In the July/August issue of PERE, there is a special section looking at the recruiting, compensation and teambuilding practices of the private equity real estate industry. Of particular note in that section is a guest column on the industry’s recruiting practices through the eyes of a recent MBA graduate – a view that is likely to be a revelation to some firms that think they have recruitment figured out.
In the column, Will Renner, a 2014 MBA graduate of the University of North Carolina’s Kenan-Flagler Business School, pointed out that “the real estate hiring process appears unorganized, unpredictable and unattractive” to new recruits. That is because much of the industry lacks a professional recruitment process, unlike the investment banks and consulting firms that take the time to visit college campuses each fall.
Meanwhile, the industry’s standby method for new talent acquisition– poaching junior analysts from investment banks – is becoming harder to do as finance houses crack down on the practice and recruits become disillusioned with the frantic pace. Indeed, the New York Times flagged the issue in its DealBook blog in early July, following up on a more in-depth piece in its Sunday Business section the weekend before.
One commentator on the Times’ Sunday article suggested that private equity firms do their own recruiting on college campuses, bypassing the banks altogether. “The time has come for private equity firms to realize they are too big individually and in aggregate to slipstream off the shoulders of investment banks anymore,” the commentator, a blogger named the Epicurean Dealmaker, wrote.
Indeed, some private equity and real estate firms already are moving in that direction. For example, DealBook cited The Carlyle Group and Kohlberg Kravis Roberts, which hired college graduates for the first time this year. Renner, meanwhile, pointed to such firms as Hines and Harrison Street Capital, which created an undergraduate intern program that seeds its hiring pool.
Still, the biggest challenge to campus recruiting for private equity and real estate firms is training new hires on the basics of the business, a skill at which investment banks have become adept. For private equity firms, however, it is undertaking that involves “time, money and effort they are normally loathe to spend,” the Epicurean Dealmaker wrote.
The university solution
Luckily for private equity real estate firms, a growing number of US universities are shouldering the burden. Schools like the University of Pennsylvania, Columbia University, the University of North Carolina, the University of Southern California and the University of Texas at Austin are offering courses in real estate finance, capital markets and development to graduate students and spending significant time crafting teamwork and leadership skills. Although a number of private real estate firms visit such campuses to present to students and conduct interviews, there is room for many more, particularly at schools with lesser-known or less established real estate programs.
Regardless if there are immediate jobs available, real estate firms can benefit by forming an on-campus presence, which offers the opportunity to market to a large group of young professionals during a single meeting. That scale is far more attractive than a series of one-on-one meetings or interviews with candidates. And when there is a position to fill, campus recruitment efforts provide a selection of thoroughly scouted candidates from which choose.
That said, getting a true count of the number of graduate degree programs currently offered with a focus on real estate is a bit tricky. University officials generally agree there are about 40 to 45 specialized Masters of Science in Real Estate (MSRE) programs currently available, many offered through a university’s architecture school. Interestingly, that total has nearly doubled from 20 to 25 programs available as recently as the early 2000s.
There is less consensus, however, on the number of Masters of Business Administration (MBA) programs that offer a dedicated real estate concentration or ‘major’. Indeed, the current estimate for real estate MBA programs varies from at least a number equal to the number of MSRE programs to as much as twice as many. The best estimate puts the number of real estate MBA programs somewhere between that, or roughly 60.
For a representative listing of real estate MBA/MSRE programs and what they offer, click here.
The proliferation of collegiate real estate
According to Lynne Sagalyn, director of Columbia University’s real estate MBA program, real estate first became an area of serious study in the mid-1980s, when the industry began to develop its institutional investment management presence. “Those with foresight saw the need to train the future leaders of the industry,” she says.
That said, it was not easy getting real estate accepted at the graduate level. Many business schools decided to follow Harvard University’s model of creating generalists, which went against the traditional discipline-based model – and still does, Sagalyn notes. Meanwhile, public universities historically tied their graduate real estate offerings to the brokerage and/or development community, which partly funded such programs, and consequently are quite different in focus than the investment management-focused programs of most business schools.
Now, after a period in which such programs have remained relatively static, the number of graduate-level real estate offerings is on the rise once again. Albert Saiz, director of the Center for Real Estate at the Massachusetts Institute of Technology (MIT), says the recent increase has to do with the fact that the wider world is beginning to realize the importance of real estate as an asset class. Specifically, there is a greater recognition of how large of a market real estate is and its importance to the function of the global financial system, he adds.
