After a 25-year run, commercial real estate in Canada may finally be at a crossroads. The long-term outlook for real estate may not be as bright as it once was, and many believe that the tricky issue of executive succession could be one of the big disruptions coming down the pike.
Real estate investment trusts (REITs) and private equity real estate (PERE) managers face a unique challenge in developing succession strategies that identify the next generation of leaders with the skills and experience needed to drive growth. In fact, according to a CIBC report, in 2016 there were more than 20 REITs included on the S&P/TSX REIT index that were still being led by the original founder; and 70 per cent of the CEOs of companies on the index were expected to retire within the next five years.
These findings are a wake-up call and it’s clear that the next decade in commercial real estate will be unlike the one before. The next generation of real estate executives will face new and evolving threats, including the continued growth of e-commerce, which has triggered an industry-wide transformation that threatens brick-and-mortar retailers.
In response to these changes, owners have begun mining their portfolios for more residential and mixed-use opportunities, which will require different management skills. Instead of being focused solely on deals and acquisitions, the next generation of real estate executives will need broader management skills, as well as direct experience leading intensification projects and managing mixed-use residential developments.
Without succession planning, Canada’s REITs and PERE managers are running a risk. So how can organizations address the challenge? Here are three strategic principles to consider when formulating an approach:
- Waiting is risky: Executives tend to avoid the issue of succession and often wait until there is too narrow a window of time until they exit the organization. New leaders need to manage through a two-to-three-year development cycle to fully immerse themselves in their roles, so waiting until the current executive’s exit is in sight puts a transition at risk.
- Tried and true is unreliable: Leaders tend to hire successors in their own image so they need to remain objective in terms of what the future needs of the organization will be. The knowledge and experience that got them to this point will not guarantee future success, as an evolving industry requires different abilities.
- Diversity is invaluable: The real estate industry tends to be insular, and those who work within it have likely progressed through their career with the same world view. Investors and boards should encourage diversity at every turn. A global perspective, as well as the perspectives of other industries and genders, is invaluable for incoming executives, and will improve their overall leadership skills and decision-making.
The commercial real estate business may be set for change. With disruption on the horizon, executives will need new skills to drive growth in an evolving market. Leadership assessment methodologies can identify and support the development of top talent. These tools can be used to evaluate potential internal and external candidates, establish development recommendations, and provide the necessary coaching to foster cross-functional knowledge. REITs and organizations with real estate portfolios should seize the opportunity to plan for a smooth executive succession that ensures that their organization is well positioned for the future.