My new iPhone 4s arrived finally arrived this past weekend. My oldest son and I opened the package with much anticipation and we immediately dropped what we were doing to configure the device. Among the many new features made part of the 4s is Siri – the speech recognition device which, as Apple advertises, “Understands what you say, knows what you mean, and takes dictation.” So, gone are the days when I have to manually type a query into Google to search for a nearby Sushi restaurant, find directions, or, get this – type to text or email. From now on, all I have to do is talk. So, over the weekend I dictated and had Siri read aloud roughly 100 text messages sent and received. I quickly grew so accustomed to iPhone dictation that I became annoyed when I had to manually type an email on my Mac later that evening. On one hand, I felt more efficient, on the other hand I questioned if I was simply becoming lazy…

Separately, as a CEO, I am constantly striving to predict the future and react to it in advance. Not only with respect to positional real estate strategies, but also in terms of adopting (and creating) new intellectual technologies – which extend mental capabilities and enable us to gain more information faster. So as a fan of applications in this category, I’ve researched and adopted as many CRE and non-CRE of these intellectual technologies as anyone. I use Dragan Dictation to dictate most of my laptop writing, regularly use Loopnet to create space surveys, view comps, and get a read on the market. SVN Advisors are LoopNet power users and many are subscribers to CoStar, including their CoStar Go iPad app, which allows you to take real estate data into the field, where you can even view detailed tenant information, including lease expiration dates without having to charm past building security or receptionists. And all of this has me thinking – are the convenience applications mentioned above changing the way I learn, eroding at certain skill sets, and making me less knowledgeable?

While I can say with reasonable certainty that my IQ remains the same since becoming an early adopter, my ability to easily become immersed in the analysis of raw research data has eroded. In addition, my typing skills aren’t what they used to be and my spelling skills, thanks to auto-correct, have gone from good to average. For those of us in CRE (or any other field for that matter), what role have research products played in the reduction in the amount of market research that we retain? Posed another way, are the CRE practitioners of yesteryear, who had to physically walk building floors, drive every property in their area of focus, conduct live courthouse research, etc., more knowledgeable than we brokers of today?

Are we becoming dependent upon these resources because we’re lazy, or because we need to in order to remain competitive? I’m not making a value judgment here, I’m just asking you to do a gut check – Do you use technology to advance your learning, or to fill a knowledge gap? The distinction between the two is subtle, yet important.

The human brain is malleable. It is capable of being reshaped and while I don’t know the answer to the above questions, I do know that my mind now approaches learning a bit differently. My mind now expects to receive information the way that Loopnet feeds it to me – instantly, and with little effort. I have made it a personal challenge to add to my cognitive skills rather than replace them. This has required me to slow down in the short run at times, but in the long run I feel as if I’m expanding my knowledge base, not shrinking it.

So, I ask – has our “encyclopedic knowledge” of CRE markets and beyond become artificial intelligence? Are Loopnet/Costar and the like making us stupid, or are we better off? I think the answer largely depends on approach and motivation. Thoughts?

These developments, alongside heightened volatility in stock markets, have obviously prompted concerns about the resilience of the commercial real estate recovery. In assessing what all of this means for the investment outlook, our clients are looking to us for leadership and a more balanced, long-term assessment of the future. Along those lines, and while I could certainly fill this post with a summary of the downside risks stemming from recent events which have recently imbued the blogosphere, the following is a different but pragmatic take on the road ahead – the market is currently sensitive to the downside risks, but it is also prone at this juncture to discount positive information. There is some good news, which stands apart from the cacophony of recently sounded panic alarms.

On the economic front, there are indications of continuing resilience. Among them, the details of last Friday’s employment report have been lost in the discussion of the downgrade. That report shows the private sector adding over 150,000 jobs during July, easily beating economists’ projections. And while job growth needs to improve further, it is significant that businesses added a meaningful number of jobs even in the midst of the budget crisis. Corporate profits have rebounded, more than doubling from their recession levels and even surpassing their pre-recession peaks. Those profits will feed hiring once a sense of long-term normalcy returns to the market.

