U.S. Unit of London-Based Savills Pursuing Growth Opportunities on West Coast of U.S., Canada
Competition in the tenant rep sector, always fierce, ratcheted up a few notches last week as JLL added a tenant rep team from Washington Partners Inc. in Seattle
, while Cresa, the international network of independent tenant rep firms, announcing a bold five-year plan to double in size and named former Cushman & Wakefield Americas CEO James Underhill as its new chief executive
to carry out the plan.
For insight on the dynamic tenant rep business and updates on his firm, CoStar turned to Michael D.Colacino, president of tenant rep leader Studley since 2002 and who has worked for the firm founded 62 years ago by the late real estate broker and entrepreneur Julien J. Studley since 1991.
As a key member of the leadership team headed by longtime Chairman and CEO Mitchell Steir, Colacino helped usher the company through more than a decade of steady growth, culminating in the $280 million sale of the firm in 2014 to Savills plc that provided the UK-based firm with a major presence in the U.S.
The parent company, with $1.5 billion in annual revenue, is publicly traded on the London Stock Exchange with 60,000 global employees, providing solid financial backing for Studley, which is now a wholly owned U.S. subsidiary.
Savills Studley has also pursuing an aggressive new phase of growth, making a number of acquisitions since the Savills merger. The firm added KLG Advisors, a New York City consulting firm, last March, followed by the acquisition of Cooper Brady Partners, which operated previously as the Silicon Valley offices of Cresa. Studley also acquired Vertical Integration, an occupier/corporate services business in Tampa, FL, and in December, entered into Canada, acquiring Toronto-based tenant rep firm Real Facilities, on top of opening four U.S. offices last year.
CoStar caught up with the veteran executive recently to discuss the state of the tenant representation service model in today's CRE services market, as well as the firm's ambitious growth plans in the U.S., Canada and Latin America.
Studley was one of only two large firms focused on tenants-only representation. Is the company still committed to sticking with the tenants-only model as Savills Studley?
Yes, absolutely. During the original discussions of the merger with Savills, there were some questions as to whether now we should become a full-service operation -- in other words, take on landlord agencies and leasing. We were adamant that this was a business that has been built since 1954 around the fundamental premise of putting the tenant first and foremost, and we’re not going to change that. Savills eventually agreed, and every piece of marketing material and press release that comes out of our company is clear that the focus of our business is predominantly on the occupiers of space.
Why did Studley, which had established a unique and independent broker-led culture, decide to combine with Savills?
There were three fundamental reasons why we did the merger. First, the nature of the business is becoming increasingly global, and we had been suffering for a long time through lack of an international presence. Second, we were very compatible on a cultural basis with the broker-led culture at Savills, which is what our culture is. Savills is not a bureaucratic, administrative-led culture. Third, there were the financial benefits that came from the sale of the company.
Some market watchers described the mergers involving tenant rep firms, including Savills Studley and JLL's merger with Staubach, as a sign that the market for a pure tenant representation model was becoming a thing of the past.
I certainly disagree. There are two fundamental ways to buy services in our industry. One is the 'everything for everybody everywhere' model, which is what CBRE and our other competitors sell, and the other is 'everything you need as a tenant.' That’s our motto and philosophy. Is that as big a market in terms of total volume of transactions compared with doing everything? Of course it isn’t. But when we talk to executives in the C-suite and we explain how our model works versus how the other models work, in most cases they say that it makes a lot of sense. They say they'd rather buy services from a company that just does one thing really well, which is what I need, as opposed to a company that does lots of things, many of which I don’t need. Or worse, one that raises potential conflict of interest issues.
What are the top strategic priorities for growing the business under Savills?
One area that is very important to us to grow dramatically is the capital transactions business. A lot of the important intellectual capital in the industry is lodged in minds of people who work on the financing side of the business, primarily capital transactions. We do capital transactions for counterparties that frequently include landlords because they’re the ones who buy and sell buildings, although we do a lot of capital transaction work for our tenants as well, and that’s been ongoing for 15 or 20 years or longer. Of our company’s $300 million in revenue, capital transactions probably account for $50 million.
In addition, most companies are interested in knowing more about the building financial structure where they lease space. Buildings have a mortgage, a layer of mezzanine after the mortgage and all sorts of complications involving the financing. We can say, let’s talk about it as a package and see how it either creates an advantage or disadvantage as a tenant. Capital markets is a very important skill to have to be able to do what we do effectively. The knowledge we gain from that side of business helps our tenants as well as landlords and other clients.
Last year, you opened several offices and entered Canada. Most recently, you’ve beefed up your presence in New Jersey. What other U.S. markets and service lines would Savills Studley like to grow, either by hiring teams, acquiring firms, partnering with firms?
