April 17, 1998

Seattle real estate services firm a big player nationally

By JON SAVELLE
Journal Staff Reporter

When Stan Harrelson hears people say they are nervous about the real estate industry tightening up, he just chuckles.

"There are so many opportunities, there almost isn't enough time," he says.

Harrelson is president and chief executive officer of Pinnacle Realty Management Company, a Seattle-based national firm specializing in property management, real estate brokerage and related services. It's a quiet giant: Pinnacle manages some 20,000 apartment units in the Northwest alone, and last year was second only to CB Commercial in apartment sales.

Nationally, Pinnacle operates 20 branch offices overseeing operations in 41 states. The firm employs some 2,700 people. Its clients include more than 240 property owners, including institutions, pension funds, private partnerships, foreign investors, sole owners and government housing groups in North America, Asia, the Caribbean and Europe.

That's not a bad record for a company founded only 18 years ago by John Goodman, its current chairman. His firm, Goodman Management Group, specialized in Puget Sound multifamily residential management. Harrelson joined him in 1985 and the name was changed to GFS, for Goodman Financial Services. National expansion followed. GFS and Phoenix Realty merged and acquired Houston-based Sovereign National Management Company, then all were blended into Pinnacle Realty Management Company.

In an interview yesterday, Harrelson, together with Executive Vice President Greg Beckel and investment manager Jeff Miller, explained the basis for the firm's growth and its future plans.

It has to do with fundamental real estate principles. One of them is that, despite the ascendancy of national REITs in today's market, real estate is fundamentally a local industry. That leads to the second principle, which is that local experts can offer better service to clients than more distant practitioners.

A third fundamental for Pinnacle is that its brokerage and management arms can be leveraged together. Management clients who want to buy or sell can turn to Pinnacle, and buyers and sellers likewise can use the firm's management services.

"Working with management gives us a heads up," said Beckel, who directs Pinnacle's brokerage side. "We control their asset on a daily basis."

In the Northwest, for example, the 20,000-unit base of Pinnacle-managed apartments provides a good pipeline for the firm's brokerage services.

"Our niche is, we want our client prospecting to be reflective of the portfolio we manage," Beckel said.

One fact of life in the business now is that REITs have vast amounts of money to put into real estate. Beckel said insurance or pension funds can't really compete with them, and so are not very active in the market. But local expertise can outmaneuver them.

"They [REITs] work on getting a certain return on each investment," said Miller. "If they buy at a high price, a lot of times they are not able to get the return that they need."

That's a pitfall that local real estate investment advisors like Pinnacle can more easily avoid. As Harrelson put it, "REITs have to be national, but real estate is fundamentally a local business. There's a lot to going into these markets and being effective. It changes every day."

Harrelson believes that while REITs have boomed -- some "mega-REITs" own 350,000 units -- their leadership has not matured at the same rate. They make mistakes in acquisition, and often offer rent concessions in markets where locals see no necessity for it.

"Management of an apartment is a local thing," Harrelson said. "It's easy to sit 3,000 miles away and say, 'Heck, give them a month free.' "

But residential property management remains an attractive business for a number of reasons. Beckel said rent growth, or increasing the revenue stream, is quicker in residential properties than in commercial ones. Leases are shorter and can be staggered to time move-outs and terminations. And, when market conditions permit, managers can bill for such things as sewer and water service.

"It's becoming a more sophisticated industry," Harrelson said. "Today's investment manager is fiscally oriented, as opposed to the property manager of 15 years ago."

In the Northwest, the much-noted rent spikes in hot areas like the Eastside have made properties there much sought after by investors. But Miller said other areas, like Bremerton and Tacoma, which not only have much higher vacancy rates and consequently lower rents, have also caught the eye of REITs. They are seeking to invest in what are called B grade, B-minus or even C grade properties with the potential for rent growth.

Despite the REITs' increasing share of that pie, Pinnacle still sees opportunities in it.

"I'm thrilled when I hear competitors get nervous about a shrinking market," Harrelson said. "REITs may want local help."

Outside of the private apartment market, however, Harrelson sees vast new opportunities in the privatization of public housing. There are 1.6 million such units nationally, of which most are administered by an expensive bureaucracy with no customer-service attitude.

Pinnacle has stepped into this vacuum, becoming the largest private operator of public housing in the country. Among the firm's clients, Harrelson said, are projects in Chicago; San Bernardino, Calif.; Washington, D.C.; Portland; Salem; San Juan, Puerto Rico; and King County.

"We found substantial turnaround in the areas we're involved in," Harrelson said.

A similar opportunity exists with military housing. In 1996 President Clinton signed into law a measure privatizing all family housing on U.S. military installations, for a total of 385,000 units. Even that, however, fills only 25 percent of demand. And much of it is in poor condition.

"It is a huge opportunity in the future," Harrelson said.

In a similar vein -- that of turning over inefficient operations to motivated private contractors -- Pinnacle has also entered the arena of facilities management. A new subsidiary, Phoenix Corporate Services, is providing maintenance functions to such clients as Sprint, Hewlett Packard, Wesleyan College and CVS drugstores.

Each of them, Harrelson said, has reached the conclusion that it is better off hiring a professional to take care of maintenance. That leaves them freer to concentrate on their core business.

As Pinnacle grows, however, it faces a common problem: finding the right people to hire. Harrelson said the talent nucleus is strongest in Seattle, where the company started.

"The challenge is to make sure the culture survives the expansion of the company," he said. His approach is, "hire attitude, train for skill."

Miller said that often means hiring from outside the real estate industry. Many of his leasing agents, for example, came from such retailers as Nordstrom and the Bon Marche, where they were trained in service skills.

"There's some level of humanity they're sharing with you," Harrelson said. "It's amazing how important that attitude is."