Closer to my world, trends in commercial real estate investment markets suggest a degree of resilience in the face of market disruptions. Some of the key trends to consider are as follows:

Investment Activity Continues to Increase

CRE property sales continued to increase in the second quarter, hitting levels comparable with sales during 2008. Even as the economic news has become more tentative, activity in July remained strong. The large coastal markets remain the most active, but rapid declines in cap rates in these locations are supporting a stronger value proposition in secondary and tertiary markets and for relatively smaller properties. Spillovers into the middle market have been slower in coming, in part because sales depend on the availability of financing, but that piece of the puzzle is also falling into place.

Credit Availability is Improving

The latest data show that delinquency and default rates at the regional and community banks that account for a large share of mid-size and small property lending have come off their peaks. As the stress from legacy loans has become more manageable for many institutions, a large number have actively returned to the market in making new loans. These banks are less active in the major metros, where lending by foreign banks and other lenders is driving outcomes. Instead, they are relatively more active in the markets where large institutional lenders and investors are not. CMBS lending is also contributing to credit availability for mid- and small-tier borrowers. We expect CMBS to be an important contributor to overall credit availability, in spite of recent bumps in the road for issuers.

As for today’s downgrade of Fannie Mae and Freddie Mac, this probably means higher costs of capital for these institutions, in spite of their unique relationship to the government under their conservatorship arrangement. Not receiving much attention over the last 3 days, however, is that strong fundamentals in the apartment sector mean that other sources of credit are eager to finance investment activity. This is clearly in evidence with banks, which Chandan Economics find have increased their net apartment lending in 2011. Keep in mind that residential mortgage rates will generally rise if Fannie and Freddie’s costs go up. That supports apartment fundamentals, supporting non-GSE lenders’ favorable assessments of the sector’s risk profile.

S&P Downgrade a Wake Up Call in Washington

I’m oversimplifying, but the U.S. debt downgrade, in my opinion, wasn’t much about the ratio of public debt to GDP or any other metric for that matter – the downgrade wasn’t rooted in math, or with respect to the U.S.’s ABILITY to service its debt. Rather, the downgrade was about our government’s WILLINGNESS to do so. The chaotic two month’s in Washington and the partisan rancor which transpired was significant, and spoke as much to the likelihood of default as anything.

Perhaps most important, when issued, the S&P downgrade offered very little in the way of new information about the quality of US debt. More than anything, it spoke to the character of the U.S. government. Dare I say that this may trigger a new, more levelheaded approach to governance and policymaking? With many of the pieces of a resilient recovery in place, stronger signals from our elected officials that the rules of business will normalize and that our countries’ challenges will be addressed in a timely and meaningful way, this could be the best legacy of the ratings rebuke. Until then, be on the lookout for continued improvements in credit availability, the debt capital markets, and other positive economic indicators which fuel the resilient commercial real estate marketplace.

I’m not being Pollyanna, but there is some good news to consider of as of late.

Look around the commercial real estate industry and you’ll find that many practitioners have taken shelter and have even found comfort in the weakened market as far as their low transaction and production levels are concerned. Other slightly more optimistic practitioners are working, but were perhaps late to the restructure game, are in “batten down the hatches” mode and are hyper focused on the “now.” With so much pressure to survive current challenges, my fear is that many will take their eye off the real drivers of long-term success: vision, strategy, and innovation.

There is no denying that the commercial real estate industry has struggled over the past 2 years. It is human nature when things are tough to get very tactical – survival mode requires you to live in the moment. That said, winning the battle does you little good if you lose the war.

Dr. Sam Chandon, of Real Capital Analytics, recently spoke at the SVN national conference, and had the following to say about U.S. sales volume: “Just as we found it hard to believe that 2007′s record setting sales volume levels would appreciably decrease, so goes the common belief that 2009′s extraordinary low sales volume levels will appreciably increase any time soon.” In other words, regardless of how you may feel about current market dynamics, the one thing I can assure you of, is that what we’re experiencing today, won’t be what we have to contend with tomorrow.

