New Ways to Grow: Case Studies in Expansion by Branching Out
- Jun 01, 2008
Their reasons to enter a new business area range from sensing changes in the commercial real estate investment climate to sourcing difficult development projects in order to compete in crowded major markets.But executives who have taken their companies into new and innovative business areas say that despite the challenges, the expense and personnel requirements moving in a new direction can entail, there are also significant benefits to be harvested.The Search for Synergy. The merger of Grubb & Ellis Co. and NNN Realty Advisors Inc. brought together a different combination of companies that what is usually seen in the commercial real estate industry. Yet it satisfied the two criteria that president, CEO & director Scott Peters believes will allow the company to capitalize on new business opportunities. “You don’t want to execute a merger that is duplicative,” he said. “And you want synergies between the two companies.”The combination will allow the company to grow in an environment where major firms are continuing to consolidate, Peters said, noting that the diversification of revenue the merger provides has already reaped benefits. For NNN Realty, ht means not being overdependent on revenue from 1031 exchanges since that business has slowed. It also provides access to Grubb & Ellis’ large property management division and research capabilities. For Grubb & Ellis, it brings to fruition a long held desire by company executives to expand its investment management business.The new Grubb & Ellis will concentrate on adding depth to its management team, Peters said, and flatten the corporation’s organizational structure. Communicating the company’s growth initiatives to its employees, and getting them behind the plan, is also crucial for the new company’s ultimate success, Peters said.New Focus On Urban Development. New Boston Fund Inc.’s entrance into urban development, by way of its Urban Strategy America Fund, was forged in large part by the state governments of Connecticut and Massachusetts wanting to invest their pension funds into workforce housing and urban development. Greater interest from New Boston’s investors in urban development also helped nudge it along, as did president & CEO Jerry Rappaport Jr.’s roots in urban development. (He serving as a consultant to the U.S. Department of Housing and Urban Development in the 1980s.)“It was important to me to have a vision of what could be,” Rappaport said of the new venture. “I was then able to make my investors understand it.” Indeed, the start of construction in 2007 on Olmstead Green, a 552,190-square-foot mixed-use development, has given investors “something to rally around,” he said.Hiring the right personnel for the new venture was a critical part of starting the fund. Kirk Sykes became president because of his knowledge of how public-private partnerships work, as well as his strong network of potential joint venture partners, Rappaport said.To foster employee buy-in, New Boston Fund instituted a profit-sharing plan for senior management as well as long-term employees, even if they did not work on one of the projects in the fund.“That is really a way to align people’s interest,” Rappaport said.Building Big in Big D. For Harvest Partners, its Park Lane mixed-use development in Dallas, its largest and most complex project to date, marked its entrée into transit-oriented development.Situated on a 33-acre site in Dallas, Park Lane is an $800 million, 2.9 million-square-foot project that will house retail, hotel, office and multi-family units. Tod Ruble, partner & co-founder of Harvest Partners, said the firm passed a major milestone when it received the final level of financing for Park Lane.“If a company can say it had a watershed moment, that was ours,” Ruble said. Since Park Lane is largely a vertical development, it required new skills. Harvest had constructed multiuse buildings before, but Park Lane includes high-rises with multiple property types. So a change in one of the uses could necessitate changes in a building’s design and construction.“It’s a project that is self-proliferating and can take on a life of its own,” Ruble said. Harvest Partners has grown from seven to 24 people today, including a specialist in design and construction, a hotel architect and a construction expert.Finding Unusual Ways to Compete. For Kearny Real Estate, finding unusual development opportunities is almost mandatory, as the company operates in the ultra-competitive Southern California market. With a focus on large, complicated projects, the company has tackled the likes of the Los Angeles Air Force Base, where Kearny obtained land in a trade with the U.S. Air Force in exchange for designing and constructing new facilities at the base. In addition, its redevelopment of the former Nissan South Bay campus in Los Angeles involved close work with the cities of Los Angeles and Carson, Calif., as well as resolution of major issues such as asbestos abatement.“We have a rifle-shot approach,” said Jeffrey Dritley, managing partner at Kearny. “We don’t chase a lot of deals.”Kearny is small enough so that Dritley can stay involved in all of the company’s projects, but project managers still enjoy autonomy. “I try to be involved in all of the major decisions on a project, but, also, I don’t want to be over-involved and slow down the decision-making process,” Dritley said.To find new development opportunities, Dritley said he and his management team engage in a thorough exchange of ideas. “It’s a balanced approach,” Dritley said. “Someone may suggest to look into a new market, or a new project, and we will look into it. We expect everyone to author new ideas and author new projects. We ask the question, ‘Do the stars and the moon align on this project, and are we going to make money if we do it?’ ”Changing to Serve a Larger Market. Whereas Spectrus Real Estate Group once focused on selling net lease properties to tenant-in-common investors, in 2005 it shifted its focus to selling to single buyers, believing the single-buyer market to be bigger. The company was also concerned about the regulatory climate changing for sales to TICs, following a longtime battle between companies like Spectrus that sold properties as real estate and others that treated them as securities. Those concerns later proved accurate, when the Securities and Exchange Commission issued statements to the effect that properties sold to TICs should be treated as securities. The company’s single-buyer sales started picking up in 2007, according to Spectrus president & CEO Gary Bringhurst. For Bringhurst, entering a new area of business can present challenges, but that is only half of the story. “If you focus only on the challenges, you are going to miss opportunities,” Bringhurst said.