SIC 6512 Operators of Nonresidential Buildings

SIC 6512

The commercial real estate operation and leasing industry consists of establishments primarily engaged in the ownership and operation of nonresidential real estate. These companies own and operate properties such as retail establishments, shopping centers, marinas, theaters, and commercial and industrial buildings. The industry does not include owners of hotels, campgrounds, or other establishments that are classified as service operations.

NAICS CODE(S)

711310

Promoters of Performing Arts, Sports and Similar Events with Facilities

531120

Lessors of Nonresidential Buildings (except Miniwarehouses)

INDUSTRY SNAPSHOT

The real estate industry experienced several significant swings during the late twentieth and early twenty-first centuries. Hammered by a depression in the real estate industry that began in the late 1980s and continued into the early 1990s, commercial property owners and operators were beset with high vacancy rates, a severe shortage of capital, and dismal earnings. Many companies were not able to meet their mortgage obligations and were forced into bankruptcy. Companies that survived the shakeout learned to operate more efficiently and to compete by providing better customer service. (See SIC 6531: Real Estate Agents and Managers.)

After a continued slump in 1993, the industry bottomed out and vacancy rates in many sectors began to stabilize. The dramatically improved economic climate through 1996 was reflected in an equally dramatic recovery of the office and industrial segments, especially in suburban areas. However, the retail segment was an exception. New construction continued unfettered, so the retail market was oversaturated by 1996. Slow retail sales and numerous retail bankruptcies threatened to worsen the situation.

The unprecedented longevity of the late-1990s economic boom spilled over into the nonresidential real estate market. The unexpected continuing strength of the U.S. economy managed to keep tenant demand relatively strong during this time, particularly in the office and shopping center segments of the market. However, by the early 2000s conditions had changed. Weak economic conditions led to massive layoffs and reduced levels of corporate and consumer spending. Although the entire commercial real estate industry was affected, these conditions impacted some segments more than others. Fortunately, overall investment levels remained strong.

By the mid-2000s conditions had improved significantly as the real estate market was bolstered by historically low interest rates and a revived economy. Office and retail showed strong performances during 2004, and although growth was expected to slow during the latter half of the 2000s due to a gradual increase in the interest rate, the industry's outlook was positive.

ORGANIZATION AND STRUCTURE

The entire real estate industry is highly fragmented and has traditionally been characterized by low barriers to entry. Therefore, companies that own, lease, and operate commercial properties range from small mom-and-pop firms to large national corporations. In addition, many of the largest owners and operators of real estate emphasize other business operations and thus are not primarily engaged in the industry. For instance, some of the largest commercial property owners are insurance companies that invest some of their reserves in real estate, which they may or may not actively manage. Other owners and operators include large corporations such as General Motors or IBM, which operate properties that serve their core businesses.

Specialization

Companies that are primarily operators and lessors of commercial properties often specialize either by region or by property function. Those that specialize by property function benefit from an acute understanding of the market segment that they serve. Through experience, they learn how to streamline their operations and reduce costs while generating maximum revenues from a given number of square feet, or dollars invested, in a project. For example, some companies specialize in the operation and leasing of shopping malls, whereas other companies focus on self-storage facilities or office buildings.

Because the real estate industry has traditionally been highly localized, many industry participants specialize in just one geographic region or locale. For a company to own and operate a property that effectively competes for tenants, it must have an intimate understanding of the local market characteristics. These attributes include demographics, location, surrounding facilities, vacancy rates, zoning restrictions, local taxation, and future economic expectations. For this reason, very small firms that concentrate in their own community benefit from a shrewd understanding of their local market. They are also more likely to take advantage of business relationships that give them an edge in their community. Property owners that do not specialize regionally will often contract with third-party management firms that are familiar with the community in which their property is located.

Institutional Investors

Aside from the large and small property owners, operators, and lessors who have traditionally dominated the commercial market, another type of owner/operator includes subsidiaries of large institutional investors. These companies specialize in real estate ownership and operation for their parent investment company. They typically invest in many properties in various regions, often worth millions of dollars. Asset managers employed by these companies oversee the properties and are ultimately responsible for their financial performance. In many cases the asset managers contract with, and directly supervise, local property management firms that perform on-site maintenance and lease tenant space.

Also falling into this category are lending institutions. Many of these institutions became property owners/operators by default as the developers to whom they loaned money during the 1980s failed to meet their debt obligations.

Professional and Trade Organizations

There are several professional and trade organizations involved with this industry. The Building Owners and Managers Association International was founded in 1908 and is headquartered in Washington, D.C. Its activities include lobbying on legislative and regulatory issues, conducting training programs for property administrators, and establishing industry standards, such as the Standard Method of Floor Measurement. The International Facility Management Association, located in Houston, Texas, focuses on the management of the work environment. It conducts research, provides educational services such as facility manager certification programs, and sponsors international conferences and...