My challenge to you is to not confuse surviving with thriving. Take the lessons learned over the past two years and apply your new found tough mindedness to forward thinking actions. Begin to reevaluate your operating strategy, consider increasing investment back into your business, start applying strategic focus to preparing for where the market is going, because it will be there faster than you realize. And while it might be less dangerous to fail to capitalize on a market upturn than to over invest in your business too soon, the former failure is just as tragic – capitalizing on emerging markets, timing upturns, developing strategies that deliver results, and earning are why you are in business.

The bottom line is this…It is not possible to prepare for the future without anticipating the future. In fact, the most important job that I have as CEO of SVN is to describe the future, to anticipate what lies ahead. Your job as CEO of your practice, or as CEO of “You,” is to do the same.

If your comfort zone as a leader has been built around the discomfort associated with current market conditions, it is incumbent upon you to break out of this unhealthy mindset. You cannot grow a business by maintaining the status quo, and in fact, any attempt to do so is an exercise in frivolity. For the good of your business, to the benefit of those you serve, and for the betterment of the industry it is time to elevate your vision and begin to look forward.

Background
Let’s start with a fundamental premise:  While you can attempt to be all things to all people, eventually reality will set-in and the ruse will be exposed. You simply cannot be everything to everyone.  In business and in life, it is impracticable to think that one can become a master of a variety of skills without being better at one than the other.  Intellectually, we all understand this – participate in a variety of sports as a child, play a range of company roles as a young executive, expose yourself to a critical mass of activities, and specific skills and talents will emerge.  Once we understand where our true gifts and abilities lie, our chances of success increase as we dedicate a significant amount of time to honing, further developing, and becoming better at one function than all others…it’s just common sense.

To further process the premise, consider the competitive disadvantage that exists for the individual whose exposed talents are not harnessed and given a greater level of attention because they are being diluted by the emphasis on other less valuable skills. The chances that the individual will grow and blossom to become an expert, authority, connoisseur or specialist shrinks in proportion to the amount of general practice that is applied, and it grows in relation to the amount of specialized practice that is carried out. In Malcolm Gladwell’s book Outliers he cites the research of Dr. Anders Ericsson who maintains that it takes approximately 10,000 hours of dedicated practice to acquire expertise regardless of the subject matter attempting to be mastered. You need to ask yourself, are you willing to put in the time?  At a minimum, are you trending in this direction?

The Generalist
So, back to the original question: Are you a commercial real estate generalist or specialist? My experience has been that if you consider yourself to be a generalist, then you are either young in your career, or are likely an individual not willing to invest the time and energy to acquire the expertise necessary to become a specialist. As harsh as it might sound, if you’re a generalist, I sincerely believe you’re on a path to mediocrity or irrelevance.

I never cease to be amazed at the plethora of CRE brokers who purport to be a master of all things to all clients all of the time.  The “widespread” natures of their practices span the horizons of geography, product type, price, and transaction type, their calling cards and marketing campaigns suggest a “one stop shop” for all things commercial real estate. Savvy clients and prospects realize the fundamental flaw with this line of thinking. They want deep levels of competency…they want an expert, not a generalist.

The Specialist
If your market considers you the “go to” advisor for a specific problem or opportunity within your submarket, it’s very likely because they view you to be a specialist in that area. They feel this way because of the investment you made in acquiring encyclopedic knowledge of a specific product, geographic area, or vertical within the commercial real estate industry.

Specialization is and always has been in high demand.  Specialists are the first to be sought when a specific opportunity arises. Their practices are the first to feel the positive effects of economic growth, and the last to experience the pains of a recession.  Their calling cards suggest specific, expert advisory services from a professional who has dedicated their entire practice to a single facet of the business.  As we say at SVN, these advisors are the “brain surgeons” of the business (The point being that a patient doesn’t go to a general practitioner for brain surgery).

