P.E.S.T./Employment Q4/21 Forecast

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Post-Covid P.E.S.T Survey Results – Ending Q4/21

Transcript of a video presentation by Forbes Rutherford, President of Rutherford International Executive Search Group Inc. & the NEXTalent Market Job Board. Transcript requires the accompanying spreadsheet. This is available to Q4/2021 survey respondents and respondents participating in our follow-up forecast for the period ending Q4/2023.

Introduction

Greetings, my name is Forbes Rutherford of Rutherford International. We offer executive search and career advisory services to high performing talent within all the critical sectors of the commercial and multi-family real estate industry. With advances in AI predictive analytics, we can accurately identify high potential and high performing talent at all levels of the organization with 85% accuracy. The granularity of our meta-analysis for predicting performance potential exceeds all known global assessment tools other than one other competitor. We are so certain of our predictive analytics that clients of Rutherford’s Search and NEXTalent Placement services don’t pay the completed portion of our placement fees for six to twelve months. We align our financial interests with client outcomes.

The granularity of our analytics helps clients develop succession strategies, build project teams, identify leadership potential, assess employees’ Work-from-Home abilities and map executive gaps to career development.

Forbes J. Rutherford

Over the years, Rutherford International has applied the “Wisdom of the Commons” approach to predicting future events. We do this by asking senior executives and thought leaders to rank the political, economic, social, and technological threats facing Canada’s real estate industry. It’s argued that the aggregate predictions using this Delphi method are more reliable than the output of individual forecasters.

Methodology

We asked 204 senior executives and thought leaders to predict what they thought would be the most critical Post-COVID19 knock-on effects in 2020/21, including the expected impact on their organization’s resource plans. We gave respondents 65 possible threat scenarios to consider. This presentation shares those results.

Think in terms of radar scope or concentric circles.

  1. Red is Very Likely, or hot top of mind, the center of the scope, over the target.
  2. Amber is Likely; it’s a medium concern but off-center to the scope.
  3. Green is Somewhat Likely. These threats sit on the outer edge of the scope and should be perceived as possible emerging trend, particularly if a high number of respondents highlighted it as an emerging threat.

A. Respondent Profile – By Function

  • CEO/BofD – 33.33%
  • First Tier Executive – 44.44%
  • Second Tier Executive – 20.25%
  • Industry Panellist – three or more times per annum – 77.78%
  • Post-Secondary Lecturer/Industry Conference Panellist – National/Regional – 88%

B. Respondent Profile – Sector

  • Lender – 9.23%
  • Integrated Property Services – 16.06%
  • REITS – 8.43%
  • REOC/Merchant Builder – 19.28%
  • Pension Fund – 9.64%
  • Brokers – 10.00%
  • Investment Advisory – 21.29%
  • Retailer – Anchor & 100+ Store Network – 4.80%
  • Other – 1.20%

C. Respondent Profile – Geographical Business Scope

  • International – 32.02%
  • USA – 18.23%
  • National – 35.47%
  • Central Canada – 37.44%
  • Prairies/Pacific – 20.20%
  • Atlantic – 5.42%

INDUSTRY THREATS

Red or Very Likely

A possible COVID19 second wave was top of mind for everybody during the data collection period. This was followed by tenant bankruptcy, deficit rising provincially, tenant insolvency, and the impact of tenants and employees productivity while working from home. Following this list was tenant workplace design, asset repurposing, a rising deficit at the municipal level, vaccine delays, municipal tax increases followed by concern over the national economy. Top of Mind trending would be vaccine access, effective remote workforce technology, particularly real estate tech. An increase in federal regulations was also a trending concern.

Heat Map: RED –  Opinions on Outcomes & Top-of-Mind Threats

  1. COVID-19/ Second Wave – 99.49%
  2. Tenant Bankruptcy – 98.45%
  3. Deficit Rising – Provincial – 98.38%
  4. Tenant Insolvency – 97.40%
  5. Remote Work – WFH – 97.38%
  6. Tenant Workplace Design/Re-purposing – 96.81%
  7. Deficit Rising – Municipal – 96.67%
  8. COVID-19 Vaccine Delays – 96.27%
  9. Tax Increases – Municipal Property – 95.66%
  10. Canada’s National Economy – 95.48%

Amber or Likely

Threats eleven through twenty are in the Amber category. Ninety-four per cent of respondents chose the global economy as eleventh, followed by tax increases at a federal level, rising corporate deficits, national economic policy, and US economic policy. These concerns speak specifically to whether the government intends to bootstrap the industry post-COVID and if the recovery would be a U-shaped recovery. Personal tax increase at the provincial level and challenges of tenant renewal came next. Again, some of these are duplicates, but it speaks to the trending elements of importance, such as federal personal tax increases.

