These days, jobs in the commercial real estate industry are all about a new buzz-phrase — convergence — the melding of the Old Economy with the New Economy in 2001. It's about merging offline with online. Old School with New School. And it's about dealing with a whole new world of belt-tightening reality.
The industry's rush to create new dot-com firms in the late-1990s trapped a lot of mid- and senior-level executives in dead-end situations when the stock markets came tumbling down and the money well ran dry.
As always, though, the employment landscape is dynamic and fluid. For example, today many New School real estate executives are back knocking on the doors of their friends and colleagues who stuck it out in their Old School jobs. The Internet experience has been both kind and cruel to the industry. Consider that more than 100,000 dot-comers have lost their jobs since December 1999. Recentfrom New York-based Challenger, Gray & Christmas, a job placement firm, shows that more than 50,000 dot-com cuts occurred in the first four months of 2001.
But just when it was time to run back home, the economy started to slow and Corporate America started tightening its belt, laying off scores of workers in the process. Overall, the national unemployment rate has continued to climb steadily upward since the end of 2000, from 4% in December 2000 to 4.5% in April 2001.
Law firms feel impact
And when Corporate America tightens its belt, real estate feels the pinch. Take law firms, for example.
Real estate law firms involved both in capital transactions and financing have witnessed two effects, said Phillip Nichols, real estate partner in the Los Angeles-based law firm Pircher, Nichols & Meeks. “Finance-related clients are reluctant to buy in some markets, waiting to see if there will be a price adjustment in the coming months,” he said. “This has in turn slowed down activity for the various service providers involved in, reducing hiring by law firm real estate departments.”
A second result is that owners of properties are using this opportunity of low rates to obtain new financing, Nichols added. “This has in turn increased activity for service providers related to financing.”
Real estate service providers have taken more dramatic steps, including cutbacks and downsizing. For example, Los Angeles-based CB Richard Ellis has announced it is trimming $35 million to $40 million from its bottom-line expenses over the next year, meaning an unspecified number of job cuts, a recruiting freeze and cuts in bonuses for senior managers. Unfortunately, as more firms decide to merge or streamline their operations, reducing headcount is often the quickest and easiest path, for some anyway, to better financial results, at least in the short term.
Most firms want to make sure that their own wage and benefits packages are competitive with their industry peers, for both budgeting purposes and because it can greatly impact employee turnover. To do this, they use surveys, such as the one that follows from Chicago-based FPL Associates to benchmark their compensation levels and performance packages. (FPL Associates' annual compensation report starts on page 40.)
How important is a solid compensation/performance policy? Just ask Sacramento, Calif.-based California Pension Employees' Retirement System (CalPERS), the largest pension fund in the world. Last year, the fund's performance and compensation committee concluded: “The establishment of incentive plan performance measures is critical to the management of a competitive compensation program for executives at the highest levels of the organization.”
A recent survey by the Washington, D.C.-based National Multi Housing Council showed a significant geographical variation in compensation, and that 85% of the firms surveyed have some type of annual incentive/bonus plan for at least one of the positions surveyed.
A world of incentives
Overall, then, what are the trends that the recruitment pros who deal specifically with the commercial real estate business see?
“First, packages are more incentive-based than ever before,” said Matthew Slepin, managing director in the San Francisco office of Chicago-based Heidrick & Struggles International, a leading executive search firm. “Whenever possible, bonus and stock compensation in public companies has become a higher percentage of overall compensation. In non-public companies, getting a percentage of transaction and/or operating company profits is the name of the game. Incentive-based pay, when structured correctly, helps keep everyone moving in the same direction.”
Slepin, the former executive director of the Multifamily Housing Institute in Washington, D.C., has observed the real estate industry for more than a decade, and he notes that the war for talent has meant that companies have had to pay more for top talent. “The 80/20 rule applies everywhere,” Slepin explained. “Companies have learned that they would rather pay much more for those 20% of their people who make 80% of the contribution than level people out just so they can afford greater head count.”
Much has been made of the dot-com tailspin, but how has it really affected the real estate industry from a personnel and human resources standpoint? “The most obvious is that there is a glut of people at the moment who left dot-coms and are now looking to get back into more traditional real estate jobs,” Slepin said.
However, what Slepin described as the “technology evolution, not revolution” will continue to influence and change the workings of commercial real estate. “This is lost in the bursting of the bubble, but technology will indeed continue on a more normal path of change,” he added.
“I also think that the dot-com experience has blown a lot of people's minds in the right way and gotten us all to think more radically about doing business,” Slepin continued. “One year ago, the real estate business was in terror of being cannibalized by dot-coms. That fear — along with other concurrent factors — forced real estate operating businesses to look harder at who their client is, how to capture more income from their clients and to examine different ways to relate to the people within their organizations. I think that these effects are long lasting and significant.”
It might be logical to think that more executives are interested in long-term packages instead of the short-term jumps we saw with the dot-com mania.
According to Slepin, the Internet tailspin shows people that getting rich overnight is not a realistic idea, and taking big risks is not always the way to go. There are those executives at one end of the spectrum who go for the risk, and they can make a quick bundle playing the market right. In the middle, there are those who create long-term value by developing a site or redeveloping a heavy value-added property. On the other end of the spectrum are those who create value over the long haul by building portfolios.
Slepin recounted a story of a friend who was a software engineer at an Internet company who was worth $10 million when the company went public. “His financial advisers did not get him to diversify, so he kept his net worth in the company, which is now worth zilch,” Slepin said.
He added that the world cannot sustain these high-risk takers becoming multi-millionaires. “It is like 10% of the population winning the lottery; it is an impossibility,” Slepin said. “In the real estate world, it is those people who take risks and build a portfolio over the long haul who get to make the big bucks. And that makes sense to me.”
Balancing home and office
In the past few years, ideas for balancing work and family have been all over the news. Are family issues more critical today than in the recent past?
“People are working their tails off these days,” Slepin said. “This creates a greater need for balance and an awareness that flexibility, at a minimum, matters.” Slepin explained that in years past if an executive got transferred, the family moved without much hesitation. Today it isn't that simple, because the spouse often has a job, and there are more complexities in a move for the kids and overall family life.
The increase in housing costs around the country also has played a greater role in deciding whether to relocate. In fact, the number of relocating families appears to be slowing with the economic times. According to a recent survey by Evansville, Ind.-based Atlas Van Lines, the nation's third-largest moving company, the number of employee transfers last year fell significantly. Half of the companies responding to the survey reported that at least one employee had turned down the opportunity to relocate during 2000, which was up from 39% in the previous year's survey.
So if more executives are staying put, geographically speaking at least, are they doing a better job? This really calls into question the proper methods of measuring any executive's performance, including benchmarking. A public company can be measured by growth in market cap and stock price over the long haul; an operating company looks to boost the bottom line of a profit-and-loss statement; and a deal-oriented company rewards performance through a percentage of the profits. If the partners and money sources make money, so will the executive.
Concluded Slepin, “At the highest levels, it is those people who create value over the long term who are the most valuable in this industry.”
Ben Johnson is an Atlanta-based writer.