Fitch sounds the alarm on servicer staffing levels

Commercial mortgage servicers are finding it difficult to attract and retain staff, particularly in metros like Kansas City and Dallas that have traditionally been the home to large servicing teams, according to a report from Fitch Ratings that was published this week.

The phenomenon – colloquially known as the Great Resignation – is being seen across the US. But in the commercial real estate market, it has meant that servicers are being forced to offer more lucrative compensation and expanded remote work access to try and solve this problem. Ultimately, this could lead to higher servicing costs, cautioned Adam Fox, a senior director at Fitch Ratings.

The agency, which provides ratings for commercial real estate master and special servicers, initially found that the covid-19 pandemic meant that there was lower-than-average employee turnover at the companies it rated in 2020. This shifted, however, as servicing portfolios began to grow and staffing needs increased, Fox said.

Since then, Fitch has observed that long-time staffers have been taking a closer look at retirement. Additionally, remote working has become a quality-of-life factor and the agency is finding that some employees don’t want to give up that flexibility.

Location and the ability to work from home have been huge contributing factors to turnover, Fox told Real Estate Capital USA.

“We’ve seen servicers become more flexible in job location where possible and, in some instances, servicers have opened satellite offices to attract talent,” Fox said. Several shops, including Trimont, Mount Street, Lument and Walker & Dunlop, have added locations in Kansas City. At the same time, companies such as Midland Loan Services have looked to open offices outside of Kansas City to mitigate reliance on a single market, he added.

Although Fitch has tracked a backlog of open positions, the agency so far hasn’t seen an impact on the quality of the function that servicers provide. Fox noted that servicers have traditionally used technology to mitigate issues around labor costs and turnover and are able to expand this on a limited basis.

“Fitch has seen an increased willingness among servicers to hire staff remotely almost as a defensive measure as well as a means to recruit experienced talent,” Fox added. “[We do not] expect elevated turnover in and of itself to result in any servicer rating actions.”

The agency first began to observe the trend in early 2021. “But the trend really came through over the summer and has continued to gather steam as we move into 2022,” Fox said. “Given that we are seeing aggressive recruitment among servicers to backfill talent, we expect the trend to continue into the first half of 2022. So far, servicers have been largely successful in backfilling departures. Because we are seeing staff move between shops, there is also an opportunity for servicers to add experienced staff.”

The big picture

The problem that Fitch is highlighting is being echoed in the broader US debt markets, said Kent Elliott, a principal at RETS Associates, a commercial real estate-focused executive recruiting company.

“We are now 10 to 12 years into a bull market in some functions and geographies and unemployment is super-low. I would argue that it’s almost a negative in some functions and geographies,” Elliott told Real Estate Capital USA. “If you’re a candidate and there is negative unemployment, that is great. As an employer, it stinks. It makes it very pricy to take someone out of a job and put them someplace else.”

It’s a little more difficult to recruit for a debt position than an equity role and firms making hires have had to make decisions about what skills are most important, Elliott said. Additionally, firms are looking for qualified candidates in one sector who would be willing to consider a new area.

“On the debt side, traditionally they have looked for the exact profile of a candidate with a specific track record,” Elliott said. “But the challenge is that debt professionals are largely commission-based, and they are often working on deals for as long as six months. Trying to recruit a candidate is like trying to get the stars aligned. We’re hearing, ‘I can walk from those commissions as long as your client can compensate me for that.’”

This trend is unprecedented in the commercial real estate market, Fox added. “While we’ve seen regional or company-specific increases in turnover before, these are unprecedented times in that all markets are affected,” he said. “Additionally, turnover is being driven as much by lifestyle choices as it is by compensation.”