According to David Hartzell, director of the real estate MBA program at the University of North Carolina’s Kenan-Flagler Business School, there are a few reasons for the recent proliferation of graduate real estate programs. First, there has been an increase in professionalization throughout the real estate industry, which has led to increased demand for trained students. This is evident in the number of people returning to school as well as the number of graduates hired by the industry, he says.
Second, the need for investment management skills has been expanding across a wider breadth of opportunities. This includes not only fund managers but insurance companies, banks and other financial services entities, Hartzell notes.
Lastly, there is the current run-up in the cycle. “An increasing market equals an increase in employment,” Hartzell says. Private equity real estate firms in particular want to “get someone who can hit the ground running and jump higher,” he adds.
Gaining a competitive advantage
With the number of dedicated graduate-level real estate programs expanding and growing, there is a greater need than ever to ensure the quality of such programs. That means a program that puts emphasis on problem solving, qualitative and quantitative analysis, communication skills and negotiation skills.
Sagalyn believes that a real estate-focused MBA absolutely gives students a leg up over traditional MBA students. “Just as it is easier to go into the investment management business with an MBA, students with a real estate focus to their MBA studies are likely to have a faster start to a successful career in the [private equity real estate] industry,” she says.
Indeed, dedicated graduate-level real estate programs have become a useful source of talent for private equity real estate firms, which use such programs as a sort of screen so they don’t need to worry about training new hires in the basics. “Private equity firms are not like the big banks,” Sagalyn says. “They don’t have the infrastructure to train new hires and therefore are depending upon people with banking experience to now have specialized training.”
Furthermore, given the time and effort it takes to recruit effectively, private equity real estate firms are seeking only top talent. Because all of that top talent isn’t necessarily located only at the top schools, every university with a graduate real estate program will want to forge the best reputation possible to attract those private equity real estate firms that actually recruit from colleges, particularly since a number of them only do so at the three to four business schools with the strongest real estate programs.
Hartzell believes that UNC’s dedicated real estate program has been an advantage to students looking to enter the private equity real estate world. “A number of private equity firms come to the school to recruit, and we have had success with the real estate concentration in the investment management field as well,” he says. “Our experience has been that the number of managers coming to the school has increased over the last 20 years and the number of real estate MBA graduates hired has increased as well.”
UNC seeks to differentiate its real estate offering by coupling its strong academic foundation with real-world experience. Specifically, the program offers students the opportunity to manage real investment funds and make actual investments. “It is a tremendous experience in running funds and across all disciplines of the business,” Hartzell adds.
To differentiate its real estate program, MIT takes a hybrid approach, offering a Masters in Real Estate Development (MRED) that includes a number of finance and economic courses not typical of such a degree. “Most schools approach development as a business proposition rather than focusing on the product itself,” Saiz says. “We take into account all the stages and disciplines involved in the entire value-add process.”
Despite offering a program that is strong in urban economics, zoning/land use and environmental issues, some 60 percent to 70 percent of MIT’s real estate graduates go to the portfolio management or investment side of the business, underlining the flexibility of its hybrid approach. “The industry’s requirements are more sophisticated than 20 years ago,” Saiz says. “No one focuses on just one aspect of the business anymore.”
Despite the evidence that the MSRE and real estate MBA programs are becoming more similar, most agree that the two competing offerings still are fundamentally different. Both may offer a student the same technical content, but some argue that only the MBA programs offer the broad set of skills necessary to create the real estate business leaders of tomorrow. Others, particular those who head MSRE programs, would disagree.
In terms of current growth trends, MSRE programs have enjoyed a rise in popularity, partly because such programs have become more accessible to undergraduate students. The general trend for MBA programs, meanwhile, has been down due to the high cost of such programs.
According to Sonia Savoulian, managing director of the Lusk Center at the University of Southern California, real estate students typically seek to enter either the development/operator world, which favor MSRE programs, or the finance/investment world, which favors MBA offerings. The ratio of which program is in favor varies, depending upon which stage of the real estate cycle the market currently is in.
For example, coming out of the downturn, more students favored MBA programs, but MSRE offerings are coming back in favor now as US property markets stabilize. As a result, Savoulian predicts that there will be an even greater shift towards MSRE programs over the next decade.