This week, MortgageOrb spoke with Robert Baron, president of American Real Estate Executive Search, an executive search firm that focuses on roles in debt origination and underwriting, equity origination and underwriting, asset and portfolio management, and development. Baron assesses the state of employment in the commercial mortgage industry and the broader real estate and capital markets. Is there any good news? Where should real estate finance professionals be looking? And what do jobs have to do with asset pricing?
Q: What are some immediate and long-term effects of the employment freeze on the broader commercial real estate market?
Baron: The reduction in transaction volume (asset sales) due to the capital crunch has resulted in reductions in headcount in the debt area – commercial mortgage-backed securities (CMBS) in particular – and also at balance-sheet lenders such as Prudential, as the demand for mortgages has declined.
The reduction in volume has also impacted service providers who rely on transactions such as lawyers, title insurance, appraisers, brokers and mortgage bankers. It has also carried over into the equity area, as purchasers unable to transact have been shedding acquisitions professionals in an effort to reduce fixed costs.
Q: In general, is the employment freeze in the commercial mortgage industry just a halting of any new hires or is downsizing happening at many companies? How severe is it?
Baron: Downsizing is real. New hires are extremely rare in the debt world. Conduit lenders are not doing new loans, so originators, underwriters and securitization teams have been let go. Even some balance-sheet lenders, such as life companies, are shedding staff due to the reduced volume overall.
The one light in the debt world may be groups putting together funds to buy distressed commercial debt. At this point, there have not been a lot of sellers at distressed prices in the commercial sector, so this has not been a large source of employment yet.
Q: What are the effects of the employment freeze in the debt markets on developers and others seeking funding? How much, if any, of the current difficulties in acquiring financing can be attributed to employment-related trends?
Baron: Investors retreated from the CMBS market and are pushing up the cost of borrowing. Higher borrowing costs lowered the prices investors could pay for real estate assets. Lower asset prices dramatically reduced the number of owners willing to sell.
Lower sales volume reduced the demand for debt. Reduced demand for debt resulted in layoffs among lenders. It is no more accurate to blame borrowers' difficulty in getting financing on reduced staff levels than to blame umbrellas and puddles for rain.
Q: Are there new opportunities for top-tier real estate talent amidst the credit crunch?
Baron: A significant amount of capital has been allocated to distressed debt or equity funds searching for higher-yield opportunities. This area is an ideal target for skilled real estate professionals who understand the true value of assets.
This opportunity has been delayed, however, by the reluctance of vendors to re-price assets to the level required by purchasers to deliver their high-yield returns. When this starts to happen, the opportunities will come in a wave.
The search for equity is on due to reduced debt levels, so anyone who can source and structure equity investments are in demand.
Q: What are the some market segments that might actually be benefiting from new talent on the market? Which types of professionals are these markets open to?
Baron: Areas of demand include asset management and property management (running properties taken over by lenders or held as investments), and leasing. A knowledge and understanding of the product type and an ability to negotiate financial terms are imperative.
Asset management has become an in-demand skill set as owners are forced to hold assets longer and create value by operating them better rather than relying on cap rate compression.
Finally, portfolio management is in demand as equity investors try to re-balance portfolios in order to catch the next growth wave.
Q: What types of skills are most transferable from the debt market to the stronger market segments (e.g. acquisitions, asset management, etc.)?
Baron: What is required to navigate choppy markets is a good understanding of real estate fundamentals and how assets will be impacted by the economy and credit markets. Professionals with a solid grounding in real estate will be in demand from employers who seek to create value in the current environment.
Those originators who can turn over rocks to find deals will always be in demand because finding vendors willing to transact at current prices will be of interest to those who do have capital available to invest.
Q: One recent trend seems to be residential mortgage brokers who are venturing into small-balance commercial in response to the troubles on the residential side. Is this a good direction to go in? Should ‘native’ commercial brokers be concerned?
Baron: When debt is difficult to come by, borrowers will rely on mortgage brokers more than ever. Former residential brokers are at a disadvantage for knowing where to find appropriately priced capital.
The good ones possess good sales skills, but they have to get up to speed on valuing commercial real estate assets, how to structure deals to get them done and knowing where to look for funds.
Q: What about this ‘re-pricing of salaries mimicking the re-pricing of assets’ phenomenon? How widespread is it? What should employers (and job-seekers) do about it?
Baron: Vendors are reluctant to re-price assets (lower) as they hold hope that any downturn may be temporary. If it is not, they risk chasing the market down as they slowly adjust their price.
Employees can follow the same logic when they are looking for employment and seeking to replicate or improve on their previous compensation package. They must step back and assess whether the compensation was truly a function of their own ability or a mirror of a hot market. There are a lot of spoils to divide in a rising market when time alone produces money.
In a flat market, superior skills are required to generate gains, and the size of the pool to spread around may be less. The employee must assess how long they can afford to sit out the market in hopes of a better offer.
