Real estate giants plan electronic procurement consortia

Copyright: David Lawson/Financial Times – June 2000

One of the world's most distinguished economists presented a stark challenge to the real estate industry recently: co-operate or die.  If  banks like Goldman Sachs, Morgan Stanley and Salomon Smith Barney can combine to create a single Internet 'portal'  for rich private clients, then the old laws of competition no longer apply, said Laura D'Andrea Tyson, former adviser to President Clinton.

   A sprinkling of smiles punctuated the rows of long faces among  real estate executives from across the world listening with rapt attention   at the IDRC  world congress in New York.   Some of the industry's top names  have already got the message, joining forces in a burst of consortium mania  over the last few months.

  First off the blocks was  Insignia, with an Internet portal  grandly titled EdificeRex. This focused on management services for  upscale New York apartment tenants but a commercial real estate version is about to roll out  with the equally impressive name RexSpeed. This will cover more than 75m sq ft of office space owned by partners including  Apollo, Blackacre  and Witkoff.

 Chief executive Andrew Farkas is an ambitious man, however. He is looking further to servicing  tenants in 230m sq ft managed by Insignia's subsidiaries. Ten city portals are planned in the US and an outpost  in London covering the European portfolio established by subsidiary Richard Ellis St Quintin.

 Another impressive name, Octane, was dreamed up by CBRichard Ellis, Jones Lang LaSalle and Trammell as  an online focus for the 5bn dollars a year spent by the partners on procurement. Within weeks, Octane joined an even larger group including names  such as  Simon Property and Morgan Stanley, which has a wider remit to consider areas such as co-investment. CBRE has also launched an application service provider (ASP) called to provide software for its tenants.

 This month another consortium emerged comprising more than a dozen of the largest landlords in North America including  TrizecHahn, Hines and CarrAmerica, with a combined portfolio of more than 700m sq ft. It is unlikely to be the last. Two more groups are rumoured, including one fronted by Goldman Sachs.

  Trammell Crow has added to the confusing interplay of names by making a separate play for overseas markets. It has taken a stake  in Savills, the UK-based consultant, to create a combined outsourcing service. This is planned to expand into areas like  Asia-Pacific and Australia, where Savills already gained a foothold through its alliance with First Pacific Davies.

 Meanwhile, the construction side of the industry is fighting its own battle to claim a stake in the  estimated 3 trillion dollar global market in  building  materials. BuildPoint Buzzsaw.Com and Contractorhub are some of the big names involved in creating online procurement and management portals.

 The US trails Europe in this field, however, claims Brian Moran, president of BuildOnline, who  saw the potential for trading materials over the Internet  after working on major projects including a 100m dollar development in Moscow. The average 100,000 sq ft building uses around 8m dollars of materials from 65 suppliers and is built by 20 contractors. 'The industry spends 500m dollars on overnight shipment of documents alone,' he says. E-procurement could save 23 per cent of construction costs and reduce building times by up to 15%.

  UK real estate investors are still beginners at this kind of process. Arlington pioneered bulk purchase of power and telephones on its business parks and others have followed with similar schemes for shopping centres and office blocks, but  property holdings are more fragmented than the US, so achieving critical mass is  difficult. The biggest listed firms, Land Securities and British Land are still investigating possibilities  and one other top company has put out feelers to competitors about pooling resources.

 But how can such fierce competitors work together? 'Who would have thought the  automobile industry could pool the market for spares - but it has,' says Joe Rubin, director for e-business and real estate at Ernst & Young in the US. 'It is a new concept called co-opetition: where competitors co-operate for the benefit of customers.'  Backroom processes such as accounts and ordering are essentially non-competitive services, so there is little potential for conflict.  Landlords long ago cottoned onto the savings they can pass on by purchasing  telecoms, power and water for their tenants. Bulk up even further by pooling billions of sq ft of space managed by competitors and the savings get bigger.

 Peter Mantle, a Jones Lang LaSalle veteran recently  appointed to oversee  e-commerce development says the potential spreads further than the 100m sq ft of space JLL has under management in Europe. Institutional clients could be offered the  service via an e-procurement 'club'.

  Savings can be  hard to predict  at such an early stage of the market but Chesterton International has launched an on-line facilities management service in the UK which boasts a potential 40 per cent savings for clients by bundling them in with  major organisations. Cutting administration costs adds to this potential. 'It can cost up to 175 dollars to process a paper invoice - even if that is for a few light bulbs worth 52 dollars,' says Mark Rose, JLL chief innovation officer. 'BT has calculated that individual invoice costs fell from 113 dollars to 8 dollars when it shifted online.'

 Overall savings between five and 15 per cent would make Octane viable, says Rose. But for the moment that means concentrating on specific areas such as repairs and maintenance, which cost an average of around 8 dollars a sq ft in the US.  'There are usually only three main players in any sector, providing up to 70 per cent of the turnover,' he says. 'To gain one of those slots means you have to be focused.' Spreading into areas such as office supplies for tenants could lose that focus, he says, although this could come later.

 But some observers believe even this might not be enough to guarantee the success of ventures which have been held up as the saviour of the real estate industry.

 'There is a lot of promiseware floating around and I would forecast a big fallout rate on some of the services being proposed,' says Trevor Miles, a consultant with PriceWaterhouseCooper.'One issue that does not appear to have been considered is whether tenants want to ally closely with landlords, which have traditionally been the enemy.'

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