As we approach the annual round of bonuses and promotions, private real estate professionals, like professionals in other sectors, will be considering their options. I wonder how many are thinking about a move into (or back into) real estate investment banking?
Real estate investment banking platforms have traditionally been the training ground for many senior professionals operating in the real estate investment sector. Some folks even regarded them as a ‘rite of passage’. You only have to look at the biographies of many well-known CEOs, CFOs, and senior advisors in the sector, to see stints at Morgan Stanley, Credit Suisse, JP Morgan or UBS, to name a few.
Yet today, the real estate investment banking advisory market faces a significant shortage in skilled professionals able to meet the current hiring demand.
Whilst investments banks have always lost their bankers to other areas of the market, the size of the talent pool has traditionally been large enough to sustain the fallout. However, today, it is a different story. The current talent pool has plummeted to an all-time low, a fraction of the size it was during the last cycle.
The effects of the global financial crisis and the redundancy programs that followed have certainly played their part in reducing this pool. But it would be incorrect to blame the GFC as the sole contributor to today’s shortage of credible and experienced real estate investment banking advisory professionals.
It would be more appropriate to say there have been several factors which have converged to cause a brain-drain in the sector.
A percentage of bankers have, and will, always be drawn to private equity. They are traditionally attracted to the long-term investment culture and the associated compensation that come with it.
However, since 2009, I have witnessed a wave of advisory professionals leaving traditional investment banks to join new and not-so-new (some of the latter on their second or third attempt to gain meaningful market share) real estate advisory platforms. Indeed, fast-forward to present day and the real estate advisory sector has a totally different landscape to the last cycle.
No longer do the global integrated banks (plus, Rothschild and Lazard) dominate the advisory scene. Today you will frequently hear names like Eastdil, E&Y, Jefferies and JLL spoken of in relation to the highest profile transactions in the sector. In addition, competition has recently increased further with the emergence of advisory boutiques established by experienced bankers. As a result, the market now has a plethora of platforms eager to offer comparable services. And so increased competition in the advisory sector has played its part in influencing decisions by real estate investment bankers as and when they come to make career moves.
Add to that factor, widespread dilution of the output from the sector’s highest profile individuals as they take on additional non-advisory roles. Their moves away from full-time executive advisory positions dilutes an already small talent pool even further.
So there has been a ‘double whammy’; not only did the talent pool of experienced real estate bankers decrease but the firms offering that service to clients increased. As a result, the two elements have driven a scarcity in experienced and credible bankers working for the traditional investment banks.
A third element influencing the available talent pool in real estate investment banking is an issue affecting the wider financial services industry: the continued and increased regulatory environment. Like many of their investment banking colleagues, a portion of real estate investment bankers have been re-evaluating their career aspirations in the sector on the back of more restrictive regulation. Not a large percentage of the total, but I think it is nevertheless sizeable enough to have an effect on the already dwindling pool.
What is the solution to this attrition? Unfortunately, the answer is anything but simple and I think the scarcity of senior real estate investment banking and advisory professionals will continue.
Of course, that is good news for those real estate investment bankers still active as they are likely to be in demand for their services, particularly at this point in the market cycle when the ‘low-hanging fruit’ has been plucked and the best deals carry with them more than a modicum of complexity.
Even if advisory firms are able to lure private equity and corporate professionals with investment banking backgrounds back into the industry, those individuals would find it difficult to compete with those who stuck it out and have greater and, importantly, continual experience to show for it.
Nonetheless, to those individuals keen for a career change and fancy joining a sector with a big need and depleted competition, I suspect they will find several suitors keen to engage in conversation.