The Re-Pricing Parallel

Compensation for commercial real estate professionals also seeks a return to realistic pricing.

While uncertainty continues to grip the capital markets, the commercial real estate sector is in a virtual deep freeze. As the cost of both debt and equity has risen over the last year, transactions that would have been routine 12 months ago are no longer economically viable.

While lenders and purchasers refer to this process as re-pricing risk, the clear impact on sellers is a requirement to re-price assets. The resulting bid-ask spread is the primary reason that sales transaction volume is down by 80 percent in some markets from a year ago.

There is a parallel dynamic at work in the employment market. Asset values increased as capitalization rates followed the decreasing cost of debt. Asset inflation allowed for the trading of assets annually at increasing prices without any value being added to the asset itself. Executive compensation packages tracked the increase in asset values over the last few years, as bonus pools shared in the promote above the hurdle returns to investors.

Like assets, compensation now is being re-priced by the perfect storm of falling asset values, fewer transactions, and increased supply of talent due to downsizing. And like property owners, executives offering their skills to the market are slow to adapt to the changing prospects for compensation.

Employees feeling the most significant fallout from these developments are debt originators, who possess a skill set for which there is little demand. Also affected are transaction employees acting for leveraged buyers, who find themselves unable to buy given the requirement for more equity, but unwilling to sell given the impact of that required equity on asset values.

Even balance-sheet lenders, which many experts believed would benefit from the commercial mortgage-backed securities fallout, are experiencing difficulty reaching their targets due to the lower volume of sales transactions during a year that also happens to have fewer renewals.

Opportunities in the Market

Despite the negative tone surrounding the market, a number of opportunities remain for skilled real estate executives. While debt and equity origination roles have experienced downward pressure in compensation, the operations side of the business has demonstrated stability. Individuals in asset management and portfolio management continue to receive market compensation for a skill set that is in demand; however, short-term flippers now are long-term holders, requiring strategies to add value to properties. While profits may be down at the firms overall, good performers still must be rewarded to retain talent.

Additionally, some originators have successfully redeployed their skill sets to become distress buyers. Some firms now are shifting their focus to acquiring assets from some of the highly leveraged owners forced to sell or buying debt from lenders who wish to clean up their balance sheets. This provides an opportunity for former CMBS employees to use their experience in the debt business despite the disappearance of the conduit market.

In the end, negotiating both property transactions and compensation in this new era of uncertainty is now a game of who will blink first. Owners holding well-leased assets simply are opting to wait out the uncertainty. However, if the asset begins to perform badly and cannot service its debt obligation, or if a fund is coming to an end and investors want out, owners may have no choice but to make a deal at the current market price. Owners also could be forced into a sale if a lender refuses to roll over a loan upon maturity.

Similarly, senior executives can resist lower offers by relying on their severance. Many executives who had become accustomed to high salaries and lucrative bonus structures remain in the employment market rather than accepting a new position at a lower salary. Unfortunately, just as we are witnessing with property values, salary, or compensation, price adjustments are sometimes just a matter of time. Supply and demand ultimately prevails.

What should surface from the turmoil is a more realistic approach to value. Assets that demonstrate strong performance and good leasing fundamentals will benefit from solid, long-term growth, and employees with well-defined skill sets and proven real estate experience will witness the same growth in their compensation over the long term.

Robert Baron

Robert Baron is president of American Real Estate Executive Search Co., a national firm with offices in New York and Chicago dedicated to executing senior-level career or employment searches in the real estate industry. Contact him at (877) 979-2404, ext. 228, or