Management in Transition

Back in the summer of 2013, Gerard J. Picaso, a veteran property manager of New York co-ops and condos, was having a get-acquainted meeting with a board president and treasurer who had just hired Picaso’s firm. At one point the board president asked, “What happens if you and your partner get hit by a bus?”

“Depends on how big the bus is,” Picaso replied.

“Let’s say it’s very big.”

At that moment, Picaso recalled recently, he had a revelation. “I realized my partner, Susan Axelbank, and I had a plan if something happened to one of us, but we had no plan if both of us were gone. It was really something to think about when you get to be a certain age.”

Picaso, who is now in his sixties, has been in the property management business since the 1970s, and he has run his eponymous company since 1982. A few months after that thought-provoking meeting with the board president and treasurer, Picaso’s telephone rang. The caller was a long-time acquaintance who is now with Halstead Management Company, one of the largest firms in the city. She told Picaso that Halstead wanted to purchase the assets of Gerard J. Picaso Inc. and bring his company on board.

“I did a lot of research into Halstead, and I couldn’t find anything bad,” Picaso says. “In fact, it was all good.”

The Halstead offer was part of a trend that is reshaping the landscape of New York City’s property management business. Simply put, the big companies – most notably Halstead and FirstService Residential New York – have been buying up the assets of smaller companies and merging with them. Picaso’s research and the condition of his company led him to understand the forces driving this trend.

Picaso Makes a Move

For starters, when he received that phone call from his friend at Halstead, Picaso knew that the lease on his Broadway offices was about to expire – and a healthy rent increase was inevitable. He also knew that his relatively small company – 22 employees handling 44 buildings – could not provide all the services offered by a big firm like Halstead, which manages 250 buildings. And he learned that the principals of the companies bought earlier by Halstead are all still with the company, a reassuring sign that there has been no seller’s remorse.

So Picaso agreed to the merger, and on September 1, under a five-year contract, he became managing director and executive vice president of the Gerard J. Picaso Division of the Halstead Management Company. Picaso and his employees moved from their old Broadway offices into Halstead’s Lexington Avenue location.

“I do think this is the way of the future,” Picaso said three months after the move. “I think it’s a trend because the smaller companies find it harder and harder to survive. They don’t have the money to upgrade their technology. Halstead has resources we would never have – energy consultants, engineers, a legal department, a human resources department. Plus they have a whole floor that’s the I.T. (information technology) department. If anything happens, they fix it right away. Also, if you need help with something – say you’re going to take estimates on fixing a building’s fire escapes – within five minutes you’ve got the names of eight or nine contractors, people who have already done good work for other Halstead managers.”

And how has the new arrangement affected the boards at the buildings Picaso manages?

“I don’t even know if they notice anything’s different,” Picaso says. “At some point, we’ll change our financial statements, add more bells and whistles. And because of Halstead’s size, the boards will see savings on fuel and electricity and get better rates for the attorneys who fight assessment increases.”

How has Picaso’s life changed? “It’s much simpler now because I don’t have to worry about paying the rent and running the business anymore. That was very time-consuming. Now I have a lot more time to manage buildings, which is what I and my staff love to do.”

Paul Gottsegen, president of Halstead, stresses that the arrangement with Picaso was an “asset purchase,” not an acquisition. The same went for the company’s 2009 purchase of Penmark Management, the 2011 purchase of Caran Properties, and the recent purchase of Lawrence Properties.

“It was a perfect synergy to add them to the Halstead family, as our firms share the same values and ethics,” Gottsegen says, adding that boards managed by Picaso and Lawrence can expect some changes. “Immediately,” he says, “we’ll enhance what the buildings already had. We have more advanced technology, more staff, and a more sophisticated back office.”

On a smaller scale, Mark Greenberg Real Estate (MGRE) and the Charles Greenthal Group recently announced that they’re merging. “To grow [a company] individually is not as easy as growing as a merged company,” says Steve Greenbaum, MGRE’s director of management. “When you’re doing it without a merger, you have to add infrastructure and you have to add people one at a time. When you add or merge with a company, you get that company’s infrastructure, you get that company’s people, and then you have the economy of scale. Plus, it’s better for the business. You have the buying power to do more for your clients than you could before. As for our clients, the only change they’re going to see after the merger is us having bigger buying power on things like insurance. We’re still a midsize company.”

Changing Times

If you want a snapshot of how New York’s property management field has changed over the past quarter-century, you should look into the history of Cooper Square Realty. When Dan Wurtzel joined the fledgling company in 1987, he was one of four employees. Today, he’s president of the New York operation of FirstService Residential, which purchased a stake in Cooper Square in 2003 and later formed partnerships with Wentworth New York and Goodstein Management. With 400 employees and more than 500 properties in its portfolio, FirstService Residential is now the largest management firm in the city.

A subsidiary of Toronto-based FirstService Corp., FirstService Residential operates in 21 states and has more than 12,000 employees.

There are advantages to bigness. Since 2010, for example, clients of FirstService Residential have benefited from FS Energy, its energy advisory subsidiary. By aggregating oil and natural gas purchasing across its portfolio and recommending efficiency projects that will provide the greatest returns, FS Energy has reduced the carbon footprint of its New York portfolio by nearly 16 percent while saving clients more than $23 million.

