The intense demand for commercial real estate debt professionals earlier this year has softened slightly as a result of uncertainty in the broader US and global economies.
Kent Elliott – principal of executive search firm RETS, based in Newport Beach, California – says the firm has seen a dip in demand. RETS works with commercial real estate managers on the debt and equity side of the business, and its team of 20 recruiters conducts about 250 searches annually.
“Very few firms hired in 2020 as we all worked to figure out the impact of the covid-19 pandemic,” Elliott says, “and then these firms got to 2021 and had business confidence. We were hearing, ‘We’re going to make up for the people we didn’t hire in 2020 and we’re going to double down or even triple down in 2021.’ And this continued until about the start of May. We felt like we were going 85 miles per hour. Now, we’re going at about 60. Hiring is still going on – it’s just that there are pockets of softness.”
There are similarities between the debt and equity side of the business, with Elliott citing a falloff in transaction activity across the board: “We’re seeing a tremendous slowdown in investment activity, which is of course impacting the structured finance side of the business.
“As rates rose, the transaction pipeline dried up very quickly and there was a big disconnect on pricing between the buyers and sellers, which meant fewer deals would close between now and the end of the year.”
The scope of the transaction slowdown is illustrated by an October report from data and analytics provider MSCI that shows deals are down significantly year-over-year on the equity side. This, naturally, has a knock-on effect for the debt markets, which have seen base rates and spreads widen substantially since the Federal Reserve began increasing interest rates in March.
“We’re seeing a tremendous slowdown in investment activity, which is of course impacting the structured finance side of the business”
The MSCI report tracked about $172.2 billion of investment activity through the end of the third quarter – a 21 percent drop from the same period in 2021.
“A rising interest rate environment has pushed the coupon on a seven- to 10-year fixed-rate mortgage from a low of 3.5 percent in September of 2021 to 5.4 percent early in the third quarter of 2022,” it stated.
Additionally, the report found that falling cap rates combined with rising financing costs have limited the impact of leverage for new acquisitions.
Additionally, the Mortgage Bankers Association in October published a substantial revision to its 2022 full-year lending forecast. The trade association, based in Washington, DC, is now forecasting that originations will drop to a projected $766 billion, compared with the $848 billion expected at the start of the year. This would also represent a 14 percent drop from the $891 billion seen in 2021, with an expectation that volumes will fall even further in 2023.
There is a broad perception that it can be more difficult to fill an opening for a real estate debt professional than a seat on the equity side of the business. But there is also a different mindset from existing debt professionals, which could make it easier to get an individual to think about moving.
“The talent pool for debt professionals is very transactional,” says Emily Von Kohorn, a managing director in the global real estate practice at Sheffield Haworth. “That is not to say they are not experiencing some of the broader themes that are affecting all workplaces in terms of how people are thinking about their careers and what their interest area is. They also have a little bit more of an open mindset and can be a little bit easier to engage than equity professionals, with a mindset that is more, ‘I’ll take the call. I’ll listen.”
Like other executive search firms, Sheffield Haworth is witnessing a lot more demand for debt professionals. “The demand is coming from some clear trends in the market, with higher interest rates and a potential recession,” says Von Kohorn. “There is potentially more opportunity that a lot of our clients are seeing to provide additional debt financing and step in where some traditional lenders could be nervous.
“Firms that perhaps had a debt strategy in the past and pivoted away from it are now looking at things from a long-term investment perspective and are returning to that strategy, while others are launching one for the first time to plug that gap.”
Carl Chang, chief executive officer of real estate investor Kairos Investment Management, believes there will be more clarity in hiring in the coming months. The manager, based in Rancho Santa Margarita, California, saw a widespread game of musical chairs in the industry earlier this year as relatively recent graduates sought jobs that better fit their skills and expectations.
“We are now seeing a higher quality of talent of people with a three- to five-year work history, and that sort of experience has been fantastic for us,” Chang says. “We have scheduled investment committees as an example but we also have impromptu investment committees.
“We’re deal-driven and so we get excited about deals and opportunities and want to talk about them when they come up, and suddenly, it’s exciting for us to be able to say, ‘Hey, we’ve got a hot deal we want to focus on – go to the conference room and take a look.’ That is easier when everyone is in the office.”
The manager strongly believes in an entrepreneurial, in-office culture, says Chang: “We are making investments in our space and in our infrastructure, so that people have an excuse to come in and be around the amenities or the food, whether it’s nitro brews or kombucha on tap. We’re trying to make it a pleasurable experience for people to come back to.”