New world market

The U.S. real estate industry has gone south with the economy, but amidst the downturn, the nation's largest fee manager of apartments is gearing up for growth at home and abroad, focused on an international frontier. Stan Harrelson, CEO of Seattle-based Pinnacle has his sights set on ramping up business in Europe and Asia.

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He named Rick Graf as successor president of the company last July, re-centering Pinnacle’s operations in Dallas, where he believes access to industry talent is greater than in the Pacific Northwest. Graf, who joined Pinnacle 14 years ago, now directs the company’s daily operations from the Dallas office, within shouting distance of Riverstone Residential and Greystar, two of Pinnacle’s top U.S. competitors.

“The move doesn’t take away from the Seattle roots of the company. I still remain here in Seattle and we have a number of affiliate companies and regional operations based here. But the international markets are a natural evolution for us and I wanted a day-to-day president for the company, so I could pursue those opportunities,” said Harrelson, whose firm provides a full complement of real estate investment, management and development services for more than 235 institutional investors, pension funds, private partnerships, foreign investors, sole owners and government housing groups in North America and Asia.

Pinnacle entered Tokyo and Beijing around five years ago and is moving into other foreign markets on the back of its development company.

Through various subsidiaries, Pinnacle has been in and out of Canada, is undertaking a venture in Mexico, exploring opportunities in the U.K. and closing in on a deal in the Middle East.

Pinnacle’s public/private partnerships with the various branches of the Department of Defense (DOD) to build and manage housing for the military have been a major coup. Here at home, Pinnacle manages about 30,000 units of military housing, from coast to coast, under 50-year contracts. Those ventures became available in 1996 when then-President Bill Clinton signed a bill calling for military family housing to be privatized over a ten-year period.

Pinnacle put its toe into military housing waters that same year, launching the now-defunct Gateway Development, which competed on a number of projects, landing a contract with the Navy for the ground-up development of Carroll Creek Landing, consisting of 288 town homes with attached garages for military families at the Everett, Wash., naval station. Carroll Creek Landing delivered first units in 1999.

Because pursuit costs are high for military projects and the bidding process highly competitive, Pinnacle found it could demonstrate strength in the areas of construction, financing and development by partnering with others like El Paso, Tex.-based Hunt Companies, Inc., and Arlington, Va.-based Clark Realty Capital, both big names in the military housing arena.

“We are fortunate to be among the top four companies to receive those public/private contracts. They are great pieces of business and obviously we get to deal with a great customer,” said Harrelson, adding that some of that business came Pinnacle’s way when other companies that were awarded deals failed, for one reason or another, to execute, opening the door for Pinnacle to step in and acquire the interests.

Most recently, Pinnacle and its partners were awarded the $1.3 billion contract to design, finance, build, own and operate 2,400 units of housing in Korea, at U.S. Army Garrison Humphreys, just outside of Seoul–the largest single military housing project since World War II and the first ever public/private military housing project to be built on an Army post in a foreign land.

Harrelson believes the Korea deal, called Park Place, will be a template for like-kind developments elsewhere around the globe, as the military consolidates a number of smaller bases into more strategically located, long-term, super-bases. Pinnacle, along with Hunt and locally based Samsung, plans to start construction this month at Humphreys on two distinct communities, one with high-rise towers and another town center component that will blend two-story traditional town homes with store-front retail space.

Because the project opened the door for additional housing at both Humphreys and elsewhere in Korea, several months ago Pinnacle and Samsung signed two memorandums of understanding. One sets the terms for an exclusive partnership to work jointly on all future military housing projects on the Korean peninsula for the next five years and the other establishes an employee internship exchange program, whereby Samsung employees will intern with Pinnacle in the U.S.

Pinnacle Director of Military Housing Mike Rouen sees the next big frontier in military housing the creation and management of for bachelor housing. The Navy already awarded two such projects domestically, one of which Pinnacle received and completed in San Diego. Pinnacle and partner Clark Realty began leasing the on-base Pacific Beacon, four 18-story towers with a total of 941 dual master- suite apartments, designed by architect Torti Gallas and Partners, last December. Sailors share a unit, but sign a lease for one bedroom only. Amenities include a rooftop sky terrace with pool and spa, three fitness centers, a Wi-Fi coffee bar, two rooftop penthouse game rooms, a multimedia theater, several lounges, a mini-mart, and a dry cleaning valet service.

Pinnacle’s foreign expansion is the realization of Harrelson’s vision in 1984, when he partnered with John Goodman, founder of then-Goodman Management Company. Goodman, Pinnacle’s current chairman, formed the original company in 1980, about the time Harrelson was getting his feet wet in the multifamily arena, working with Paul McTaggart, one of Seattle’s top commercial brokers.

McTaggart had organized syndications and needed someone to manage them. “I agreed to do that for him and learned on the job. I got involved with everything from helping to hire people on the sites to getting units ready for rental,” Harrelson said of his early functions operating McTaggart’s portfolio of older, inner city, brick apartments that averaged 15 or 20 units per building.

