As retail real estate developers pull back on theof new shopping centers throughout the United States, development professionals are suddenly finding themselves on the street. At the same time, professionals with any kind of leasing acumen are in demand, although even they are not being recruited in massive numbers.
During second-quarter earnings calls, retail REITs Developers Diversified Realty Trust and General Growth Properties were just two of a growing number of firms that have announced decisions to curb, postpone and/or more closely scrutinize development pipelines.
The numbers illustrate the extent of the development slowdown. From June 2007 through June 2008, spending on private non-residential construction fell 15 percent, to $301 billion from $354 billion, according to the Washington D.C.-based Associated General Contractors of America, a national construction trade association. Moreover, in July, spending on new retail projects fell 24 percent compared to the same month a year ago, cites Reed Construction, a Norcross, Ga.-based construction research and information provider.
As a result, in June, the U.S. nonresidential construction sector lost approximately 17,000 jobs, according to the U.S. Census Bureau. Overall, the construction sector lost 557,000 jobs since its peak in September 2006, with both residential and nonresidential sectors contributing to the decline, reports the Bureau of Labor Statistics.
“The number of resumes we are seeing has probably doubled, maybe more than that,” says John Kreiss, president of Morgan Sullivan, a Northboro, Mass.-based executive search firm serving the construction and real estate industries. “Site managers,people, people in charge of a particular region are being eliminated. Their positions have gone by the wayside,” he says.
Being a cyclical industry, the commercial real estate boom that began in 2001 was sure to slow sooner or later. While it has been almost a decade since the boom began, it did not spark the overbuilding that was responsible for the market's collapse in the 1990s. However, over the past few years, many firms had expanded their pipelines. This year developers are forecast to deliver approximately 136 million square feet of new retail space to the market, or 23 percent more space than the historical annual average of 104 million square feet, according to Property & Portfolio Research (PPR), a Boston-based real estate research and portfolio strategy firm.
The projected development prompted real estate firms to hire more retail real estate professionals, including site selection specialists, site acquisition agents and building managers. Now, as retailers apply the brakes on their expansion plans and financing for new projects has dried up, cash-strapped developers are jettisoning workers, many of whom are seasoned professionals.
With the current downturn expected to last at least until 2010 or 2011, it will be a while before things begin to improve, says Robert Baron, founder and president of American Real Estate Executive Search Co., a-based executive search firm specializing in the real estate industry.
Even before firms started shrinking their pipelines, real estate researchers estimated there would be a significant drop in new retail completions next year to 70 million square feet, according to PPR. As a result, the number of jobs in the development and construction sectors will most likely continue to drop.
It wasn't that long ago when real estate staffing firms went begging for talent, citing a dearth especially within the retail sector. Last year, John M. Ryan, president of Chicago-based human resources consulting firm RSMR Global Resources, told Retail Traffic at the ICSC Spring Show in Las Vegas that experienced real estate professionals had the upper hand in job negotiations because there were too few of them to satisfy everyone's staffing needs. Many retail real estate firms such as Developers Diversified, Macerich Co. and Inland Real Estate Group of Cos., had even instituted internship and training programs for college students, hoping to lure more young professionals into the field.
This held especially true for development departments, according to Baron, where high rates of return on new projects guaranteed generous compensation packages.
“When everybody is expanding, the retailers need [real estate] people, the developers need people, there was so much growth going on that you needed new people coming into the industry almost every year,” Baron says. “And there was lots of money to go around to contribute to bonus pools and compensation because if you developed a shopping center, you knew you could build it at a 7.5 percent cap and sell it at a 6 percent cap.”
That's no longer the case. Today, owners are more consumed with maintaining occupancy levels at existing centers, let alone securing tenants for new projects. In July, the value of nonresidential buildings fell 31 percent compared to 2007. And, year-to-date construction starts declined 7 percent in dollars and 15 percent in square footage, according to Reed Construction Data.
