Day of the Deal-Maker Is Over : Real Estate Managers Are Supplanting Entrepreneurs : Questions & Answers: JAMES J. GORMAN
James J. Gorman used to be a real estate executive before joining the executive search firm Korn/Ferry International two years ago. Now he specializes in rounding up executives for Southern California’s large real estate industry.
The problem is, the industry doesn’t need all that many executives these days. Or any other types of employees, for that matter. The real estate industry in Southern California and across the nation is going through one of the most wrenching periods anyone can remember. It is reminiscent, some experts say, to the kind of widespread and permanent changes that the auto and steel industries have seen.
Consequently, real estate companies will look far different in the future, and the types of executives they’ll need will change dramatically, Gorman says. The flashy, entrepreneurial developer will be largely gone. In his place will be a more corporate type, more prone to pin-striped suits and business-school case studies than wheeling and dealing.
Korn/Ferry, with headquarters in Los Angeles, is the world’s largest executive search firm and has offices worldwide.
Gorman, 53, graduated from Loyola University of Chicago and worked as a mortgage banker and lending officer in Chicago before joining Korn/Ferry in Chicago. He is now a vice president.
He recently moved to Irvine and works out of Korn/Ferry’s small Orange County outpost in a modest office near John Wayne Airport in Newport Beach.
In a recent interview with Times staff writer Michael Flagg, Gorman talked about what the industry will look like in the 1990s and what types of people it will need to survive.
Q. First a background question. How’s the executive search business work?
A. We work strictly for the employer. We do not represent the employee. We charge a fee on the basis of the first year’s cash compensation. Our fee normally runs one-third of that. The firm does search work in every industry. As a retained search firm versus a contingency firm, I don’t think we operate too differently from other firms, nor is our fee structure much different.
Q. How many people work in the real estate section of the firm?
A. Three other people and I specialize in the real estate industry.
Q. Do all the big search firms have a specialty in real estate executives?
A. Most of the larger retained search firms have partners that work primarily in real estate, and there are also a number of small boutique firms that work in the real estate field.
Q. Is real estate a new field for these firms or have search firms always worked for real estate companies?
A. We’ve had a partner specializing in real estate for the last 18 years, and over the years we’ve had two or three partners doing it.
Q. Typically, what kind of industries are big users of search firms?
A. I would say almost every large industry uses search firms to one degree or another.
Q. How important is real estate work to your firm?
A. It’s a small percentage of our total revenues. It’s not a significant piece of the business. But it’s a very profitable piece of the business.
Q. Real estate developers generally haven’t used executive search firms as much as other industries, have they?
A. That may have been true years ago, but as the industry itself has become more sophisticated, people realize that the good-old-boy network doesn’t really work anymore and that these firms have become more professional and more sophisticated. So they’ve begun to use search firms more and more over, say, the last five to 10 years.
Q. Traditionally, there was an old-boy network among these companies, then?
A. I think so. But the industry’s become more institutionalized, and they’ve had to hire people who fit into that situation.
Q. Given the problems the real estate business is going through right now, that part of the search business can’t exactly be a high-growth area, can it?
A. Not right now. There are a lot of people looking for jobs, but there aren’t that many jobs available. The industry is going through a retooling process. It’s certainly in a down cycle, and the dust hasn’t settled yet. Everybody has taken a half-step backward and said: “Let’s wait and see how bad the problems are and how they shake out.” The biggest problems, of course, are the oversupply of space and the undersupply of capital.
Q. By “retooling,” I assume you mean layoffs, which have already occurred widely, even in a relatively prosperous area such as Orange County. How many people are going to lose their jobs in this business overall?
A. If you read the trade publications over the last few months, the soothsayers are predicting that there will be anywhere from 25% to 50% fewer people in the industry by the end of 1991 or 1992. So the number depends on whom you believe, but there will certainly be a lot fewer people. And there will be different kinds of people coming in.
Q. How so?
A. The industry has changed from being focused on development and finance to one that’s going to be focused on operations and management of assets.
Q. Is this decline in jobs going to be a permanent thing? Or will they come back once we go into an up cycle?
A. No, they won’t. This cycle, I believe, is going to be a lot more serious and a lot longer than the previous ones have been.
Q. Why? What’s different about this down cycle from some of the others, after which the industry came back strongly?
A. First of all, I don’t think we’ve ever had as serious an oversupply problem in this industry as we do today. It’s extremely serious, and it’s serious in almost every major first- and second-tier market I can think of. You couple that with the fact we have an economy that’s slowed down significantly, with no immediate hope of it fueling up again, and it’s clear that empty space is not going to be absorbed nearly as quickly as people have projected it would be. You go to a major market like Orange County or Los Angeles--where there is a significant amount of space still under development right now that is going to further add to overdevelopment--and I don’t see where we’re going to come out of this cycle for quite some time.
Q. Then there’s the fact nobody can borrow any money for a real estate deal anymore, isn’t there?
A. Yes. You couple all of this with the fact we have no liquidity in this business, which has never been the case before. Back in the early 1980s we had high interest rates but ample money, and deals were being made. Today there’s no money, regardless of the cost. Actually, interest rates are not that high these days, but there’s no money available. At least, the sources of the money say there’s no money available, although I’m not so sure that’s true.
Q. A lot of people say developers won’t be building many buildings on spec--that is, with no particular tenant in mind but with the expectation the building will lease up--in the 1990s. True?
