Motorola Inc. entrusts the oversight of more than 400 campuses, manufacturing sites and offices around the globe to Tom Schultz, senior vice president for real estate and development. Although he has 30 years' experience at the corporation, Schultz spent the first 28 in finance and accounting rather than real estate.
“I wouldn't know how to write a contract,” Schultz quips. “What I do know how to do is understand net present values, buy vs. lease, and financial implications. I've had a lot of experience in buying and selling businesses and buildings, and in relocations and consolidations.”
Schultz switched from financial planning to real estate shortly after the electronics manufacturer outsourced management of its major U.S. properties to Jones Lang LaSalle in 2002. With JLL handling facility management, Schultz has devoted his energies to the sort of analysis and strategic planning that has helped Motorola reduce its portfolio from about 700 sites three years ago to a little more than 400 today, driving down annual operating costs by $400 million in the process.
Schultz's strategic role typifies the increased responsibilities placed on corporate real estate executives in recent years. Now, new industry research indicates these execs are earning more to reflect the bigger impact they have on the bottom line. Even so, corporate real estate executives' compensation hasn't caught up with the pay of service providers.
Those are some of the key findings in the 2004 Compensation and Benefits Report published by CoreNet Global, an international coalition of corporate real estate professionals and service providers based in Atlanta.
The study queried 1,248 real estate professionals about changes in their total compensation in 2003 over the prior year, and included both corporate real estate execs and service providers domestically and abroad.
“The senior real estate people and the transaction specialists are getting more connected with the general business of the [corporation], and their pay scale is starting to look more like a strategic corporate executive,” says Barbara Hampton, vice president of knowledge management at CoreNet.
Inside the Numbers
CoreNet found that corporate executives are increasingly involved in business planning rather than day-to-day real estate operations. Some 71% of survey respondents hold senior management positions, a 10% increase from a similar study conducted two years ago.
Pay for top corporate real estate officers spiked 9% in 2003. On average, those executives earned $227,727. “The reason the heads of real estate are being compensated at a higher level now than before is that corporations are asking them to do more than just management work,” confirms John Davis, executive managing director of global corporate services at CB Richard Ellis. “They're asking them to be more strategic, and they are having a bigger impact on the company, so they are worth more.”
On average, pay for U.S. corporate real estate execs and service providers increased 8% in 2003 over 2002 levels. The average compensation was nearly $158,000. Some respondents earned as much as $1.3 million, while newcomers to the industry brought home about $88,000.
Observers say the results were a welcome change from 2002, when a study by the National Association of Corporate Real Estate Executives (a CoreNet predecessor) noted declines in compensation for all service providers and some corporate real estate officers, primarily due to reduced bonuses and fewer commissions in the year following the Sept. 11 terrorist attacks.
Broker commissions returned in force in 2003 as many companies rekindled real estate deals that were put on hold the previous year. Third-party tenant representatives garnered the most dramatic compensation gains in 2003 with a 24% leap to $248,537 in average compensation (see chart, above).
Commissions, bonuses and performance-based incentives boosted total pay for those transaction-oriented positions to more than 3.5 times the average base salary of $67,355. Chief executives and other top officers at service-provider companies also enjoyed one of the largest increases in any category as their incomes climbed 16%, averaging $213,367.
Though most experts would conclude the numbers reflect a definite trend in compensation, one executive recruiter suggests last year's surge in leasing and investment sales skewed CoreNet's findings. Sharon Krohn, principal of Chicago-based executive recruiting firm Krohn Consulting, says the survey's 8% overall compensation increase is “artificially high” and reflects a temporary boost rather than a sustainable increase.
“The report tries to be encouraging … but the recovery is sluggish,” she says. In addition to the double-digit percentage increase in compensation for tenant reps, Krohn attributes much of the 16% increase for service-provider CEOs, CFOs and chief real estate officers to an atypically busy year. “That seems to be a result of filling pent-up requirements of the post 9-11 market,” she says.
Providers Earn a Premium
Service providers raked in commissions and bonuses last year that bumped their total compensation to levels significantly greater than those received by corporate real estate executives (see chart, page 36).
There were exceptions to that rule, of course. Service providers who worked in positions without direct involvement in leasing or sales — and therefore had no opportunity for large commissions — did not fare nearly as well. Those less-lucrative service-provider jobs in 2003 included development officers, third-party property managers and construction directors.
“Service providers earn higher levels of compensation than corporate real estate directors because more of their compensation is at risk, it's not guaranteed,” emphasizes Krohn, the executive recruiter. CoreNet's survey found that commissions and performance-based incentives make up 17% of a U.S. real estate service provider's total compensation, compared with 4% for corporate executives (see chart, page 38).
Insiders Become Service Providers
The disparity in compensation between corporate real estate execs and service providers has helped fuel the outsourcing trend. Large companies such as CB Richard Ellis, Johnson Controls and Cushman & Wakefield now employ a number of former corporate real estate executives to handle facility management, leasing, and other day-to-day real estate operations for client companies.
Motorola's Schultz says many of his company's property managers and other real estate personnel transferred to jobs at JLL when Motorola outsourced many of its real estate functions to the giant global services firm in 2002.
CBRE's Davis says the breadth of services he is able to offer clients frees up executives at corporations to focus on the aspects of business planning and analysis that command higher salaries. “You typically can't do both; you can't be fully engaged in day-to-day activities and continue to do strategic work,” Davis says.
Many service providers have added personnel and new specialties to take advantage of the outsourcing trend. Bob Hess, hired this year as managing director of a new strategic advisory practice at Cushman & Wakefield, says most of his account executives come from non-real estate backgrounds.
