Earlier this year, Ron Terwilliger and his senior management team at Trammell Crow Residential in Atlanta had an experience that the multifamily leader never wants to repeat again. "We were on a two-hour conference call about a class action lawsuit in Florida over some bizarre judge's ruling about not being able to charge late fees or penalties," the chairman and CEO of Trammell Crow recalls. "We thought, 'Life is too short for our senior management to be spending all of this time fighting class action suits.'"
Terwilliger was as good as his word. In October, Trammell Crow Residential announced that it had decided to sell its residential services division to Terry Danner and Christy Freeland, two executives who ran that business at Trammell Crow banner. Those conference calls had proved symbolic of the bigger issue: The private firm was spending too much of its time, money, and resources on a division that wasn't producing as much profit as its other entities.
"It's become a distraction," Terwilliger says. "It is also fraught with liability as the owners of properties push more and more of the liability onto property managers."
Since Trammell Crow's development focused on condos, 75 percent of its management portfolio was for outside companies. "It became a relatively unprofitable business because of the fee structure in property management, which was attractive back in the early '90s," says Terwilliger, who says the business is no longer as financially appealing. "We had a company with 2,000 people, 80 percent of which were in property management. It caused us to have a big national overhead. We've just streamlined and simplified our business, and it enables us to concentrate on our core business, which is finding and entitling land."
Terwilliger believes Danner and Freeland will be successful with their new company–which hasn't been named yet–if they can reduce overhead. In fact, the new entity will count Trammell Crow's rental units among the 56,000 units it will manage nationally. That number could increase, though. "Terry and I have a vision that we will be expanding the group and our property base pretty quickly," Freeland says.
The new entity will consolidate a five-region company into one large organization with two groups. Freeland will oversee properties east of the Mississippi, and Danner will handle those to the west. The company's senior leadership group and many of its regional managers and trainers are also expected to stay with the business.
The trend of developers outsourcing property management could become increasingly popular, says Stacy Hunt, a regional partner at Charleston, S.C.-based Greystar, a private developer, owner, and manager. Though Greystar will continue to manage, Hunt understands why others are narrowing their focus. "A lot of developers don't want to have the financial and administrative burden of having a management company," he says. "Developers used to fear that lenders and partners wouldn't work with them if they didn't do management. But they aren't as worried about that now, if the developer hires a strong third-party manager."