“It was a great training ground because there is very little margin for error. If someone owns a 300-unit building with a five percent vacancy, that’s 15 units and there is a tolerance that we can get those ready to rent or phase them in, but if you have five percent vacancy on a 20-unit building, that’s one unit and it’s a bigger ordeal and more meaningful,” he said.

“I started to think about how things have to work and the tolerances of the business. The challenge was that my mentor had gotten older and was spending more time relaxing and I was getting very enthusiastic about the business and wanted to build upon it in a large way. I had every intention of doing so on my own when John and I, sort of fatefully one night after a softball game, started scribbling things on a piece of a paper over some beers,” said Harrelson, who earlier that day on the ball field had swung a bat that accidentally connected with Goodman’s face, landing him in the hospital with a broken nose.

Goodman responded by offering Harrelson a job and, soon thereafter, the two sketched out the details of their partnership and changed the company name to Goodman Financial Services (GFS).

Goodman was drawn to the brokerage side of the business and Harrelson was intrigued by what he calls the “mom-and-pop state of the property management side, as it was then,” believing it needed to go in a different direction to become a viable professional opportunity. He was fascinated with the idea of systems and accountability and putting in place machinery that would make property management more accountable.

“There wasn’t a lot of standardization in the industry pre-1986 and, although that is still the case today, it’s better than it was,” said Harrelson.

Before 1986, institutional investors avoided multifamily real estate because tax laws put in place in 1982 allowed for accelerated appreciation, a great incentive for individuals to acquire, but not a vehicle that would work for pension funds or tax-exempt investors. The playing field began to level when the tax law was rescinded and buildings again were based on income production.

At that time, Harrelson saw an opportunity to fill a void for an institutional-quality manager. “I saw that we could deliver results on a broad platform, allowing for the fact that institutions may have something in Florida and something in Chicago and something in San Diego. The alternative for them is to hire different people in three different places and deal with three different responses,” he said.

His observations came as the economy entered a recession that would last for several years. Other companies, like Trammell Crow Residential and Lincoln Property Company, that had spent the early 1980s building for investors eager to capitalize on the tax loophole, also began focusing on the property management business when that loophole disappeared, in addition to buying from other developers to beef up their portfolios. By 1991, Lincoln had become the nation’s largest management company, overseeing 84,000 apartments, with Trammell Crow as the second largest.

Throughout the following decade, GFS grew from a back-of-a-napkin idea with around 3,500 units in the Pacific Northwest to a nationwide presence, moving down the coast into Oregon and Northern California, over to Arizona and Las Vegas and across the country to Michigan, Georgia and Florida. The company would reinvent and rename itself several times over the years, stumbling at times, but learning from every misstep.

With around 48,000 units in 1994, Harrelson and Goodman decided they could grow faster by purchasing another company. To raise capital for the acquisition they sold a 50 percent interest in GFS to Phoenix Realty, which was part of Phoenix Home Life and Mutual Insurance Company, and bought Houston-based Sovereign National Management, expecting to gain 20,000 fee-managed units and several new markets.

“Because Sovereign competed with GFS, we thought we needed to have a new banner so there wasn’t an issue of whether you were with the acquired company or the acquiring company. So, there was a new flag for us all to salute,” said Harrelson of the company’s name change to Pinnacle Realty Management Co. in 1994.

The partnership with Phoenix Realty lasted five years, ending because Phoenix wanted to sell off its lending and advisory platforms and wanted Harrelson and Goodman to sell Pinnacle. “So we negotiated buying them out and went back to the way it was, which was just John and I,” said Harrelson.

“The valuable lesson there was that we liked being able to make decisions without having to check with somebody else. So that was a very cool day because, when we did that, we actually had a little ceremony, burning up the old partnership agreement,” he said. And, although Pinnacle started out with 20,000 units from the Sovereign acquisition, only 12,000 of those remained, providing another important lesson about the realities of consolidation.

“Property management is a service business. It’s nice to think that there is some better mouse trap, some widget, some piece of technology that ensures you have a unique and distinct approach to your business, but fundamentally, it is a people business. It is people with knowledge providing services to those that need it. And the challenge with doing consolidations is that a lot of that does not stick because a lot of those people don’t stick. If you are planning on the efficiencies of the back room to provide the uptick in doing an acquisition, you may be overestimating the relationship between the to- be-acquired company and its customers,” said Harrelson.

In 1996, Pinnacle became more diversified with the acquisition of Zuckerman Kronstandt in Bethesda, Md., adding 3.5 million sq. ft. of commercial space and 1,500 fee-managed apartments to its portfolio.

But, Pinnacle basically built its national presence organically, one customer at a time.

