As home to pioneers like Trammell Crow Co., Lincoln Property Co., The Staubach Co., and others, Dallas helped create the commercial real estate industry. From those early days, the business has grown to become an economic force—a $15 trillion business that’s as big as the U.S. stock market. It has also grown in reach and sophistication. Much of the evolution has occurred in the past two decades.
A wave of mega-mergers has created a triumvirate of global commercial real estate power players: CBRE, JLL, and Cushman & Wakefield, which is months away from finalizing its merger with DTZ. Throughout it all, Dallas has continued to play a leadership role. Some of the world’s most influential industry executives are based here.
We recently sat down with key players from “the big three” to find out where the industry is headed. The discussion was moderated by Linda McMahon, president of The Real Estate Council.
Let’s begin by getting a summary of your roles within your organizations.
JOHN GATES: I’m CEO, Markets, for the Americas, which is our non-corporate solutions business. So I’m responsible for property and project management, all capital markets activities, and all leasing activities.
And how many people do you have working for you?
GATES: Many. In all, it’s about 8,000.
STEVE EVERBACH: I used to be one of them.
He’s OK to work with?
EVERBACH: Yeah, he’s OK.
Good to hear. Tell us about your current role at Cushman & Wakefield, Steve.
EVERBACH: I’m responsible for the Dallas-Fort Worth market, which includes all of our business lines. We have about 300 employees locally. I’m also responsible for our U.S. Agency Leasing group, which consists of approximately 600 professionals, including all of our offices and all the Alliance offices.
Great. Mike?
MIKE LAFITTE: I serve as the global chief operating officer for CBRE. My responsibilities include all product lines of our service business, globally, and then I support and oversee the geographies as well.
GATES: So that’s got to be, like, 60,000 people.
LAFITTE: We’ve got 50,000 employees today, in that group, and then we are working on an acquisition that we hope to close in the next couple of months that will take it to 70,000, the JCI and GWS business.
How do you strive to stand out when appealing to talent and clients and building a multinational team?
LAFITTE: Our approach has been to build a global company and global platform, much like the other two firms that are represented here today. We operate in a very respectful competitive world. We’re a service provider. When you think about our assets, it’s people. Our platform is our market intelligence, and it’s all the tools that we bring to bear to our people to deliver services for our clients. For us it’s about training, attracting and keeping great people, but then also investing deeply into our platform. At the end of the day, you’re serving the client. I think we’re all very client-centric firms. We’re already global, so we’ve got a great footprint to start with, so it’s just continuing to make investments to try to become a world-class company. Our industry continues to grow up. We all kind of started in a corner of the business.
GATES: Whether it’s our folks working hard and trying to out-compete Steve’s or Mike’s, it’s unique solutions at the point of sale. And in our industry, it’s the breadth of the things we are doing. Our client base falls into two big categories: investors and occupiers. I’ve heard Mike say this, and I totally agree. You would think they’re not even in the same sphere or industry if you get in a room and talk to them, because they’re very different. They all have unique things they’re trying to accomplish. They have problems they’re trying to solve. They have risks they’re trying to mitigate. They have opportunities they would like to find or would capitalize. We have to understand them well enough to show up and say, “We’ve got an idea that seems unique.” Or we have a platform and systems and technology and processes and expertise and experience that sort of nail it for them. In some respects, it’s different almost every time. That being said, every investor client we have right now says they need to put money out. “Bring me something.” One hundred percent of them are saying that. It’s a common element, but they’re looking for different things. We have to work very hard to understand our clients and what they’re trying to achieve. We then have to go do the work to come back and say, “This is something unique that might work for you.” That’s when we tend to get ideas.
At the same time, there’s a dramatic change happening in American business. In 2010, half the U.S. workforce was comprised of baby boomers. By 2020, that will be millennials. It skips a generation. We collectively have to get better at attracting those young people and then get them up to speed pretty quickly. Historically, the industry is sort of known for not having the best training and mentoring systems in place. So it’s working hard, but not making sure they’re getting better at it, too. We’re going to have to double and triple down on the number of young folks that come into our industry over the next 10 years or so.
Do you find millennials different in the U.S. than they are in other countries?
GATES: Well, culturally you have to be prepared for at least some subtle differences in almost every different country in the world. But there are some very common elements too. There’s a wonderful sort of optimism and there’s a purity about their view of the world. They do want to have an impact, and they want to understand why this is good for the economy and why this is good for society and why it has an element that makes them feel like they’re almost part of a cause. Companies that are successful today kind of create that element. There are subsets that are highly motivated by some of the things we were when we were younger too.
