REmatrix Interview with Forbes J. Rutherford, President of Rutherford International Executive Search Group Inc.

June 5, 2007 – Toronto, Canada

Topic: Globalization – An Overview of Real Estate Markets & Career Opportunities

Forbes Rutherford has provided specialized HR consulting and Executive Search services to both national and international property and investment firms for the past twenty-one years. Having dealt with a broad cross section of the industry’s senior executives and rising stars, Mr. Rutherford is in a unique position to observe the changing macro trends and oncoming challenges facing the Canadian and International real estate community. Additional information on Mr. Rutherford’s background may be viewed at the following web links: www.rutherfordinternational.com or http://www.linkedin.com/in/rutherfordintl

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What would you consider a fundamental consideration for choosing a career in commercial real estate?

Forbes Rutherford
I’ve been involved in real estate executive search since 1986 and prior to this profession, I worked in real estate development in Canada and property investment overseas. I’ve experienced all the market cycles and am intimately aware of the economic machinations associated with oil price shocks, double digit interest rates, “loan to own” commercial lending, tax driven squeezing and pumping of industry sectors, economic recessions and industry specific depressions. Real estate is the first industry sector to be cooled by a country’s monetary policy; and the last to be warmed up by it.

 A fundamental consideration for choosing a career in real estate is to understand its structure and economic role in our lives. In business theoretical terms, commercial real estate is a “complex adaptive system;” meaning it can move to the brink of chaos before new patterns emerge and new forms of organizations take place.

For more than ten years, we have witnessed the rise of domestic oligarchic ownership through the acquisition of institutional investment grade trophy portfolios and assets however new transnational capital pools and service companies are emerging – they’re nimble, unwedded to the asset and focused on their particular niche within the risk/reward investment spectrum.

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What advice do you give to young real estate professionals starting out?

Forbes Rutherford
Stay current, plan for rainy days and be as adaptive as the system you’re entering. Real estate is cyclical and dynamic; and one should be comfortable with the concept of living with uncertainty. A large percentage of our real estate professionals haven’t experienced a full market cycle – but in time they will, as financial gravity does exist. It's part of the natural order of a market economy. The framework for doing business today may not exist tomorrow. To understand this assertion, one only needs to review business history and list the iconic names that no longer exist but for a shell company on a receiver’s shelf.

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What trends have you observed in the globalization of real estate and what will the impact of globalization have on careers?

Forbes Rutherford
It’s not globalization of real estate per se, as all real estate is local; it’s really the globalization of real estate investment, portfolio management, infrastructure investment in emerging markets and the rapid consolidation of global service companies to support these transnational property owners.

It’s not a comprehensive list of observed trends, but some that come to mind are:

  1. Consolidation of Service Providers: Markets in major industrialized nations are by and large “Established Markets.” They cycle through four primary phases over time – stabilization – improvement – positive position and trading. The majority of institutional capital pools typically buy at or just prior to the fourth phase and then have a policy of “holding.” They don’t trade as often, so “deal flow” of institutional grade real estate is constrained. The only motivation to kick it out of the “portfolio nest” is a reallocation of portfolio risk; or the asset has reached life cycle obsolescence and is in need of revaluation and transformation. Without “deal flow” of A, B, and C Class institutional grade investments, you will note that service providers associated with facilitating these transactions are broadening their service scope through international merger and acquisition. They need to find other ways to make money, and clients are demanding “one stop” shopping. CB Richard Ellis acquiring Trammel Crow; or Europe’s DTZ expansion into North America are prime examples of international property service companies consolidating to meet the service needs of global corporations and transnational property owners.
  2. Growth of non-traditional owners such as private equity opportunity funds that are often a combination of high net worth sophisticated investors and institutional capital that have a higher level of managed risk associated with it. I refer to it as institutional “mad money” if you pardon the expression, that’s looking for a little more “juice” and is prepared to back stop entrepreneurial fund management expertise.
  3. Growing interest in emerging markets by more nimble and private capital. The institutions have been front and center for quite some time in foreign markets using foreign intermediaries; private equity is just beginning to flow into emerging markets but not at any significant rate relative to what we see coming into the Continental USA and Canada. The aggregation of our respective immigrant communities that hail from “emerging industrial nations” into private equity pools for off-shore investing strikes me as an opportunity at the local entrepreneurial level that we’re missing. There is an immense opportunity for “revaluation and transformation” of real estate assets in these emerging markets that the larger capital pools would typically avoid.
  4. Exportation of North American expertise - I believe career opportunities in a globalizing real estate community are immense. The world real estate community puts a great deal of value in North American trained real estate and construction expertise. It’s not unusual for major retail centres and office complexes in emerging nations to hire North American expertise to build and manage them. One needs to look no further than Dubai.

Yes! Real estate is local, and one can achieve a promising and lucrative career servicing a local and regional market; however if one wants to work within the global community whether it’s in the rarified air of transnational capital flows, deal structuring or down to the bricks and mortar – the opportunities are for the taking.

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Would you comment on some of the trends or underlying dynamics of the countries with which you’re familiar?

Forbes Rutherford
Let’s refer to some of the countries, whose expatriates’ make up part of the Diaspora of North American’s citizenry and could easily be aggregated into private equity pools aimed at investing in their native land assuming of course that the risk is manageable.