Throughout the summer, one developer after another announced project delays and cancellations — Memphis, Tenn.-based Poag & McEwen Lifestyle Centers, for example, scrapped plans to build a 200,000-square-foot development in Boise, Idaho, that would have become the first lifestyle center in the state. Meanwhile, New York City-based Related Cos. had to seek permission from city government for a ground-breaking delay on the Grand, a $3 billion, 3.6-million-square-foot mixed-use project in downtown Los Angeles.
During its second quarter earnings call in July, Developers Diversified Realty executives told analysts that the Beachwood, Ohio-based shopping center REIT would pay close attention to its development pipeline going forward and scale down or scrap any project that no longer made financial sense. The REIT wouldn't say whether its new strategy would have an impact on the size or depth of its development department.
“Our development pipeline remains robust, and we have staffed accordingly to meet our needs,” says Nan Zieleniec, senior vice president of human resources with Developers Diversified. “We won't speculate on future staffing needs; however, we are committed to the development business, it is part of our strategic plan, and will continue to provide our retail tenants with great opportunities. As our business needs change, we will continue to monitor our staffing.”
General Growth Properties, Inc., during its second quarter earnings call, said the Chicago-based regional mall REIT planned to cut its development costs by $500 million by delaying several new projects.
As a result of all these cutbacks, completions in the retail sector next year may be off by as much as 70 percent from projected numbers, according to David Kass, CEO of Continental Retail Development, a Columbus, Ohio-based firm.
Leasing representatives and asset managers, however, continue to be coveted among owners who are fiercely competing for tenants. Morgan Sullivan, for example, is currently conducting a search for 15 real estate positions. Most are for leasing agents, financial analysts and property managers.
“In a down market, good leasing people are needed to gain good relationships with tenants and to get relocations to your center,” says Baron. “The same with asset management — people who are able to figure out how to keep tenants happy, how to bring them in, that skill is important.”
Even so, prospective employers have gotten a lot more demanding in their requirements. Unlike in the past, when developers hired on the spot because they were in a hurry to fill a position, now the process has been prolonged to ensure the potential candidate is right for the job. In one example, according to Kreiss, a client recently requested that a candidate applying for a middle management level position provide six references instead of the usual three.
Even newly minted MBAs from the country's top real estate programs can no longer count on multiple offers from potential employers, according to a May 2008 story in our sister publication National Real Estate Investor (NREI). In some cases, employers are taking back job offers made just a year ago, NREI reports.
At Developers Diversified, which recently welcomed several new employees to its property management department, human resources professionals seek new hires who have strong experience in the retail sector, says Zieleniec. Developers Diversified prefers they have expertise in two property types, shopping and lifestyle centers; since “our people handle a lot of GLA.”
Zieleniec adds, Developer's Diversified's stringent hiring requirements were in place before the current market downturn.
Meanwhile, the scrutiny those highly sought after asset managers and leasing professionals face when changing jobs won't necessarily translate into higher compensation packages. It's more about having a sense of security in a down market, says Baron.
Even then, those who have the opportunity to take better jobs are content to stay put, Kreiss notes, either because they have concerns of being the last person to be hired and therefore the first person to be asked to leave or because they have reservations about not being able to recoup the value of their homes should they have to relocate.
“In the past, relocation has been difficult,” says Kreiss. “But now, if somebody owns a house, they don't want to take a loss on it. We haven't seen that in a long time.”
While development departments are expected to continue to downsize for the foreseeable future, Kreiss doesn't believe average salaries in the retail sector will fall as well; instead they will stabilize.
At the same time, those development professionals who might find themselves out of a job in the current economic climate may want to look to real estate service providers or expanding retail chains for job opportunities.
One positive sign is that Developers Diversified remains committed to recruiting on college campuses, according to Zieleniec. This summer it hired five people from its management training program and is on target to hire three new graduates in 2009.
On the other hand, some firms have no choice but to let people go. “At the start of the downturn people still had the mindset that talent is hard to come by, but now the scarcity has gone,” explains Baron. “And developers just don't have the choice — they are trying to save cash.”