Canadian Real Estate Executive Market Condition and Employment Survey

Rutherford International’s will be distributing the results of its Market Condition and Employment Survey - Third Quarter 2009 through its newsletter next week. To receive a copy of the complete survey, Rutherford International blog readers should go to our Home Page at http://www.rutherfordinternational.com and register on our Newsletter link, or via the REmatrix.com Commercial Real Estate Portal at http://www.rematrix.com/newsletter/rematrixnewlet-registration.html

The survey was designed to provide a third quarter snapshot of senior executive opinion on the state of their industry during the latter month of July and early August 2009. The questionnaire was directed to the top and first-tier executives within the Owner/Developer/Lender/Service sectors of Canada’s commercial real estate industry.

Segmented by sector, opinion was measured on the following:
a) Fundamentals for acquisition, disposition and financing for the next two years;
b) Employment demand within the industry in 2010;
c) Functional changes likely to take place within respondents’ organizations over 2010;
d) Critical human resource priorities within respondents’ organizations;
e) Economic factors shaping their opinion.

Two survey reports are available. First, a comprehensive sector-based analysis for respondents and second, a general overview for the industry at large. Some of the questions and excerpts of our analysis are highlighted below.

Excerpts:1. Fundamentals for acquisition and disposition in 2009 through to 2011/04.The results suggest the vendors’ lack of market cycle certainty in 2010 with the pricing gap between ‘buyer’ and ‘vendor’ expectations continuing well into 2010. "There is a perception that lenders are afraid to foreclose, which is keeping sellers hopes high."

2. Fundamentals for financing and refinancing in 2009 through to 2011/04.Lender" respondents were more inclined to choose "Favorable" for both ‘financing’ and ‘refinancing’ in 2009 and 2010; however they were less sure of conditions in 2011. We believe their uncertainty for 2011 is due to ....

3. Based on current economic climate, employment opportunities in the commercial real estate sector will:
Be limited to modest growth in leasing, accounting, asset and property management. Vacancy will be primarily due to normal attrition and voluntary turnover with general, employment opportunities within the industry remaining "static" well into 2010. If recovery is in the offing, it will be a "jobless" recovery. The impact of retirements, "geared back" or semi-retirement life/work styles, and the incoming "baby boom echo" or "double cohort" offspring entering lower middle management positions should be evident by 2012.

E: Key Findings – By Sector with Commentary
(This information is available in the survey results reserved for respondents.)

F:Commentary Excerpts
"Appraising Back to the Future"In terms of acquisition and disposition, aggressive valuations have been blamed for contributing to the variance between "Buyers" and "Vendors."

"I’ll Have a Bromo with that Denominator Effect"
It is also assumed that an increase in the equity markets will result in ameliorating the ‘denominator effect’ leading to a return of institutional capital to the real estate market for Class AAA and AA assets.

"Sitting on a Picket Fence can Hurt!"It’s a bit of high stakes game that’s being played in some shops – ante up with house stakes – ‘Check’ when able – and enter 2010 with a plan to make fine adjustments and seek quick opportunity plays; but in general – mark time until the industry completes its de-leveraging.

"Retaining your Walking Assets"The predicted demographic labour supply bust, which all industry and government sectors are currently experiencing – and self evident by respondents concerns over ....

"Forward to the Future"The worrisome trend that emerged from the analysis is that respondents appear to place little importance .....

"Peter’s Principle Exposed"We purposely referenced the term "effective" to emphasize a human resource reality that generally becomes evident in recessionary markets after a long wave rise in the economy.

"Economic Recovery and Generational Knowledge Transfer"Good managers are the product of acquiring "tacit" knowledge, ....

In general, anyone under 45 today wasn’t in a position of management and leadership during the last major recession .....

"Best Case – Leveraging Brand & Grabbing Talent on Waivers"Companies that prepare for recovery ......

"Worst Case - A Dead Cat Bounce"Lenders are less sure about the fundamentals for real estate in 2011 then that of the Broker and Owner respondents....

It would seem to us that the ability to think laterally, to problem solve creatively; to sort out the winners and losers when identifying tenants for "blend & extend" negotiations (or to inoculate an asset’s mix with a good balance of recession and high interest rate resistant tenants); or to squeeze out additional "Net Operating Income" or negotiate financial workouts will be long-term and valued skills in our industry going forward.

Three Market Opportunites & What We Can Do For You

Rutherford International Executive Search Group Inc.
We support clients that need to: improve their executive, staff, investment and development teams; insert interim CRO and/or CFO expertise into an organization; and/or identify strategic and alliance partners in local and foreign markets, which includes coalescing expertise for Public Private Partnerships.

Real Estate:
We have experienced more than one recession as a real estate search consultancy; late 1989 to late 1994 were years of hardship for any profession that serviced the commercial real estate industry. Rutherford International was new, and we adjusted to this lengthy recession by staffing financial service companies with mortgage valuation and restructuring experts; leasing executives that understood blend/extend strategy; and property managers that understood tenant retention and the importance of “Net Operating Income.”

This credit crisis in Canada is much different than in the United States; conventional commercial mortgage lenders in Canada (with the exception of certain strained markets) are not convinced that they will see any significant increase in their “Special Loan” files.

We have approximately 2000 individuals in our resume files who claim to have expertise in real estate repositioning and workout, so we decided to find out if there would be a requirement for this skill set by surveying the lending community. Surprisingly, the consensus is that we are six months ahead of ourselves in terms of demand for a clearinghouse of experts with this kind of experience.