“As the business has become more complex in recent years,” says Wurtzel, “mom-and-pop companies are finding it difficult to allocate the resources necessary to succeed. Our size provides clients with a broad swath of expertise and a deep bench of professionals that few companies can match.”

Wurtzel adds that FirstService’s size has allowed it to develop an elaborate infrastructure – not just
FS Energy but also experts devoted to financial management, compliance, closings, human resources, and training and education – that is beyond the capabilities of most small- and medium-sized firms.

When the Cooper Square name disappeared in the summer of 2013, company founder David Kuperberg, now chairman of FirstService Residential New York, vowed, “The only thing changing is our name.”

Bigger Not Better?

But bigger is not necessarily better, in the eyes of Peter von Simson, CEO of midsize New Bedford Management. With midsize firms – generally running 40 or 50 buildings – “a client can always speak to the chief executive of the company,” von Simson says. “I think with these larger firms that would be difficult. With these companies that manage a thousand buildings nationwide, it’s impossible.” Managers in midsize firms “know who you are, top to bottom, and not as a building in a general category.”

MGRE’s Greenbaum agrees that the larger companies can lose touch not only with their clients – but with their employees as well. “They’re huge, and they don’t have the hands-on or the interrelationship of midsize companies.”

Von Simson adds that one key “difference between us and a lot of the larger firms is that they’re in it to provide ancillary services – things like insurance and energy – not just managing the building. With midsize companies like us, the core business is management. With these massive companies, there’s more of a chance that something will be missed.”

The widely touted advantages of buying in bulk are not as impressive as they seem, argues von Simson. “By paying attention to the bills and going with vendors who are paid on time and appreciate the work – combined with our knowledge of the buildings – can get buildings good deals.”

The Little Firm That Couldn’t

Some are saying that changing times and the growth/mergers of larger firms will be hard on smaller firms, especially ones that are just entering the arena. Greenbaum notes that the management business has become more complicated in recent years: “Ten years ago, little companies – with five, six, ten buildings – could make it. But now they’re falling apart. The management business is just so time-consuming and the paperwork and the filings that are now required compared to five years ago – we’re not getting the kind of [fee] increase that is commensurate with the amount of work we do. The demands of the co-op world have gotten great, and those demands have put a lot of stress on many, many companies.” Consequently, smaller firms find it harder to stay afloat.

“There is a much greater barrier to entry,” agrees von Simson. “With all the new requirements that are in place, the risk to a building if it takes on a new manager without experience is much greater. It stops smaller guys from becoming midsize. You could be a small company in the 80s and still be able to manage buildings well. Now, everything is so fast, if you’re not able to respond immediately, you’re going to be at a disadvantage.”

He insists midsize firms are in a good position: “We can’t serve every building in Manhattan, and we wouldn’t want to. But the midsize management company is, in a lot of ways, the sweet spot. For buildings with, say, 50 to 200 units, I don’t think there’s any better choice than the midsize management company.”

Geoffrey Mazel, a partner in the law firm Hankin & Mazel, has worked for nearly three decades with co-op and condo boards that have hired small management companies, big ones, and everything in between. “I find, as an attorney, that I prefer to have personal relationships,” Mazel says. “I don’t see that bigness in a management company is necessarily better. The best fit between the manager and the building is what matters.”

Smaller Is Better?

Dawn Dickstein apparently didn’t get the memo that a wave of consolidations and mergers is sweeping New York’s real estate management world. After earning an MBA degree, Dickstein served on her co-op board as treasurer and then president for a combined dozen years, and worked as a property manager, a vice president of client accounting, and a managing director for Cooper Square Realty/FirstService Residential. Last September, Dickstein and a colleague named Michael Mintz decided to strike out on their own. Their new company, MD2 Property Group, is currently managing two properties, with plans to grow.

“I’ve always felt a smaller company is more effective in providing a go-to person,” says Dickstein. “As a company grows, who is that go-to person? It’s difficult when you’re large to provide the personalized service that many buildings want. It’s easier for a smaller management company to provide one-off service.”

MD2 Property Group’s business model calls for giving future employees a stake in the business, much like partners in a law firm.

“I believe most board members would agree with our business model,” Dickstein says. “At the end of the day, what boards want is attentiveness and responsiveness. You need managers who care, and if they have a stake in the business, they’re going to care.”

Dickstein also believes that property management is, first and foremost, a personal business. While MD2 has partnered with technology companies to provide state-of-the-art services, no amount of advanced technology or support staff can replace the relationship that has to exist between a successful property manager and a board of directors and residents.

“We have put a lot of effort into creating a strong back office to complement our strong managers,” she says, “even though a strong manager can compensate for a weak back office. A weak manager can’t compensate for anything.”

So in the end, yes, the size of your management company matters. But the key is not finding the biggest company or the smallest one. The key is finding the company that’s the right size for your building – and the property manager who’s the right fit with your board.

Additional reporting by Tom Soter.