Heat Map: Amber – Opinions on Outcomes & Top-of-Mind Threats

  1. Global Economy – 95.40%
  2. Tax Increases – Federal/Corporate – 94.97%
  3. Deficit Rising – Federal – 94.87%
  4. Canada’s Economic Policy – 94.28%
  5. “U”-Shaped Recovery – 93.34%
  6. Tax Increase – Provincial/Personal – 92.48%
  7. Tenant Renewal – 92.39%
  8. Tax Increase – Federal/Personal – 91.58%
  9. CRE Tech Competitiveness – 91.37%
  10. Tax Increase – Provincial/Corporate – 91.35%

Green or Somewhat Likely

However, it is the green rankings that are most revealing. In the context of a radar scope, the Green threats are on the outer edge of the scope. We call them ghosts in the machine or possible trends waiting to happen in Q3 & Q4/21, and not to be ignored. The top emerging threat begins with constricted structured debt financing, a currency devaluation, market recognition of a tech bubble, constricted project financing, workforce employment equity and rising 10-year treasury rates. Respondents were fearful of a third wave ( which is now a reality), and a possible geopolitical event in Europe leading to the disruption of the European Union.

Additional emerging threats would be a US-China trade war, some form of a global credit event, whether sovereign or corporate, increased provincial regulations, and rising transaction fees at the provincial level such as land transfer tax.

Heat Map – GREEN – Outliers & Emergent Threats 

  1. COVID-19 – Third Wave – 86.56%
  2. USA/China Trade War – 83.24%
  3. Project Financing Constricted – 82.95%
  4. Structured Debt Financing Constricted – 81.87%
  5. CAP Rates Rising – 79.78%
  6. Credit Event – Corporate/Sovereign – 77.98%
  7. Ten Year Treasuries – 77.57%
  8. Tech Bubble – 74.29%
  9. Currency Devaluation – 64.49%
  10. Black Swan – Geo-political – 67.25%

Political Threats

Even though most survey respondents were from Central Canada, 38.5% of respondents think the Western (WEXIT) separation movement is an emerging threat to the country. Furthermore, an even higher percentage, 60.65%, believe the potential of domestic unrest should be part of Canada’s threat calculus.

The top political threats begin with the second wave of COVID. Tax increases are top of mind followed by increased transaction fees. A rising deficit beginning with the provinces, then federal, and followed by municipal governments precede concerns for the national economy. In terms an economic recovery, the direction is a toss-up between a K shaped or U shaped. A V-shaped recovery is all but dismissed.

Economic Threats

Insofar as the rapid interest rate increases, the threat is deemed relatively low, which I find perplexing, given the fact that respondents are equally concerned about the rise in the deficit. Considering a higher percentage of respondents believe we’re facing a currency devaluation, one might conclude respondents don’t expect the Bank of Canada to defend the Canadian dollar with a rate increase.

Social & Technological Threats

There’s no getting around it. The Canadian Real Estate industry is preparing for asset repositioning and revaluing of assets. Financial and operational asset management, particularly property management, are top of mind concerns for medium and large enterprises. The focus on these asset management factors is evident by the expected increase in CRE-TECH expenditures which are designed to improve internal efficiencies and external customer-facing experiences. The watchword for the CRE industry is “automation” as a path to improving profits.

Corporate Resource Planning – Ending Q4/21

How will industry threat concerns impact organizational resource plans? Where will the jobs be? The better question, however, is, where is the talent? Seventy-six per cent of the main survey respondents ranked the lack of talent quality and talent availability as a threat to the industry. Of this group, 130 respondents claimed to have a direct impact on or influence in hiring for their organizations.

How companies plan to resource their firms in 2021 often reflects their economic expectations for the coming year. However, you may be surprised at the double-digit projections. Some of the hirings are replacing Boomer Generation and early GEN-X retirements. Last year’s bonuses are collected, leaving the Spring open to retirements. Over the last five, six years, we have seen spikes in retirement from April through June. Unlike in 2008, Boomers have protected their retirement funds. They sniff a recession and have no interest in riding out another. The majority have already retired to the cottage.

What Can We Expect?

Don’t Mistake Confidence for Competence

Forbes J. Rutherford

Functional Ebb & Flow – Ending 2021

The most active functions are as follows, and each has a story to tell:

We see a 26.5% increase in job growth with about a 3.9% churn in information systems. Again, this reflects the move to workplace efficiency and profit improvements through automation.

There are two types of asset managers, financial and operational. Both roles, including Property Management, are ascendant. The emphasis of these roles in 1989/90, 2000 and 2008 by industry employers was a leading predictor of a market correction.

Investor management relations will increase. Canada’s CRE is an industry of Public Companies, capital funds and General Partnership’s, all requiring investor relations. In a recession, no retail investor is sophisticated. They will all need handholding.

Investment, acquisition, disposition, analysis, and research positions are in play. There will be churn, but there will be net new growth opportunities in 2021 as capital shifts from development to acquisition. I believe single assets and portfolios will be in play. The primary acquirers are capital pools insulated from rising capital costs or firms, able to source capital from emerging international markets, seeking to denominate assets in G7 countries.

