FPL Reports on Hiring Opportunities and How Talent Will be Compensated in 2012

A downturn can provide breathing room for firms to examine compensation levels and hiring demand. By William Ferguson and Jeremy Banoff.

Hiring: More Demand Than Meets the Eye
By William Ferguson, Co-Chairman & Co-CEO, FPL Advisory Group

Anytime there is uncertainty and an inability to make decisions, it negatively impacts every business, including real estate. Commercial real estate hiring saw a distinct falloff in July 2011, a typical precursor to an economic slowdown. Toward the end of 2011, there seemed to be signs of increased demand. Why the hiring uptick? Market sentiment suggested that the industry’s leadership is resigned to the fact that uncertainty is a reality and realized the necessity of making decisions in order to manage business.

In addition, all-time-low U.S. interest rates have made debt capital inexpensive, while immigration trends and increased home mortgage qualifications have made the multi-family business vibrant. The aging society bodes well for the healthcare sector. Increased use of IT to re- duce labor costs has improved opportunities in the data center sector. Sales of luxury consumer goods and services have rebounded. And non-profit employment is on track to replace civilian public-sector employment by 2014-2015, which bodes well for the office sector in geographies like Washington, D.C., while eGame, eBook, social networking and video streaming companies are driving office demand in high-technology hubs like Austin and the Bay Area.

A number of sectors do remain extremely troubled. Besides the single-family residential business, private developers are strapped, as are construction/engineering firms, with the possible exception of public firms doing business globally. With the slowdown in asset sales, brokerage firms are suffering. The real estate private equity firms are also challenged, and the CMBS business is shut down again; it will come back at some future point, but more modestly. The real estate investment banking business is predicted to be bumpy at best in 2012. The retail, industrial and office sectors are generally viewed to be episodic, and demand will only be driven by well- positioned firms in growth-oriented geographies.

Talent Upgrade

But many companies are hiring, recognizing that this is a good time to upgrade talent. Whenever market conditions are unstable and unvested equity is worthless, it makes sense to upgrade members of a firm’s senior leadership team, as it can be done more reasonably then.

The firms that are best positioned today are those that are well capitalized. While the REITs have been buffeted by the stock market’s volatility, they are poised to take advantage of market opportunities. Real estate investment managers (with the possible exception of private equity firms) will benefit from investors’ desire to work with fewer firms with broader capabilities, both from a geographic and asset-class perspective. Core investors in particular are deploying incremental capital on a conservative basis, and managers with a track record in that space are receiving additional allocations.

Among those actively hiring, the insurance companies and commercial banks are bringing in lenders and underwriters as they are overwhelmed by demand. Multi-family investment and development professionals are in demand, as are healthcare investment and asset management executives, while the hospitality sector is seeking acquisitions professionals. Service firms want professionals who can manage outsourced relationships with corporate America. And office owners in the gateway cities are seeking professionals who can manage and lease properties.

Among investment managers, capital raisers and portfolio managers are still in demand, and investment professionals are generally being recruited, with boots on the ground often considered critical to identifying purchases with attractive returns.

In addition, directors and board members are being actively recruited, as are CEOs, COOs and CFOs across all sectors, and global experience is becoming increasingly important as the world grows smaller.

Compensation: Fluctuating Rewards
By Jeremy Banoff, Senior Managing Director, FPL Associates L.P.

In light of the volatile real estate market, exacerbated by the wide variance in performance across the public and private real estate sectors and within each asset class and risk profile, this year’s expectations for compensation payouts vis-à-vis incentives, both cash and equity, are likewise expected to vary widely.

Public Real Estate Firms

Real estate executives are coming off of re- cord high levels of pay with respect to performance year 2010 (compensation typically paid or granted in early 2011 rewarding for the prior year’s performance), according to findings for FPL’s “Ninth Annual Top 100 Public Real Estate Compensation Analysis.” Expectations for this year are the widest we’ve seen in recent years, with projections ranging from a dip of 10 percent year-over-year to an increase of 10 percent, largely differentiated by expected firm performance, as noted in our exclusive “Compensation Pulse Survey—2011 Year End Bonus Expectations and 2012 Salary Projections.” This is not surprising, given the volatility that continues to confront the public markets.

The one constant since the downturn in 2008 has been three consecutive record years of equity capital raising. This has allowed companies to clean up their balance sheets and have a distinct advantage over many private companies.

With the market performing exceptionally well, retention is not nearly the concern it was just a couple of years ago. Equity awards granted since the market downturn have appreciated in light of such high levels of positive total return performance and have proven to be a valuable tool in retaining and attracting executives.

Consecutive years of outperformance have translated into incentives awarded above “target” levels. Such payouts are still largely anticipated for performance year 2011, as well, but their magnitude is likely to decline.

Private Real Estate Firms

Notwithstanding the fact that private companies vary widely in structure relating to both capital and risk, they are also expected to increase compensation for performance year 2011 by healthy levels. Pay that occurred for performance year 2010 increased by 10 to 25 percent, on average, and further increases in the low double digits are expected for performance year 2011. And according to FPL’s “Pulse Survey,” twice as many firms expect pay to increase versus decrease for performance year 2011.

However, increases are occurring on relatively low baselines, and with private real estate firms tending to lag their public counterparts by 12 to 18 months, payouts are still a year removed from levels not seen since the early part of the 2000s.

Interestingly, less risky firms that specialize in core/core-plus products tend to be performing better than higher-risk value-added and opportunistic products. As a result, the largest increases are expected in the real estate investment management space, not private equity firms.

Another impact comes from a “resetting” of fee structures that has slowly evolved in recent years. Asset management fees, which typically play a major role in funding cash bonus pools, are declining (not just the fee percentages but the capital raised), as are performance fees corresponding to long-term compensation levels. Longer-term expected fund returns are declining compared to the mid-2000s, as are performance fee structures, with managers receiving a lesser share of profits in many new instances.

Going forward, as noted in the most recent quarter of the “Real Estate Roundtable Sentiment Index,” conducted by FPL, the mood among public and private executives has changed, registering the lowest levels since late 2009. A majority of executives predict a decline in 2012, with very early indications suggesting the public side will not see material changes to compensation structures while the private side may continue to experience pressure.