Current interest rates and deep pocketed ownership are the primary reasons for this perspective; however we’re not convinced that the industry can sit in sublime isolation, inattentive from what’s going on within the commercial real estate world. Real estate may be local, but Canada sits at the wrong end of the global supply chain. The lender’s primary concern is the cost of long-term capital in thirty months or less as the international capacity to borrow reaches its limits, and global capital begins to flow to the highest interest unhindered by national borders.

Expertise in mortgage workout is not in high demand as of yet; however knowledge in stabilizing values through operations and leasing will more likely be a requirement at the ownership level; REITs with limited cash reserves, dispositions and erosion of unit values will undergo stress. As well, the restructuring of real estate service companies (particularly those focused on transaction and development) along with home builders and owners of retail and industrial property in tertiary markets will have need of legal services, and perhaps a renewal of their executive team.

The “Denominator Effect” – as it pertains to the fall in equity portfolio value relative to real estate portfolio value – has destabilized the traditional asset weighting in investment portfolios. This appears to have constrained the domestic real estate investment activities of the major private pension funds. Some funds may consider a disposition of non-strategic elements in their portfolio as a means to re-balance their asset weighting.

The concurrent impact of face rate erosion; and social movement for environmentally efficient structures or the “Green Effect” will have a dual impact on asset retention decisions. The erosion of face rates may no longer justify the capital reinvestment to achieve a LEED’s standard, especially institutions that are driven by investment yield.

Life cycle obsolescence is a little known but important element of consideration when “buy and hold” portfolio strategists conduct their acquisition and disposition due-diligence. In the mid-1990’s, experts in the revaluation of commercial real estate claimed that more than fifty percent of Manhattan’s commercial real estate stock (much owned by pension funds) was reaching technical obsolesce. Most large American cities continue to face this same reality. I would expect assets that are reaching the limits of their life cycle and are slated for re-valuation to a LEEDS standard are ripe for acquisition by private equity funds and deep-pocketed interests.

In key markets throughout North America, erosion of commercial property values in this down cycle, combined with the need to revalue mid-life-cycle assets to a LEED’s standard offers a unique opportunity for the application of existing, and the aggregation of opportunistic capital into debt and equity funds.

Rutherford International has the ability to bring together the expertise for staffing and/or creating these funds. For further information on our real estate search services, please contact Forbes Rutherford.


Infrastructure and Public Private Partnerships:
Faced with increasing deficits, eroding tax revenues and concern over legal liability associated with catastrophic failure, governments have acquired a renewed sense of appreciation for the private sector role in delivering services and infrastructure to the public domain.

When we consider what’s happening in the United States, clearly Public Private Partnership has an important role to play in this current economic maelstrom we’re facing.

“US GDP contracted at an annualized rate of 6.1 percent during the first quarter, little improvement on the 6.3 percent fall in the last three months of 2008. US exports fell by 30 percent, the US Commerce Department reported. New US business investment, normally made when companies are planning production increases, tumbled by a record 37.9 percent in the first quarter. US capacity utilization is at a rock bottom 69.3 percent. In real economic terms, this amounts to almost one-third of all plants standing idle. The number of US jobs has fallen by 3.9 percent, exceeding the 3.2 percent decline in the 1981-82 recessions. The 15.4 percent fall in US industrial production is worse than in previous recessions.”
Bill Buckler, Privateer Economic Newsletter - May/09

"Public Private Partnerships and economic stimulus have become synonymous."

Rutherford International has access to a network of analysts and experts with experience in PPP endeavors throughout the industrialized world. We can help you structure your PPP initiative; or staff an existing project. For more information, contact Forbes Rutherford

Corporate Restructuring and Insolvency
There was a time when a country’s success was measured by the hard goods it produced, however “off-shoring”, “near-shoring”, predatory pricing, uncompetitive taxation, knowledge deficit, succession challenges and a cultural ethos of “entitlement” compounded by a malaise in visionary leadership to re-invest has all but contributed to the hollowing-out of key sectors in North America’s manufacturing industry

For example, California, Eastern Seaboard and Great Lake States and Province’s ignored the needs of their manufacturers – consumerism drove public policy - construction and rising home values were a Kafkaesque masquerade for economic vitality. “One can not build a sustainable economy on a housing boom” - that is the essential truism re-learned - the dislocation associated with the de-leveraging of the sub-prime and prime mortgage industry simply punctuates this tenet. Historically, "real estate has followed economic cycles not led the forefront"; however I believe it would be fair to suggest that this fundamental truism was lost on public policy makers during these past three years.

In all industry sectors, the business of business is in need of serious and sober introspection; governments need to set the rules and step aside. Manufacturing risk should be rewarded even celebrated; real risk and not contrived failure easily forgiven. These are fragile times – companies will restructure – industry sectors will consolidate – those who are resilient and agile will lead our economic recovery.

It’s during a recession that one prepares for recovery – this is the optimum time for Stakeholders to tweak their executive and managerial teams. I have a growing list of “Chief Restructuring Officers” and “Chief Financial Officers” that we are able to insert into and be effective immediately in a broad range of industry sectors.

Rutherford International has access to an international network of full-time and interim “Turnaround” executives. We would welcome the opportunity to assist you on files where this type of interim or permanent executive requirement is needed. We'll even leave a portion of our fee on the table in return for "prefs" or "warrants." For more information or to be considered for membership within our network of "turnaround" executives, please contact Forbes Rutherford.