In the bullet points that follow, I’ll share with you the reasons why CRE industry specialists outperform and out produce the industry’s generalists, have proven to be amazingly resilient to changing market conditions, and are uniquely positioned to attract business on an ongoing basis:

• Increased Market Share – In terms of controlling the controllable, and focusing on that which you can affect, there isn’t a more productive focus than that which is market share.  There will always be a certain number of transactions in a given marketplace.  How many will you be a part of? Specialization within as narrow a vertical as possible virtually ensures that you will have opportunities to vie for the business that will take place. Examine the market share of any product category or asset class in any market and you’ll find it is the specialist that consistently outpaces the generalist.
• Economic Resiliency – Those who specialize are better equipped to resolve complex real estate issues, and are better suited to handle sophisticated real estate assignments.  In the current market, the overwhelming majority of assignments, whether Landlord/Tenant, or Buy/Sell side, are in the complicated category.  Specialists are earning in this market, generalists have little work and will not be able to make it past initial meetings with banks, special servicers or private clients whose needs far exceed the “broker” whose past experience is limited to matching the high net worth individual with eager seller.
• Business Development - Specialists are sought after – they are magnets who attract business.  The specialist’s phone rings while the generalist is out beating the streets for potential opportunities. They are proactively contacted based not only on past successes, but on having demonstrated subject matter mastery, a trait that all professionals appreciate and recognize as invaluable.
• Market Size - I often hear, “I am in a tertiary market…there aren’t enough transactions in a given year to specialize.”  While I will admit that it becomes difficult to carve out a niche in a small market, and an Advisor in Lubbock, TX, can’t focus on shopping center sales under $10M within a 10 block radius, that same advisor would be best served to limit his focus as narrowly as possible, and to specialize in retail sales and retail leasing, for example.

Conclusion
Bottom line…smart commercial real estate brokers invest the time and resources necessary to become true specialists while others either pretend to be experts, attempt to wax eloquent about why specialization doesn’t matter, or make excuses for why they don’t choose to become a specialist. My strongest recommendation is that you do the right thing for your career, your company and your family by doing whatever it takes to become a specialist in your chosen practice area.

So my question is this – which CRE brokerage business model is better, brick & mortar or franchise/network? The current prevailing strategy associated with M&A transactions is for buyers and investors to disenfranchise independently owned, network member, CRE brokerages and covert them to wholly owned, corporate store entities, which are often dubbed “brick & mortar” brands.  The parties on the buy-side of these “deals” cite greater control and therefore better client service as two of their reasons for buying.

From my perspective, the current thinking outlined above incorrectly implies that “corporate store” CRE brands are better suited to service their clients than franchises and networks.  In today’s post, I will share with you why the CRE, brick & mortar brand model of old is broken, uncreative and non-scalable, while franchises and strong networks foster innovation, creativity, scalability and are positioned to deliver greater results for their clients.

There currently exist some great CRE brokerage brands.  Talented leaders stand atop sharp, seasoned, and knowledgeable industry experts who collectively make-up some well run brick & mortar brokerage brands.  It is the model in which these firms operate that is broken, and not necessarily the firms themselves.

Brick & mortar brands employ a model that operates with high fixed costs in a cyclical and unpredictable commercial real estate market.  Brokers who work for these firms often feel that they are giving too much (in commission split) for what they are receiving in return, the firm’s management team’s struggle to eke out profits in poor and mediocre markets, management’s focus steers toward survivability and earnings vs. client’s interests, and all stakeholders suffer – even the client.  CRE franchise organizations, and well run networks, by contrast, are not boot strapped by high fixed costs, can turn profits with regularity in varying market conditions, and this allows their focus and energy to be heavily weighted towards the client.  Additional benefits afforded to CRE networks and franchises, as compared to brick & mortar brands are as follows:

• Cost Structure & Focus:  Take into consideration the cost of running a national brick & mortar business with multiple leasehold obligations, high labor costs, the expense of creating brand recognition at the local, regional and national level, high IT costs, etc., and one can easily draw the conclusion that a predominant focus on size, breadth and volume is a survivability requirement.  History has shown that this frequently forces some national CRE brands to focus on recapitalization for survival.  Undistracted by high fixed costs, Franchisors and networks are, more often than not, run with inexpensive, variable, scalable, but effective cost structures, and their emphasis can be placed on innovation, creativity, marketing, and delivering results for their clients.
• Client’s Interests: In light of the high fixed costs mentioned above, it becomes cost prohibitive for some brick & mortar modeled brands to encourage fee sharing with competitive brokers.  The result is a preponderance of “double-ended” investment sales transactions, where the focus of a broker is more on finding the buyer independently vs. utilizing the brokerage community to assist – the result is nothing less than an effort on the broker’s part to earn a higher fee.  Franchisees and network members, whose businesses are independently owned and operated, on the other hand, operate with higher margins, can “afford” to put the client’s interests first, engage competitive brokers to shop listings to their buyers, split fees (some as high as 50% as we do at SVN as a matter or policy), generate organized competition, and ultimately a higher price for the client.  The latter approach is clearly in the best interest of the seller or client.
• Innovation: While franchisees and network members are both tied to strict brand standards, and some with codes of ethics, both are usually afforded tremendous, healthy independence with utilizing and developing technology, and processes, testing and identifying key vendors and developing the creative edge that client’s continually demand.

Bottom line – While large brick & motor CRE business models may look dominant at first glance, when you look under the hood, some represent organizations that cannibalize themselves from the inside out. Their constant need for investment capital requires them to be focused on short-term financial objectives which doesn’t afford them the ability to focus on the creation of long-term value through an efficient, client-centric business model. When all the dust settles, it will be the well run franchisors and networks who demonstrate the consistent ability to generate profits, and the ability to scale regardless of the economy that will prove to have the better business model.

It’s never been about the market. Great producers don’t only thrive during robust markets, they thrive regardless of markets. Top performers understand the need to adapt their business practices to help clients in advancing, declining or flat markets. Sub-par performers, on the other hand, often fail to adjust their plans of attack out of stubbornness or lack of knowledge. Regardless, I would submit to you that salespeople adjusting to a changing market is more of a challenge than dealing with the market itself. You cannot control the market, but you can control how you choose to deal with it. Let me point out one thing that should be obvious, but seems to be invisible to many…At no time do clients need more advice and counsel than during down markets. Your clients need you more now than they ever have. Your clients are seeking solutions, but are you providing them? The strongest relationships are built during the toughest of circumstances. The simple truth is that you have the opportunity to earn more trust and engender more confidence by solving tough problems when no one else seems to have the answer.

If you want to have a better year in 2010 than you did in 2009 you need to create a better 2010 for your clients. Your clients want more of everything from you, and it is the advisors that are capable of understanding and can delivering this that will be the most successful in the coming year. I believe 2010 will be a defining year commercial real estate advisors as they are either going to step up, or step away. Advisors perceived to be stepping away will have a difficult time surviving, while those advisors who step up will position themselves as a cut above the rest.

So, will the market get better, will the market get worse, or will the market stay the same? The truth is that it doesn’t matter. What matters is what you’re going to do differently. My challenge to you is this…find ways to grow and develop, not to shrink. I’m not advocating that you don’t seek to eliminate waste or to create sustainability, but wherever possible, reinvest those resources to expand other areas.

Bottom line, even if you were a top performer in 2009, it will take changes in your business plan to continue to grow in 2010. If you weren’t a top performer in 2009, than you business plan for 2010 better incorporate massive changes that are built around growth and not shrinkage.

For some, graduating from high school or college means an end to organized learning.  The days and nights of reading and studying for 5-10 hours become a thing of the past, and entering the rat race of a corporate job, where knowledge is gained by what is fed to you takes center stage.  Young professionals breathe a sigh of relief knowing that mid-terms and finals are long gone, and non-essential learning simply stops.

What I find most interesting about the aforementioned trend is that a student’s fear of receiving a poor grade, disappointing a parent, or failing to graduate is more of a motivation to learn than learning is to advancing one’s career.  Yet, ironically, the stakes are arguably higher the further we progress through our careers.  Consider that investors, executive committees, direct reports, employees, customers and your family are relying on you to consistently improve upon your knowledge base and skill set and you start to realize that while a return to the classroom may not be required, a significant investment in independent learning certainly is.