Consider:
India
Prior to 2005 banks and pension fund ownership rights were severely limited, acquisitions were completed as “all cash deals” and primarily by the “end user.”

Post 2005, with changes in government policy on credit and expatriate investment, a highly educated population with a relatively stable democracy has shaken lose its artificial constraints and become a global powerhouse. Major financial players have set up in India, the mortgage market is expanding, and the Middle Class is growing. This has had a direct effect on retail development. Over 300 malls will have been built by 2008. Retail expansion and housing starts is not the underpinning of a healthy economy but rather its measure. India has poured money into energy production and distribution infrastructure to support its growing manufacturing and knowledge based industries. It’s a frenetic market that adheres to business rules that are familiar to North Americans.

China
A politburo with unfettered mercantile tendencies that has little regard for collective safety let alone individual rights to life, liberty and property (real or intellectual.) The political elite are trying to reconcile the consumerist demands of an austere and rapidly growing middle class within the confines of a giant agrarian serfdom that has only begun to rebel against government sanctioned Dickensian themed workhouses.

China sells products and makes strategic off-shore investments in raw commodities with client companies. Its trade imbalance and associated risk with these client countries is akin to “Godzilla” walking a tightrope. It excavates client country’s mineral and energy wealth through ersatz corporations and stamps its political feet if it doesn’t get its way. Free markets and mercantilism can not co-exist and in time will rupture; in the meantime however Western societies will hold their collective noses because…”well Jiminy Cricket, you can’t beat the price!” Wal-Mart will be building 400 stores over 10 years. Commercial and retail structures are built on top of land leased by the government for seventy years. There is nothing “free” about trade activity with China; Western consumers have traded their country’s manufacturing sovereignty by supporting predation.

With seventy year land leases, there are at least three generations of real estate careers, which will provide all manner of real estate and construction services to the Chinese economy. However I can’t help but remember the recent and very public trashing of corporate offices by miner families when they learned about the unnecessary death of over a hundred miners and fathers. No pun intended, but I believe the anger and anguish by these families is simply the Canary in the shaft as it foretells a growing anger within the economically disenfranchised Chinese masses.

As Japan and Saudi Arabia have done and continue to do, China needs to ship money out of the country to offset trade imbalances. Real estate is a convenient place to park capital offshore, but I wouldn’t bet the farm on China’s ability to sustain its growth without serious social and economic upheaval. You can tell I’m not a big fan of communist tainted mercantilism masquerading as a free market capitalist society.

Russia
The concept of “capital preservation” takes on a whole new meaning when hiring a body guard is part of your business expense while traveling there. Doing business requires sophisticated and connected associates that can guide you through the three separate and not necessarily equal economies in Russia. The first two are hidden and weld great influence – the Kremlin and the Military. The third is the Public economy and is what we read about in the daily press. Within this framework, the country is undergoing a clash of competing ideologies - reform versus reactionary; and the people that are outside the hidden economies vacillate between embracing the vagaries of reform and returning to a time of collectivist entitlements.

Czech Republic
The Czech Republic is an interesting contrast to the Russian Republic. They’re introducing the right mechanisms for practicing real estate. They’ve amended corporate structures to include limited liability and joint stock companies. They’ve introduced a variety of debt instruments; and most importantly for landlord security – lease provisions that are enforceable.

Spain
The Spanish worker is one of Europe’s most productive; interest rates are low and the country has become an attractive place to do business. These factors may undergo some friction if the Euro-Government enforces Pan-European rules as a means of protecting old Europe at the expense of new Union members that are rapidly growing within the Euro trading block.

Turkey
It sits on the margins of the European Union looking in wanting to be embraced like a jilted lover. Much like the Czech Republic, it’s introduced westernized debt and mortgage instruments; and provides for limited liability and joint stock companies. There are opportunities to be had in Turkey, for instance – not one enclosed mall exists in Turkey.

Mexico
With
sixty percent of its population under the age of thirty, Mexico will not be slipping into zero population growth anytime soon; unlike Europe, Japan or Canada, which are already there. It has a growing middle class; and is currently suffering a five million unit housing shortage. It’s the third member of NAFTA, one of the world’s largest trading blocks – need I say more about its potential.

Japan
Japan’s international forays into real estate and real estate debt were not kind to it, however it’s working its way through and appears to be moving forward. Its population is aging rapidly and has entered the red zone of zero population growth. This might explain why Japanese REIT capitalization is expected to treble over the near to medium term as investment yield becomes critical to the aging unit holder.

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How should one prepare academically to work in a global real estate economy?

Forbes Rutherford
Depends on the function and industry sector your interested in. If you’re pursuing something down at the bricks and mortar level, an internationally recognized designation such as the Royal Institute of Chartered Surveyors would be advantageous in most countries other than the United States and Canada.

In terms of post secondary education, apart from business, design and engineering, an undergrad that includes macro economics, Twentieth century history, international trade, urban and environmental planning; and courses that promote lateral thinking would be critical.

As for post-graduate studies, once you have a couple of working years under your belt, I tend to favor graduates of real property programs such as Columbia, Carnegie and Wharton. These programs have substantial foreign enrollment with international alumni that are active in helping each other find opportunities.

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