“Clients want us to be more strategic in managing their accounts, not just doing one-off transactions, but helping them deal with the whole value chain of the organization,” Hess says. “That includes manufacturing, distribution, the whole realm of real estate.”
The Road Ahead
The dwindling ranks of corporate real estate executives face several hurdles to continued large pay hikes. For many, the challenge is simply to make superiors aware of the good work they've done.
George Bouris, who leads corporate real estate operations and systems consulting at Deloitte Consulting in San Francisco, acknowledges that pay increases for corporate executives are an indicator that they've begun to contribute substantially to the corporation's business activities.
But significant pay increases, he says, will only come to those who communicate their accomplishments to chief executives and educate those corporate leaders about real estate's impact on the bottom line.
“These [corporate real estate executives] are just not very good at communicating their successes,” Bouris says. “Senior management still does not believe that corporate real estate is strategic to the company's overall business goals.”
So, could the evolving sophistication of service providers lead to the extinction of the corporate real estate strategist? The general consensus is that most corporate outsourcing has already taken place, leaving a necessary handful of executives to plan real estate at the corporate level while service providers execute those plans.
Others, however, see a day coming when service providers will even assume the strategic tasks currently undertaken by corporate real estate executives. “We will see a major trend toward outsourcing of real estate functions that until now haven't been outsourced; this is truly outsourcing of the entire real estate activity,” Bouris says.
Bouris predicts such unprecedented outsourcing will begin to arrive within five years at companies unable to derive strategic guidance from in-house real estate executives. “It's not just about compensation, it's about getting religion,” he says. “More and more companies will no longer tolerate mediocrity and the lack of a strategic focus.”
Self-Development Is Key
How can real estate professionals position themselves to earn more, and what direction will compensation take in the coming years?
The improving economy will fuel corporate growth for the next 12 to 18 months, generating pressure to hire top talent at both corporations and service-provider companies, predicts Eric Scaff, vice president for corporate clients at Milwaukee-based Johnson Controls. “That should mean an increase in wages,” he says.
Individuals who want to earn more can improve their chances by adding the skills required of higher-paying positions. A corporate executive who wants to become a service provider, for example, should work on honing presentation and sales skills, urges Krohn, the executive search consultant.
Even those planning to stick with their current jobs can show greater value to employers by learning new business skills. Dean Stanberry, a manager at Johnson Controls in Englewood, Colo., says facility managers who have a strong grasp of operational costs can become a valuable planning asset to employers.
The facilities manager who can show upper management which of several space options will be most conducive to worker productivity will provide the sort of strategic value that garners higher compensation.
The compensation study should serve as a warning to corporate executives who haven't adjusted to changing industry demands, according to executive recruiter Wesley Easly, a senior associate at Specialty Consultants Inc. in Pittsburgh and a member of CoreNet's advisory panel on the compensation study.
“Hone your real estate thinking skills as opposed to real estate doing skills, because the doer positions are being outsourced.”
Matt Hudgins is an Austin-based writer.
Service Providers Report Hefty Pay Raises
| Compensation Increases 2002-2003 | % Change in Compensation | ||
|---|---|---|---|
| U.S. Corporate Real Estate Officers | U.S. Service Providers | ||
| Senior Real Estate Representative/Transaction Specialist/Broker/Manager, Leasing* | 7% | 24% | |
| C-Suite (President, CEO, CRO, CFO) | 5% | 16% | |
| Facility/Property Manager | 5% | 10% | |
| Top Real Estate Officer | 9% | 2% | |
| *Results for senior real estate representative/transaction specialist and leasing manager have been combined due to low response rate. Respondents for both positions also reported similar duties. | |||
| Source: 2004 CoreNet Global Compensation and Benefits Report | |||
Service Providers Rake in Commissions
| U.S. Corporate Real Estate Officer | U.S. Service Provider | |||
|---|---|---|---|---|
| Job Title | Total Compensation | Annual Base Salary | Total Compensation | Annual Base Salary |
| C-Suite (President, CEO, CRO, CFO) | $206,111 | $147,333 | $213,367 | $122,235 |
| Top Real Estate Officer | $227,727 | $157,595 | $304,068 | $156,000 |
| Facility/Property Manager | $105,929 | $95,857 | $95,450 | $81,300 |
| Senior Real Estate Representative/Transaction Specialist/Broker/Manager, Leasing* | $94,138 | $81,875 | $248,537 | $67,355 |
| *Results for senior real estate representative/transaction specialist and leasing manager have been combined due to low response rate. Respondents for both positions also reported similar duties. | ||||
| Source: 2004 CoreNet Global Compensation and Benefits Report | ||||
Coming in November
FEATURES
REIT Report Card — Which property sectors have performed the strongest year-to-date and why? NREI analyzes some of the key factors that have led to high REIT stock valuations across the industry and discusses some potential red flags amid an improving economy. We'll also examine why M&A activity is heating up and recap some of the biggest deals so far in 2004.
Trends in Real Estate Law — From environmental law to Chapter 11 bankruptcy protection, legal firms are creating and expanding specialty practices to address the needs of their commercial real estate clients. NREI talks with the nation's most prominent law firms about where they see growth opportunities.
New York Area Review — With office buildings under construction in Lower Manhattan and mixed-used projects on the drawing board for the West Side, New York is preparing for a building boom. Investors and developers analyze the market's long-term prospects as well as major projects under construction in each of the property sectors.
STRATEGIES
A New Frontier — Retail lifestyle centers are cropping up in mid-size markets, especially college towns and capital cities, as developers seek to capitalize on wealthy enclaves. Find out where savvy retail developers are building and why.
COLUMNS
Brokerage Insights
NMHC
Financing Today
Last Word