Is bigger really better? CAS Riverstone sure seems to think so. The third-party management firm's unit count jumped from 62,000 to 91,250 between '05 and '06 thanks to an aggressive acquisition plan. By year's end, that number could soar to 225,000 units.

“We are the only ones who have started consolidating the property management industry as best we can,” says Terry Danner, co-CEO of Dallas-based Riverstone, which is owned by Consolidated American Services head quartered in London. “Consolidation has occurred in banking [and] the airlines industry, and the REITs have done it, so it's not something new. We look at the rationale as to why all those groups did it, and I think the reasoning is the same: Bigger can be better because you are more efficient.”

Riverstone just might be on to something. Many in the multifamily industry say that such consolidation is long overdue, citing the efficiencies gained with size that can help meet the demands of property owners wanting increased access to property data and reporting at reasonable costs. The power of size allows for lower costs through efficiencies in back office services, such as accounting, human resources, and IT, whose combined payrolls can account for as much as 80 percent of a property management firm's total overhead, says Steve Heimler, a principal at Riverstone. (His property management company, Stratus Real Estate, was recently acquired by Riverstone for an undisclosed amount.)

“The good news for our industry is consolidated groups, whether it's CAS or another competitor that comes along, will drive best practices in what I call an immature industry,” says Heimler. “The property owner will end up with a better product at lower costs.”

To date, Riverstone is the only property management firm to pursue such an aggressive acquisition plan, with the ultimate goal of owning as many as 350,000 units within two years. Opinions are mixed as to whether others will attempt Riverstone's strategy. Some see the company's consolidation efforts as a one-off deal and don't expect competitors to follow suite. “I don't see others out there doing it with any wild abandon or with the overall strategy that the folks at CAS have,” says Stan Harrelson, president and CEO of Pinnacle, an American Management Services company based in Seattle, which manages about 150,000 units nationally and has no plans to actively acquire fee managers.

Others see Riverstone's business move as the beginning of a broader trend with the potential to transform the highly fragmented fee-management industry. The top 50 largest managers in the country managed just 15 percent of the country's apartments in 2006, managing 2.6 million units, according to the annual MFE Top 50 survey.

“I imagine this might be the start of consolidation because once one company starts doing it, they all reexamine how they grow, and it may lead to further consolidation,” says David Dufenhorst, managing director of income properties for Seattle-based Security Properties, which uses Riverstone to manage about 80 percent of its 5,000-unit national portfolio. “Up until now, the industry has been more about growing organically, but I think you might see a lot more mergers as the founders of these companies get older and they are looking for ways to monetize their firms' values.” If Dufenhorst's predictions come true, expect big changes to follow.

STRENGTH IN NUMBERS Like any business strategy, consolidation has its pros and cons. From a pure profitability standpoint, consolidation makes perfect sense. Unit mass is critical for firms who strictly fee-manage, as the business is extremely low-margin and has only grown tighter over the past several decades. About 25 years ago, property management fees were roughly 5 percent of a property's gross revenue. Now, a firm is lucky to get 3 percent or 3.25 percent of the revenue, says Dave Woodward, managing partner and CEO of Laramar Communities, a Greenwood Village, Colo.-based real estate firm. “That's a 30 [percent] to 40 percent decrease in your revenue, yet your overhead really hasn't changed that much. If anything, it has gone up,” he says.“ That squeezes most of the profit out of these organizations, so as a result, you really need to have at least 20,000 to 25,000 units for it to make sense.”

Critical mass, which arguably happens at the 100,000-unit mark, does far more than allow for back office efficiencies. It also enables firms to offer property owners top-notch management staff and sophisticated technology resources at a reasonable cost—and still reap a profit. Just one example: Riverstone's high unit count has allowed the firm to hire the expertise it needs as the industry evolves and requires an increasingly talented and diverse employee base. “A few years ago, chief information officers just needed to keep computers running, and you could find one for $150,000,” says Danner. “Now there's online rent payment, yield management, et cetera, so you need the $250,000 CIO who can handle those programs. If you are a 15,000-unit company, you can't afford to hire a $250,000 CIO—but that is the level of expertise that is needed, or going to be needed, in our industry.”

Property owners also like having one national management firm to handle all their properties' operations with one uniform reporting system. “It's just very efficient,” says Dufenhorst of Security Properties, which no longer has to coordinate with five-plus management firms spread across the country because it uses Riverstone to manage the majority of its properties. “We can have consistent weekly and monthly meetings with one firm and go through all of our assets.”