The repurposing of developed assets to their highest and best use will be necessary. We have seen an increase in both front and back-ended roles over the past years. However, in 2021, I think it will be less about coming out of the ground and more about redeveloping from the pedestal, focusing on interior fit-outs. We predict the churn in development roles will consist of underperforming development officers pushed one position above their competence getting purged. Already, the purging of the underperforming talent has begun and will continue through 2021.

The role of Customer Experience Support goes hand in hand with hiring increases in Information systems.

Project marketing and brand management analytics on social media roles are increasing as multi-family developers begin to understand project marketing means more than just digitizing their site sales offices. The process is far more sophisticated than that, reaching right back to the initial branding of project design. This role is increasing in demand. For instance, less than ten executives in the Toronto GTA use social media to develop trend analysis for competitive project design and management.

Concerning capital and allocation. How does a capital pool balance its investment portfolio in a world of tenant bankruptcy, insolvency, and flexible lease renewals? Understanding corporate performance relative to the tenant’s industry mean is a new form of expertise when analyzing portfolio risk.

 ESG is not going away. So, expect regulators to be as officious as ever when it comes to checking the necessary boxes on RFP’s.

Construction – We’re forecasting a single-digit in real employment growth and double-digit churn with inflationary spikes in material costs and constricted access to capital. The first half of the year will be about project completion, and the latter half will parallel development activity.

Finance and accounting – Our forecast for this category suggests single-digit new job growth and double-digit churn. Double-digit churn in accounting departments is not uncommon. The burden of this annual churn must be an onerous impact on the bottom line and overall efficiency. It would take little effort to fix the problem, however, the industry has failed to hire above-average talent.

Leasing and sales. We expect both functions to experience single-digit growth of new hires but double-digit churn of existing jobs. As a result, this functional category is a revolving door of talent weakness, with available talent migrating to the same position but a different business card. A harsh condemnation and not likely to win us any fans, but the truth of the matter is, as we learned during Alberta’s NEP and Central Canada’s 1990-94 real estate depression, a different leasing executive and broker is required to fill the excessive vacancy.

In these roles, there is a tendency to apply confirmation bias by mistaking confidence for competence when hiring. Ten years ago, my firm hired a behavioural scientist to analyze the success traits of 75 retail leasing executives and senior managers across the country. With this research, we established four performance benchmarks, VP Retail Leasing, Senior Retail Leasing (Open-air and Closed malls), Development/Greenfield Leasing Representative/Leasing broker.

At the time, we found fifty per cent of the Vice President’s scored high for development/greenfield leasing, and all were above the age of 50. In addition, a small percentage of the Senior Leasing Managers assessed had the behavioural profile to high-perform in Greenfield leasing.

As for open-air or enclosed malls, contrary to industry bias, we found very little difference in the behavioural profile for the two positions. Success was measured more by the location of the assets available for lease and industry relationships. All subject to change.

Improving the leasing department’s output in 2022. First, both retail and office assets will be undergoing some form of repositioning strategy requiring above average creative sales competency. However, many leasing representatives are more skilled at leasing stabilized assets but do not possess the behavioural profile necessary for repositioning the tenant mix in an entire asset. The most efficient leasing representative one could hire for either asset category is a greenfield leasing manager or broker, who can fill space creatively and generate qualified tenant leads by correctly interpreting urban-economic and industry intelligence.

Not a lot of growth in legal roles. These positions will have slightly above average churn. This seems surprising given the expectation for tenant bankruptcy, insolvency, and tough renewal negotiations. We do foresee growth in the larger law firm’s real estate and receivership departments.

Administrative/operations which should not be mistaken with building operations should anticipate double-digit decline as companies foster improvements through investments in automation.

Conclusion…Some thoughts on a Hybrid & Remote Workforce

This brings this portion of the presentation to a close. Our Q4/2023 P.E.S.T. & Employment survey will delve more deeply into the Hybrid Employee phenomenon. However, our early thoughts on the subject are as follows:

  1. 51.6% of respondents struggle to accurately predict an employee’s potential to work productivity in a remote environment or geographically distributed organization,
  2. 59.2% of respondents believe the long-term ramifications of employee expectations for a remote workstyle will cause employers to actively embrace the idea of a distributed workforce, which includes near and offshoring of talent.
  3. The probable outcome of this COVID19 2020/21 workforce experiment will result in the selective hiring of skills on-demand, independent consulting specialists for one day to six months project-specific contracts. In addition, flex workers from flexible geographies with lower billable costs will become commonplace.

Contact me if you would like to address anything specific about the work from the home topic, as I will be publishing a series of articles on the subject over the coming months. Again, I want to thank you for your time, and if I can be of any assistance to you or your organization, please do not hesitate to call me at 416 250 6300 extension 101 or email me at forbes@rutherfordinternational.com

RUTHERFORD INTERNATIONAL

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CA: (416) 250-6300 Ext. 101 | USA: (855) 256-5778 | UK: +44 (1225) 976499

E. forbes@rutherfordinternational.com

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