The company now oversees a portfolio of more than 1,000 apartment, office, industrial and retail assets valued at roughly $17 billion, including approximately 175,000 multifamily housing units and 15 million sq. ft. of commercial space and also offers construction management, consulting and brokerage services.

Harrelson, Goodman and various partners own and control 46 percent of the managed portfolio through limited liability companies with more than 40 branches throughout the U.S., including Pinnacle Military Housing, Cascade Affordable Housing, Olympic Investors–the conventional equity group–and Goodman Real Estate (GRE), a platform that includes everything from hotels to office to multifamily. A newly introduced platform, Pinnacle Capital Assets, currently is raising capital to take advantage of distressed-asset opportunities.

“The entities that own the real estate are not Pinnacle, they are all principals and partnerships and joint ventures and companies that John and I have put together that are pursuing different aspects of these various investments. But, what I wanted to make certain, was that Pinnacle never lost its character of being a service provider. And I never want to come to a place where the third-party business is a small part of what we do,” said Harrelson.

The company’s most impressive period of growth has taken place over the past four or five years. Since the company became a subsidiary of American Management Services LLC in 2003, shortening its name to Pinnacle, it has nearly doubled in size.

“Keeping up with that amount of growth and change is difficult if you don’t have systems and policies and procedures that are scalable with the growth of the company. Because we can see this growth continuing, within the U.S. and internationally, we want to position ourselves and our technology to support the growth that we know is ultimately coming,” said VP of Information Technology Scott McCurdy, who joined Pinnacle last year during a restructuring of the company’s IT service department.

The restructuring began last March when Pinnacle recruited Ed Wolff to serve as chief administrative officer. Wolff hired former JPI VP of Technology Services Woodrow Stone to head up Pinnacle’s newly formed project management office and Bryan Galla to serve as director of professional services, a post he previously held at Lincoln Property Company for eight years, and McCurdy, who formerly served as VP for Inland American Communities Group.

This year, Pinnacle’s IT initiatives will focus on interfacing Pinnacle’s property management application, Yardi, with other businesses, applications and service providers. “We are looking to standardize the use of our services to ultimately form one Pinnacle on a global basis,” said McCurdy. And, while that technology is globally portable, he sees the time difference as the biggest challenge for the growing international business.

Meanwhile, Harrelson also is looking to acquire and privatize a multifamily-related REIT. “I’m a believer that the public markets are a terrible place for investment real estate. From my perspective, as it relates to multifamily, if your customer doesn’t come first, then the value of your investment is suspect. It’s hard to serve a public master,” he said.

Harrelson also believes the strategy Riverstone Residential has employed since its acquisition by CAS in 2006, which involves bundled services, could border on a conflict of interest.

“We believe our job is to be a client advocate, to find the best service providers and not confuse the landscape with trying to provide them ourselves. We want the independence to make decisions on buying services and goods, based on who is the best provider with the best cost and the best terms,” he said.

He believes companies that try to provide ancillary services in addition to property management lack the perspective to make decisions that favor the client.

“I find it’s just easier to remove ourselves from the competition for additional work and just to stay true to the client,” said Harrelson, adding that when you’re dealing with the government, there are numerous rules and restrictions against using your own company to provide additional services like insurance and landscaping services in the process. “So, we found it’s just easier to keep it squeaky clean and transparent,” said Harrelson.

Another new Pinnacle initiative is in the realm of philanthropy, increasing the involvement of the company’s 5,000 employees in The Pinnacle Foundation, created 10 years ago as a vehicle for Goodman and Harrelson to channel revenue from various ventures to various charities. “We began to think about expanding the vehicle and turning it over to employees so that they could use it to stimulate their desires to be involved in charitable work,” said Harrelson.

Those efforts began with a new business plan and the hiring of Jan Barber as executive director and challenging her with taking the essence of the 501c3 nonprofit foundation and turning it into an employee-driven entity that raises money and provides awards through grants or donations to charities chosen by a board, made up mostly of employees.

“We are using it as an entity to establish a matching funds program, as well as a community service bank, which will essentially, when completed, provide each employee with time off with pay to spend in service of legitimate nonprofit needs. If that’s working with the elderly in a hospital or working with cancer patients at the cancer care center here or building a house with Habitat for Humanity, whatever it is, we want to give them the time to do that. If you quantify that, given the number of people that work for our company, it’s like a $5 million per year donation for our employees to use in ways they think are meaningful.

“We spend our time together working hard, playing hard and I think this is the natural extension of solidifying that relationship. Some will want to participate a lot and some not so much, but it’s out there as a way to get involved and I’m a big believer that everyone has charity in their heart, there are just a lot of people who don’t know how to connect it to action and, if we can provide that, then we will have done a pretty good thing,” said Harrelson.

With everything going on at Pinnacle at home and abroad, Harrelson says, “It’s a fun time, and the benefits of being a private company are we can go as far as we dare to dream. We have only ourselves to blame if that doesn’t work out and only ourselves to share it with as it succeeds,” said Harrelson.