SAN FRANCISCO-The real estate industry is a tale of have’s and the have-nots coming out of the Great Recession. The recovery is real, but from the perspective of the real estate industry, it has been spotty–dependent upon property type sector, geography, capital structure, and other factors. From our standpoint as real estate recruiters, we see this best-of-times, worst-of-times dichotomy across the business. So, for 2014, what do we see as the trends, particularly as they affect executive level employment in the business?
From our perspective, there are four measures that form the basis for long-term success–strong leadership teams, strong operating platforms, strong balance sheets, and a portfolio and strategy that resonates within a particular sector. If a company has these four key attributes, chances are high that it is poised for long-term success. Success is possible in the absence of any one of these elements, but missing two or more suggests it is time for meaningful change. These elements also provide a useful framework for understanding the trends that may lie ahead in the coming year.
From a capital perspective, in a continually institutionalizing business, the order of the world is for the strong to get stronger, which in many cases just means that the big get bigger. In REITland, companies like EQR and AvalonBay have broken from the pack through their joint acquisition of Archstone. Similarly the AMB-ProLogis merger broke the combined company far beyond the pack in the industrial sector. We have certainly seen this in the private-equity world, where the Blackstone effect is enormous. The big get bigger, hopefully the medium holds its own, and the barriers to entry for the small guys are enormous. We actually fear the challenges for the mid-sized players who can neither articulate a scale-is-better or a best-in-class sharpshooter strategy.
Geographically, the high-tech centers such as San Francisco, Seattle and Austin, and energy producing markets such as Denver, Houston and Dallas, have recovered strongly, with other markets stuck somewhere in a slow recovery. DC is famously in a rare downcycle based on uncertainty and cutbacks, but hopefully the government will find direction and stabilize, which will help both that region and the country as a whole. The recovery has been in favor of downtowns and transit oriented development, but the costs seem to be driving some investment back to the suburbs.
It has clearly been a rolling recovery by property type. Multifamily was the first out of the recession and benefitted from residential market crash. Multifamily is now fairly mature in its cycle and there is talk about overbuilding in some markets – even talk of how to weather an inevitable downturn. There is also the interesting opportunity of institutional ownership of single-family rental, where some of the biggest players in the industry (Blackstone, Colony, Beazer Homes, for example) are betting on an efficiency-scale play in that formerly mom-and-pop business. Given the slowness of job growth overall, it will be interesting to see if the interplay between multifamily and for-sale residential is a zero-sum game where multifamily gives back as residential recovers or whether both can grow as employment continues to recover. Finally, the evolving multifamily business echoes our theme of a business moving more and more towards institutionalization of capital and operating platform.
Among other sectors, single-family home building remains spotty, showing some employment gains but still well below its peak of the middle 2000s. Office development, retail and hotel development is likewise spotty, with all four of these sectors still one to two years behind multifamily in terms of recovery. There are secular changes, particularly in office where both technology and space efficiency have driven down the overall demand for space. Specialized sectors also have increased importance in the industry, including data centers, self storage, seniors housing and now the REITization other sectors such as cell towers, document storage and others.
We break employment at our level of work into cyclical roles, non-cyclical/stable roles, and roles driven by new trends in the business. The cyclical roles of development and construction are on fire in markets like our home base of San Francisco, where building is gangbusters and development and construction manager positions are at a premium. We have a data point from one of our recent placements of a regional development leader in a booming high-tech market leaving within 6 months of being hired for another position at “2x” current compensation. That is evidence of a market on fire and a firm’s paying up to balance their execution risk on a critical mandate.
Hiring among the stable roles, from property management to asset management to finance and C level positions are on a routine basis, although the bar has continued to rise in terms of the demand for institutional skillset and experience among senior professionals in all disciplines. Overall, the balance has definitely shifted to an employee’s market. Where several years ago everyone was up for grabs, either because they were unemployed or because their long-term comp programs had no value, employment is more sticky in this upswing market. In particular, the value of many executives’ long-term comp programs is now prohibitive for them to entertain a move.
There are also some secular shifts in the industry causing increased hiring in some areas. One is in the marketing and sales area. In an increasingly competitive market, where social media has fully taken over from print advertising, and where the customer base is a new demographic, the importance and focus of both marketing and head-of-sales positions have evolved. New-school is now essential, particularly for marketing leaders. Another evolved role is in sustainability, which is increasing in importance in multiple sectors, from owners and developers to the big service companies.
Finally, we are seeing increased focus on bringing diversity into the real estate workforce. This applies to the broad range of diversity – gender, race, sexual orientation, age and other factors. Having a workforce at all levels, including senior management and in the boardroom, that reflects a company’s clients, a company’s investors and the company’s future market is increasingly critical. Real estate as an industry is clearly lagging the broader economy. It is no longer just a legal and compliance issue; it is increasingly accepted that it is an economic imperative for our business.
In the strongest sectors in the strongest markets, several trends are evident for 2014: An employers’ market has turned to an employees’ market, longer-term compensation agreements based on future payouts are causing some employees to stay with their companies as opposed to seeking higher wages elsewhere, and companies juggling several projects in a single market have shown a willingness to greatly increase compensation offers for sought-after construction management and finance professionals, in case of the latter, particularly those with knowledge of and experience in global finance. [this is now redundant since each of these points are made up above – but I am okay to leave in]
A final trend and one that is increasingly evident, particularly if you attend meetings of the Urban Land Institute and other real estate establishment organizations is the graying of real estate entrepreneurs. Numerous titans of the industry are working past age 65, often well into their 70s. In many cases, succession and estate plans have not been put in place. There thus will be increased demand for executives who can both assist in that planning process and serve as eventual successors to the legends who built the business.
So, 2014 should be an interesting year for real estate companies and their leadership teams. There is plenty of opportunity, but the business still must be ready for threats, continued evolution, and change. Stay tuned.