Real Estate Pros Still Vital Despite REIT Consolidation

May 1, 1999

A year and a half ago, Sam Zell blew into Atlanta and told a group consisting largely of real estate practitioners that they’d become less important as the consolidation craze heated up. As large real estate companies got larger, he said, they’d rely less on third-party brokers to lease space in their buildings.

Zell even went as far as predicting that by mid-2002, “75 percent of the office space in Atlanta will be owned by four owners.”

He didn’t say which four, but he probably included his own REIT, Equity Office Properties Trust, in the count.

Although some may consider Zell a visionary, it’s obvious he didn’t foresee the capital markets’ collapse of August and September 1998, which limited the ability of REITs to raise capital in the public markets and relegated them to the sidelines of the acquisition game.

At least for now, Zell was wrong. The trend of a few companies buying every available property has slowed, even stopped in some cities. Private funds and pension funds filled the void and made several large investment purchases, and the REITs looked for other ways to increase their funds from operation.

In Atlanta, for example, 1998’s largest investment purchase was made by a private fund. Taylor Simpson Group of New York bought the 2.4-million-square-foot Peachtree Center downtown for $245 million. Although a few REITs considered buying the mixed-use complex, the top two offers came from private funds.

The deal done, Taylor Simpson didn’t clean house and fire the Trammell Crow Co. brokers who lease space in Peachtree Center. With no major presence in Atlanta, Taylor Simpson had little choice about whether to hire brokers. It retained the brokers who lease space in the six office buildings.

Zell was off the mark here, too.

Real estate practitioners continue to be needed to lease and market space. In fact, Zell’s own company is using third-party brokers to co-lease a project in Atlanta that it plans to buy. As part of its strategy of entering the development business in key submarkets, Equity Office has agreed to buy a development of Holder Properties Inc. of Atlanta. Holder is building an 18-story, 424,000-square-foot office tower that Equity Office will buy when it’s completed.

Equity Office and Holder Properties are co-marketing the building. For Equity, it’s a shrewd move: Holder’s Clark Gore is one of the city’s best-connected brokers. While working together to attract tenants, the companies say they’ve developed a close relationship—a relationship that very likely will result in future business for Holder.

So despite Zell’s heady prediction, it’s clear that brokers remain a vital component of real estate deals. No matter how quickly globalization accelerates, real estate transactions will always be local in nature. The buyer, the seller, the landlord, or the tenant will always want someone with local real estate knowledge involved in the deal.

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