A. Absolutely. I’m not so sure there will ever be a big spec market again.
A. I think people are going to have longer memories after this cycle. And I doubt very seriously if the banks, insurance companies and pension funds are going to provide that easy, inexpensive capital for developers that’s been the case in the last 15 or 20 years.
Q. So what happens instead?
A. Most of what you will see in the future--not all, but most--will be build-to-suit. The developers that are building spec properties are going to have to have their own equity in the deal, and the properties themselves are going to have to have significant pre-leasing before any funds will be made available. The supply-and-demand ratio of buildings will be a lot more in balance in the future. It’s not going to be a year or two, and then everything’s going to be rosy.
Q. How long do you think the down cycle’s going to last?
A. Hard to say, but probably three years. In some markets, five years, partly because I believe the institutions (pension funds, insurance companies) that provide capital will play by different rules in the future. The money’s not going to be so cheap or so plentiful. The real estate industry will be more regulated and more institutionalized.
Q. So where do search firms fit into all this?
A. Search firms will be spending more of their time looking for asset managers and operations-oriented executives. We’ll be looking for fewer developers and deal-makers.
Q. Where will the entrepreneurial, development- and deal-oriented types go?
A. I think there are significant numbers of real estate people who will have to move into other industries. If somebody’s been a successful marketing person in real estate, he’s probably going to have to take a hard look at selling those skills in another industry.
Q. So guys who have traditionally been asset managers, say, must be in some demand in the business today?
A. They’re in very, very strong demand.
Q. That’s kind of ironic, given that’s the least glamorous, least sexy part of the business.
A. Yes, but the bulk of the activity in the business is not going to be development. It’s going to be managing the buildings that are already here, and you’re going to need those kinds of people. It might not be glamorous, but it’s necessary today.
Q. People say real estate companies are likely to become just another type of service company, building mostly for other people for a fee instead of getting a piece of the ownership of the building. Do you agree?
A. The bulk of the real estate companies that will survive this cycle will be mostly generating revenue from fees. They’ll become merchant builders, asset managers, that kind of thing. And the banks and insurance companies and offshore investors that will be buying a lot of these buildings that are struggling these days will be looking to the development companies to manage these assets.
Q. So most of the companies that grew rapidly in the 1980s, the Kolls and the Birtchers, probably won’t be growing nearly as rapidly in the coming decade?
A. Absolutely. If you talk to any partner at any large company today, they’ll tell you the people who were involved in development are now going to be a lot more involved in asset management.
Q. When did this change start to happen?
A. It’s only been the last three or four months. Many companies have not cut back and won’t until the first of 1991. That’s when I think the big cuts will occur here and nationwide.
Q. But the overbuilding problem’s been around since the mid-1980s, and vacancies have been high in this county since the same period. Why the layoffs now?
A. People always have an ability to not believe the signs they see. Real estate people are the ultimate optimists. Just take a look at all the empty buildings around here.
Q. That’s one reason for the overbuilding, isn’t it? The people who built these large organizations had to keep feeding them with new projects and banked on the tenants still arriving in droves to fill them?
A. The developers have been able to borrow the money to keep that machine going. But now they’re no longer able to borrow, and that’s what’s going to shut the system down.
Q. Now it seems that the joint-venture partners are getting a bit more cautious and requiring developers to put their own money into some of these deals, doesn’t it?
A. Yes. Or the developers will be hired strictly as a subcontractor and won’t even get a piece of the deal. They’ll merely get a fee. The developers previously have received a significant piece of the equity--or whatever equity there is left in some of these buildings that are sitting empty or with tenants paying low rents--for their expertise. Now the institutions are turning around and saying, “What did we get for our money? A portfolio of empty properties?” That leads the institutions to say, “When we get back in the business again, we’re going to play by a whole new set of rules.” After all, they’ve got the money, and nobody else has money anymore.
Q. What kind of person goes into property management? What are the companies looking for?
A. First, he has to have excellent marketing skills. If he can’t keep the tenants in the building, what’s he doing? And a tremendous amount of efficiency will be required out of property managers today. They’re going to have to watch every single dime they spend, while still keeping their buildings aesthetically attractive, because the cash flow on these buildings is often little or none.
Q. Can you bring in an executive from another industry and have him or her succeed in the real estate business?
A. Sure. You’ll find at the big brokerages and development companies that many of their top people came from IBM and Xerox and other big companies. Marketing has always been a lot of what it takes to be successful in real estate--good salesmanship. Now I think it’s going to change. You’ll have to be a little more numbers oriented.
Q. As you travel around the country, do you perceive any differences between Orange County and other markets? Are we really quite as strong economically as people say?
A. There are differences. As long as you continue to have growth in the population in Southern California, there’s going to be more opportunities for growth in every industry, not just real estate. My guess is that Orange County will suffer less because of its diversity and the strong business activity here. The real estate industry is big here, but it’s not enough to negate the effect of local businesses that are surviving better than real estate. One interesting thing, though: This is the only time in this industry that I can think of where the unemployment is higher in the white-collar area than it is in the blue-collar area.
Q. What about the outlook for your own business? Are the local real estate developers likely to hire a firm such as Korn/Ferry to help it find people in an era of cost-cutting?
A. We have excellent relationships with most of the big developers, including the Koll Co. and the Irvine Co., and I expect that when things turn around they’ll be asking us to come back and work for them again. But right now we’re doing a lot less search work in real estate. And it may well be that we’ll have to find work in other areas besides real estate, at least for a while. I’ve done search work in other industries, but not much because there was so much business to be done in real estate. Now I have more time, and I’ll be doing search work in other industries.