restructured and chosen the path of multiple services. The restructured firm has all of the elements that pension funds want in their real estate managers: alignment of interests; multiple products; and accountability.
But only time will tell if investors will warm up to the organization.
Robert Zerbst is charged with molding the different units that comprise CB Richard Ellis into a seamless organization. He assumed the top spot from Richard Clotfelter, who retired April 1. Mr. Zerbst joined what was then CB Commercial in October 1997 as president.
The new firm, with $4.5 billion under management and another $1 billion to invest, is an amalgam of real estate money managers CB Commercial Real Estate Advisors, Westmark Realty Advisors, Koll Investment Management and international property manager Richard Ellis International Ltd.
CB Commercial and Westmark, which CB acquired in 1995, were the major building blocks of the organization.
Bad Start
The relationship began badly.
Westmark senior management expected to lead the new firm, according to Mr. Zerbst. "The Westmark people got money upfront and a contract," he said. "The CB guys had no contract (and received less money), so that made it difficult for the cultures to merge."
Ultimately, the CB senior management took control of the firm. Now, Richard Pink, executive managing director, is the only remaining Westmark senior executive in an upper management position with CB Richard Ellis.
"I have tried to ingrain (in remaining Westmark and CB staff) that we will create our own new culture," said Mr. Zerbst. "In the course of this year, I have had a number terminated, and a number have said they don't like the new direction."
Another stumbling block was a negative perception of Westmark.
"The goodwill between Westmark and its clients wasn't what they (CB Commercial) thought," said Terrance Ahern, a partner with The Townsend Group, a Cleveland real estate consulting firm.
Mr. Zerbst agrees. "My perception was they (Westmark) were having difficulty in the marketplace," he said. "In the early 1990s when property values were declining, Westmark (then known as TCW Realty Advisors) senior management took a position that it was a temporary blip. . . .
"The reality was their properties were overvalued and there was a perception that they were not being forthcoming with clients.
"It caused a lot of clients to lose confidence with them and not want to do business with them," said Mr. Zerbst.
CB MORE STABLE
The situation was more stable on the CB side.
A "small scrappy-type firm that didn't have great relationships with the consulting community," CB Commercial developed a core group of six or seven separate account clients, among them the State of Utah Retirement System, the Alaska Permanent Fund and the pension funds for Eastman Kodak Co. and Delta Air Lines Inc., said Mr. Zerbst.
"That is a big part of our clients today."
Those and other clients now will find themselves dealing with a firm that, Mr. Zerbst said, puts the client first.
"We are going to change from a product focus to a customer focus," he said.
"We were organized by function when I got here.
"I've eliminated all of that and created a series of independent operating units separated by strategy," said Mr. Zerbst. "Each unit will have its own CEO, a focused strategy, a dedicated staff and coinvestment capability in almost every case.
"The corporation will provide the back-office duties in order to allow the business units to focus solely on executing the investment strategy."
The success that REITs have enjoyed in attracting pension fund investment prompted Mr. Zerbst and its management consultant --San Francisco-based The MacMahan Group -- to adopt many REIT characteristics.
"The classic problem with the 1980s' real estate managers is the incentive structure was wrong," said John Koza, managing director with MacMahan Group. "The advisers made money while the clients lost money."
Also, no person at the top of the organization was responsible for investments, said Mr. Koza. REITs are vertically integrated, and now CB Richard Ellis is structured that way too.
"The REITs made it clear that where the authority is clear and compensation is tied to performance and interests are aligned is superior," said John MacMahan, chairman of the MacMahan Group.
OPERATING UNITS
CB Richard Ellis' operating units are:
* Fiduciary services, which contains traditional real estate investing business such as separate accounts and commingled funds. It will be overseen by Bill Harris.
* Real estate securities, a partnership with Alliance Capital Management, is headed by Richard Wollack.
* Strategic investments, CB Richard Ellis' first new venture, led by Vance Maddocks, Westmark's acquisitions chief. The unit's value-added strategy will target a return on investment between core properties and the opportunistic funds, now in the high teens, said Mr. Zerbst.
* Corporate property trust, which will tap into the huge reservoir of corporate-owned real estate and the outsourcing trend by corporate America, said Mr. Zerbst. Scott Tracey will run the unit. Mr. Zerbst noted CB is No. 2 in U.S. corporate real estate. "We want to build our investment program on top of this function," he said.
* International, headed by Mr. Pink, which will focus on investments in Europe and Asia, using Richard Ellis International as its platform, said Mr. Zerbst.
INVESTORS WANT PROOF
Despite the positive changes, investors will want to see results before investing with CB Commercial, said Mr. Ahern, the consultant.
"There are some talented people there, and they have had some recent successes with their value-added strategy," said Mr. Ahern. "We are in a wait-and-see mode.
"As a firm, they are undergoing significant changes in size and focus and that is always a flag to be aware of.
"They also have a new leader.
"Bob is bright and capable, but he is an academic," said Mr. Ahern. Mr. Zerbst was once a professor of real estate at Southern Methodist University and The University of California.
Mr. Ahern also cited Mr. Zerbst's lack of experience running a big real estate firm. Mr. Zerbst was the founder of Piedmont Realty Advisors, a successful firm that was merged with The RREEF Funds in 1991.
Mr. Zerbst worked shortly with RREEF before embarking on a number of small consultant-style endeavors.
"He ran a small, successful entrepreneurial shop," said Mr. Ahern. "He hasn't been in a management position in as large an organization.
"This is a new challenge."
Mr. Zerbst needs to create a broad structure that allows the firm to move from one initiative to the next as well as managing the complexity of a global company, said Mr. Ahern.
"That is a set of challenges that you shouldn't underestimate."
