2024: A Wave of Executive Movement?
While the entire commercial real estate industry awaits an expected property valuation reset, with as much as $1.4T in outstanding commercial mortgage debt coming due by the end of 2025, another concerning and related trend that many CRE professionals are currently experiencing as a result of these macroeconomic events and higher interest rates is the significant decline in, or the complete erasure, of the value of their Long Term Incentive Plan (LTIP)/Equity/Profit Participation– often referred to as ‘promote’ and considered the most important third component of executive compensation. These select CRE professionals, many a part of the executive team or in vital acquisition and development roles, have long strived to earn their promote – the coveted third component of compensation beyond a base salary and annual cash bonus that is tied to company profit and/or ownership. Also referred to as ‘golden handcuffs,’ the promote’s profit-sharing nature is leveraged by firms to help keep key professionals long term. But for many, these handcuffs are falling away as property values plummet and corporate profits take a major hit. These CRE professionals are coming to the realization that what had long ago been calculated to be a significant portion of their overall compensation as they matured in their careers with retirement on the horizon, are now at values near zero and they are freer to reexamine the future direction of their careers.
Real world concerns
As the leading executive placement firm in the CRE industry, the principals of RETS have had scores of conversations over the last 3-4 months with mid/senior level development, acquisition, and executive level talent and discussed how their promote has come full cycle. Some of these difficult conversations have included the 100% disappearance of their promote compared to the significant figures that had existed just a few short years ago. Others have recently recalculated their promote values and realized that their projections are significantly less than their worst-case scenarios, an unbelievable change compared to the sky high, yet reasonable projections from years previous. Here are just a few of many examples:
- An acquisition/asset VP of a value-add office operator had achieved “partner” with a compensation package that was a base salary plus a generous promote. Over the last seven years, however, the company had made a series of office acquisitions and is now faced with all of the challenges office product faces related to COVID and remote/hybrid work schedules. Convinced the promote was long gone and that there was no compelling reason to remain, the VP ultimately left for a new opportunity with high cash potential and no promote.
- The CIO of a multifamily investment and development firm in the Southwest described the loss of his promote as extremely significant, sharing that just two years ago, his promote on a number of high-profile multifamily developments was significant enough to ponder retirement by 2024. And now? That promote is gone and the next batch of deals (land) he finds will ultimately be developed over the next 7-10 years with a promote to be earned on these investments to replace what vanished over the last few years.
- The CFO of an industrial development firm described an investment opportunity with an institutional entity back in 2019 that enabled the developer to purchase 10+ sites (land) in Southern California in 2021-2022. Now with the benefit of 20/20, the prices paid for this dirt was top of the market. While it is anticipated the development will proceed on all sites, the developer believes the originally calculated promote has vanished and there will be no significant profit on these projects other than recovering expenses and covering salaries.
CRE Executives – What’s Next?
As increasing numbers of CRE executives discover their promote may no longer be compelling enough to hold them to their company long term, they are coming to the realization that now is a great time to examine their current situation and compare to other opportunities in the marketplace. As CRE executive search specialists, we cannot stress enough how important it is for them to give great consideration to some key employment tenets that we advise all of our talent to acknowledge:
- The grass is not always greener. No firm is perfect. Many operate differently making direct comparisons difficult. Do your research.
- The unknown (firm) is not always better than the known. You know a lot more about the machinations of your long-term employer. In a recruitment process, you can learn only so much about the alternatives. Ask for as many details as can be provided about the Promote potential and supposed income streams for each opportunity so you have clear optics into the perceived value of deals and exit cap rates.
- You are really the only one who can calculate the value of your promote, but it’s not realized until it is realized. What it was, versus what it is, versus what it will be, can be vastly different figures. CRE is cyclical – with great challenges come great opportunities.
- Promote does not happen overnight. In many instances, you may need to be with a firm during a capital raise to earn points in a fund, or a significant investment needs to be made, or a gain must be realized before an incentive can be distributed. This can take time – 3 to 10 years! Consider or reconsider your career timeline.
CRE Firms – How do we retain our Talent?
As a CRE firm in which your talent’s promote has vanished, what alternate strategies do you have to retain existing staffers who no longer have a long-term financial reason to stay? Again, we consult daily with our CRE partners on employee retention and succession planning to ensure there are multiple vehicles to retain executive talent and foster the next generation of leaders. Some real-world examples include:
- Increased Performance Fees: While not desiring to increase burn/current cash comp, some employers offer increased incentives with variable/performance fees (i.e. increasing fee percentage on leasing fees or other revenue streams) to increase current cash compensation. While we’ve heard some candidates feel these increased incentives were “pennies on the dollar” compared to the lost Promote, extra incentives can serve to ease shorter term pain until longer term Promote can be earned.
- Clear Vision and Positive Attitude: The CRE industry is a cyclical business. Can your business endure it. Can you fight through to the next cycle? Offering a clear vision with a positive attitude can go a long way to reinvigorating and retaining your key personnel.
- Increasing Future Promote: We also have examples of employers attempting to retain employees who had given notice by increasing their 3rd component participation on future acquisitions and elevating their titles. With the pending market reset, opportunities for future promote look much brighter.
- Promote is a Zero-Sum Game. Proceed Wisely: There are only 100 points of Promote. For one executive to get more, another gets less, so there’s a balance to be found. Employers who increase promote figures for some will be faced with other staffers who are less than thrilled.
- Diversity can be Key. The ability to offer diversification of promote across different deals, product types, and geographies helps to manage risk for key executives.
As current conditions highlight, the CRE industry is a cyclical one, yet with the upcoming commercial property reset, we are on the precipice of unchartered waters. As with all challenges, however, this will create opportunities for both CRE firms and their key executives alike. It is a gut check for executives to have lost considerable promote dollars that had been long counted upon to carry through retirement, but this is a great opportunity for them to examine their situation and rally the team, whether at the existing firm or new, and recapture the joy of rising to the challenge a new marketplace brings. For CRE firms worried about the departure or poaching of executive talent, it’s long past time to dust off the company vision and business strategy, identify and assemble the key personnel to carry it out, and set forth to take advantage of the many opportunities that are sure to arise. In either case, this year is likely to experience a sea change in the careers of many of CRE’s executive level.
By Kent Elliott and Berkeley Davis Principals, RETS Associates.
The RETS Team brings a deep, strategic understanding of the real estate industry to your recruitment needs. Click here for more insights & tips.