As the CEO of one of the largest commercial real estate brokerage firms in the world, covering more than 150 markets in 3 countries, and having completed more than 39 billion dollars in sales volume in the last 4 years, I can state that learning and professional development are critical to both our growth and sustainability as an enterprise. Why is our firm growing and debt free, while others are in decline and even failing during this tough market? One of the key reasons is that our learning and development initiatives provide us with a strong competitive advantage. While other brokerage firms are doing business in largely the same fashion as they have for decades, we are innovating and adapting our business practices to embrace current market conditions while planning for changes in future market conditions.

When you engage with one of our advisors you won’t encounter the same old “broker-speak”, but rather you’ll find someone well versed in every aspect of what it takes to successfully serve their client. Notice that I didn’t say ”sell” but I chose the word “serve.” We don’t sell, we add value. We don’t push, we listen and engage. We don’t just try, we provide a certainty of execution not found when working with many of our competitors.

We are successful because we are relevant, because we have learned. We have learned that clients aren’t looking for brokers or hobbyists, they are seeking skilled advisors. They’re not looking for someone who simply puts up signs and sends out post cards. They are looking for someone progressive, who has embraced social media and knows how to engage in meaningful conversations.

At Sperry Van Ness, we don’t sell to close deals…we have learned to meet client needs which culminates in creating value, building relationships, and facilitating transactions that stick. Our advisors have learned, they are relevant, and they provide a certainty of execution. Can you say this about your broker?

The harsh reality is that you won’t be remembered for your production in 2005…You see, it is the 2009 market that will define you professionally. Will you rise to the challenge or succumb to the adversity? Will you find innovative ways to get things done for your clients, or will you just continue to do the same things in the same way you always have? It is the producers that find a way to perform when most are struggling that will be remembered as the go-to brokers in the years ahead…So, the question is: “Can you survive 2009 and 2010, or will you be weeded-out by the exceptionally tough and competitive current market conditions?”

A fundamental macro-economic reality is that when markets cycle, consolidations occur…weak players who once prospered by riding the wave of booming markets are often crushed by more savvy competitors with greater skill sets capable of competing during even the toughest market conditions. Nowhere in the commercial real estate industry is this phenomenon more present than in the brokerage community. I witnessed novice brokers with little experience or competency have seven-figure years during 2005. Many of these same brokers are now out of the business because they didn’t possess the tools, competencies, skill sets, or the sphere of influence to navigate today’s market conditions.

The reality is that top commercial real estate brokers have staying power…they have reached the pinnacle of their profession because they invest in their business, have the best marketing platforms, possess better business and real estate acumen, and have the right connections. These are the power brokers that can close deals when everyone else’s transactions are falling out of bed. Top performers, especially in today’s market are absolutely worth of penny of the commissions they earn…

Bottom line…how will this market define you? How will your clients and prospects remember your contributions to their success in 2009? With only one quarter left in 2009 the jury will be in soon. My advice is simple…go make it happen.

I don’t at all mean to sound callus, but businesses prosper and fail in any economic cycle. It just so happens that when things get really tough, businesses that have weak leadership at the executive level are weeded out much more rapidly. It doesn’t really matter what’s going on with the economy, businesses with sound leadership will find a way to navigate whatever the market throws their way. The economy doesn’t force an enterprise to become bloated, over-leveraged, over allocated or under diversified. The economy doesn’t force companies to cease managing the balance between risk and opportunity, supply and demand, or to stop being innovative.

The simple truth is that companies with sound leadership don’t get caught-up in the irrational exuberance and run-away emotions fueled by overheated markets. Smart leadership understands that markets are cyclical, and they plan and operate accordingly. Smart companies don’t stop innovating just because times are good, they don’t stray from sound fiscal prudence just because capital markets become frothy, and they don’t deviate from their values and vision. The economy isn’t an excuse for success or failure, rather it just is what it is…

Maggiacomo’s Moral: turbulent markets require steady leadership, quick and decisive action, and the ability to do the things that others either don’t or won’t do in order to reamain sustainable.