We’re very actively involved in M&A. Last year, we made five significant acquisitions, which was a lot for us, but something we were able to do with the backing of Savills. We’re looking to buy businesses, particularly niche businesses that fit well with our tenant model -- for example, tenant corporate services providers or technology providers. For Savills, a British public company, standing still is the same as going backwards. We’re very acquisitive in our mindset.
In addition to the acquisitions, we opened offices in Minneapolis, Baltimore, Austin and Phoenix last year. Right now, there aren't a lot of geographies we can point to and say, we're not there but we’d like to be there in a big way.
In terms of the map, the place most interesting to me right now is Seattle. We’ve had a lot of dialogue and discussions with tenant rep firms in Seattle. Portland is another place we’d possibly like to be in the Pacific Northwest.
Canada is a large country where we see a lot of opportunity. From the toe hold we’ve established in Toronto, we’d like to have multiple offices in Toronto, perhaps servicing the large number of industrial as well as office tenants. We’d also like to be on the West Coast of Canada, whether that’s Vancouver or Calgary. We’d also like to be in Montreal. All of these markets are being discussed.
Beyond North America, we also have relationships in Central and South America, correspondent brokers with whom we work, but we’d like to be much bigger there eventually. Our goal is to be the number-one tenant provider, not be an also-ran.
How has the tenant rep business changed in the past decade?
Today, clients are asking for -- or demanding, depending upon your prospective -- a much broader range of services encompassing all aspects of their workspace. The breadth of what we do has gone from being very focused on making the best lease deals, to assisting companies that are very, very focused on having the best work force.
When I first started here in 1991, the focus was on transactions, pure and simple. The argument our industry would make in winning new business was that we would get them a better transaction -- better structured, more flexible, better economics. While that aspect of our business is still important and must remain important, the focus of the C-suite has changed from money to people in a very profound way. For top companies, the battle of the future is the battle for talent. This can be seen in a recent study which estimates that intangible assets, including investments in intellectual property and other people assets, have gone from 20% of the value of companies in 1980 to 70% today.
Our shift has gone from purely bricks and mortar to people, and the services necessary to make that happen are now entry services that are required for a company to be effective. We no longer simply look at a space and say, I can get it for you cheaper. No, we ask, what does your work force look like, where should they be located, how can we figure out the right location and environment to support their work, and their ability to be happier doing that?
There were some reports in Europe that Savills and JLL held exploratory talks on a possible merger. Do you expect any more blockbuster mergers and acquisitions transactions like Cushman/DTZ? Could Savills gain scale and geographic and service offerings reach through an M&A?
I don't know of anything about any discussions, and if I did, I could not comment on it.
Like a lot of processes, there is an S curve to these things, with a slow period and an exponential period of activity, then another slow period. I think we’re definitely at the top of the S curve so I don’t think there will be the same number of major transactions or rate of change as before. But I still think CRE services is a very fertile area for transactions.
We are very much in growth mode and we have a very pristine balance sheet with limited amount of debt and good cash position. Our British parent is constantly looking at acquisitions internationally. In the U.S., there’s no service organization that provides a useful real estate service to tenants that we wouldn’t be interested in taking a look at in terms of buying. I’ve been directed to be very forward looking here in the U.S. on the acquisition side.
How big does Savills Studley aspire to be in a market of global real estate providers?
Our U.S. division is now about 600 people, and about 380 of those are brokers or other professionals in the U.S., what Savills calls fee-earners in the UK. One of the things about our company is we have a very unique culture here. It is very collaboratively oriented, family-focused and I would say kind of quirky.
So the question for us is, how big can we get while preserving that all-important culture? I think we can get significantly bigger, on the order of say 1,000 people. But at the end of the day, I don’t think we’d be able to maintain that unique identity much beyond that.
My aspiration is to have a $1 billion company with 1,000 people. That would be a nice place to be. You can’t keep together a group of highly successful, highly motivated people by infinitely expanding the work force. At some point, the regression to the mean starts to happen. It’s like the Lake Woebegon effect. Not everyone can be above average.
How important is technology in today’s CRE market, and within the Savills Studley business?
I spent the first 10 years of my career running a management consulting business as a data analyst and programmer. I think technology is a critical factor. Real estate, as it does in many cases, is lagging behind the trends of big data, analytics and business intelligence in a fundamental way. We have an R&D group inside the company whose job is to leapfrog those trends. It’s one of the battles we have to fight. We’re still in the infancy of this, which means we’re gathering the data and assembling it in ways that are organized. But using it to make better decisions is a place where other industries are ahead of real estate.
The casino and airline industries, for example, are two businesses where every fundamental marketing and operational decision is influenced by the extensive analysis of data. Real estate cannot say the same thing yet. I think we're well behind others as an industry but I also believe we're uniquely positioned to do that because the leadership of Savills Studley, both me and the COO, were CEOs of technology companies before this job.