Industry Overview
Real estate operations involve the management of real estate. This industry analysis places an emphasis on commercial real estate; property that is specifically zoned, or designated, to facilitate business for the purpose of operating business. This article will; 1) identify the most important environmental trends affecting this industry, 2) evaluate the elements of Porter’s Five Forces Model as applicable to this industry, and 3) identify key competitors of this industry as well as their estimated market share.
At this time, the most significant environmental factor, from both a macro and micro perspective, is the economy. All companies within the real estate operations industry have been devastated by the current economic downturn. From the macro-environmental perspective, the economic impact is in itself a cause. However, as the economy is looked at with further scrutiny, from a micro perspective, there are numerous causes for the adversities faced within this industry.
The banking crisis is central to the economic issue. As a result of the banking industry making poor investments, they don’t have capital to finance businesses, which in turn can’t pay employees, who then don’t have jobs or money to spend at these same businesses. This particular aspect affects this industry from two perspectives. Real estate operations manage commercial properties that house businesses; in some cases the property can house one business, while in others the property can house many businesses, such as a mall. In short, the banking crisis means businesses are closing or remaining conservative, which effects income for this industry; and potential consumers of the business products are either unemployed or remaining conservative- effecting those businesses which exist under the property management. Additionally, quite a few companies within this industry over-leveraged themselves by following the real estate boom without anticipating the bust. This definitely has had an adverse effect on their ability to operate, with quite a few companies having difficulty finding lender’s to refinance notes that are coming due while others are finding themselves short on cash flow to make payments for notes due. Additional economic factors are inflation, higher utility costs, higher interest expenses, decreasing real estate value, and reduced retail sales (CBL & Associates).
As a result of these numerous economic factors, the government and legal aspects of the industry environment will inevitably have an effect on future trends. As a result of corporate fraud, irresponsible lending practices, etc. the government will be implementing regulatory legislation in addition to virtually nationalizing the banking industry. At this point it is difficult to project whether this effect will be positive, neutral, or negative. One other governmental aspect that should be noted is the change in presidency, from republican to democrat. This particular aspect is significant due to the tax implications historically established by the differing political agenda’s.
A positive effect that results in the harsh economic downturn is that new projects have come to a halt, therefore lowering the prospects for competition. Additionally, while inflation can negatively affect business, there are contract clauses that allow management companies to increase rents to offset inflationary pressures (CBL & Associates).
Porter's 5 Forces Analysis
This next section will identify key elements of Porter’s Five Forces Model. Each force will be identified, followed by the level of threat and then each threat will be described in further detail. The five forces are as follows; 1) Threat of new entry- Relatively weak, 2) Threat of buyers- Strong, 3) Threat of suppliers- Strong, 4) Threat of substitutes- Moderate, and 5) Threat of rivalry- Strong
While the threat of new entrants is currently relatively weak, an economic upturn will inevitably change this position. The primary cause of this low entry threat is due to the current economy; difficulty in obtaining capital, retail and service industry bankruptcies combined with slow sales, little to no commercial construction, and strong rivalry among existing industry competitors. However, there are minimal barriers to entry (excluding required capital) and virtually no economies of scale or brand loyalty issues to contend with. Striving for maximum lease occupancy and carefully selecting companies that already possess consumer brand loyalty can overcome these obstacles.
The threat of buyers is strong. This industry heavily relies on the retail and service oriented business industry. While consumers are not a primary threat here, they significantly influence business operations, in turn affecting the real estate operations industry. As a result, when consumers aren’t spending and new businesses aren’t opening (or when they are closing) this industry suffers.
The threat of suppliers is strong. While there are numerous suppliers to choose from, reducing their effective threat to the industry, there are also numerous inputs required in order for this industry to operate. Each input is vital for establishing and maintaining profitability within this industry. Banks and other private capital firms have an effect on this industry; in respect to whether or not it will finance the venture and at what cost they will lend the money. Additionally, property owners have the power to control the cost of the real estate. Commercial real estate is significantly more expensive than residential real estate. The construction industry influences this industry as a result of material costs, wages, and again, financing. Investors also bear influence on publicly traded real estate operations corporations. If investors aren’t satisfied with the management of the company, market price will go down, influencing equity, and they will be reluctant to purchase newly issued shares and weary of other investment offerings from the company.
The threat of substitutes is moderate to weak. Most buyers within this industry choose to lease property because of the demographic and geographic advantages facilitated by the management company. Additionally, when comparing the cost to purchase prime real estate versus the cost to lease space, it is beneficial to lease. This particularly holds true for chain retailers that provide specialty products, requiring minimal space. Another substitute, or alternative, for this industry would be to establish a joint venture and privately own the business facility.
Continue reading page two of Porter's 5 Forces Analysis.