EVERBACH: To John’s point, we recently put out a white paper on millennials, and there were a couple of stats that astounded me. Approximately 40 percent of the workforce today is millennials, and in 10 years, it’s going to be 75 percent. All of us sitting at this table are baby boomers. Our motivations are different. Millennials are highly collaborative. They’re motivated by self-development. They look for new opportunities. They’re competitive, but they’re competitive in a different way than we are. They’re competitive with themselves. They do a benchmark of where they were a year or two ago. Their self-performance is important. At the same time, as I mentioned, they are highly collaborative. And I think you’re seeing that pervasive throughout not just our industry, but all the industries and all the companies we serve. In order to recruit the talent, we have to understand it.
I’ve known these gentlemen for years and years. We’re very friendly, but it is a war for talent. And each of our companies are different, and that usually is driven by the culture of the company. Platforms are similar, but we’ve got to offer a unique and broad opportunity. We have to have a platform of services and provide those individuals that are looking at Cushman & Wakefield with a career path that’s attractive to them. If we don’t do that, we can’t recruit the best people. And if we don’t recruit the best people, we won’t be able to come up with creative, value-added solutions for clients, and we’ll lose the overall war. So we’re very focused on talent right now as a company.
GATES: The trends have changed the nature of a couple of asset classes too. Offi ce space is different in some respects than it used to be. I recently toured some WeWork space. [WeWork Cos. Inc. is a New York-based provider of shared workspace, community, and services for entrepreneurs, freelancers, startups and small businesses.] Just the nature of the space and how they use it is amazing. Multifamily has changed a lot, too. Thousands and thousands of units are 700-, 800-, or 900-square-foot open lofts. We didn’t used to build those, except in super expensive markets.
LAFITTE: Another thing I think is unique to real estate—it’s certainly become a real trend in this industry—and that’s this incredible, intense specialization in everything that you do. Whether it’s office or data centers or labor analytics or workplace solutions or sustainability— you find all these niche practices and an intense focus on expertise. And that’s true across capital markets, that’s true across leasing, that’s true across corporate solutions. The days of being a generalist are gone.
And those specializations are a lot narrower now.
GATES: Well, the good news about it, though, is it provides a much deeper level of expertise than when we were younger.
LAFITTE: To the earlier point about knowing your customer, the language of the investor- client and the language of the occupier-client are very different. What drives them—their metrics, how they think about using space with real estate—is completely different. You’ve got investor clients that are looking at a way to make money, and occupiers, it’s a means to an end, in terms of establishing their corporate objectives. So if you’re Google, Apple, Microso or Bank of America—whoever you are—real estate is just a different thing. That specialization helps us all drive these strategies around the world and ultimately serve these clients a lot better.
But the investor is worried about profits, and it costs a lot more to build out those spaces that are amenity-rich and create a different kind of environment than what we’re traditionally used to. So how do you match that investor return perspective with the cost of delivering the product?
GATES: It depends on what product you’re talking about. Office generally is where we gravitate. That’s where we make the most money, but it’s counter-balanced a little bit by increasing densities. The cost per employee to the occupier at the end of the day is not any higher. Maybe it’s even lower in some respects. In fact, we know it’s lower in a lot of respects, so the returns are there on the investor side right now. The fundamentals look healthy.
Commercial real estate is a $15 trillion industry. It’s as big as the entire U.S. stock market. But it seems like it doesn’t get the respect it deserves. How can we change that perspective? How do we get recognition for what we contribute to the bottom line of the global economy?
LAFITTE: From the investment community side, real estate as an asset class is getting tremendous interest and more respect. The returns in real estate over the last 10 years compare well to fixed income and equity. So it has done its job. You’re seeing [investors] from all around the world, especially in Asia, increase their allocations to real estate. The appetite is huge for commercial real estate, because it has been a great asset.
It’s funny. When you travel around the world, if you go to Australia, you go to Hong Kong, you go to London, you go to other places, property is front and center on the business page. You go to Dallas, it might be on the second or third page. There will be maybe an article a week that’s talking about real estate, because we’re in a very diversified economy. In these other places, where real estate is such a big part of the community and so expensive, it’s front and center. I would say, globally, the perception that we might have here that it’s not as big news as oil and gas might be to Houston, or banking might be to Dallas. In other parts of the world, though, it is. You pick up the paper in Hong Kong or in Sydney or in London and a third of the paper is going to be about property—both residential and commercial.
EVERBACH: Historically, as an investment class, it has been fragmented and it hasn’t been as attractive as stocks and bonds, etc. But what we’re seeing is a perfect landscape right now for real estate, with low interest rates pretty much around the globe. You have nice economic growth. You have equity markets that are getting a little frothy. Investors are looking for alternatives and investing in real estate in general terms provides stability; it provides a better immediate return than stocks, and it has the potential for capital appreciation. It’s getting lot more respect, globally. We think that’s going to continue, and we’re going to see much more global volume of transactions going forward in the years ahead.
GATES: I don’t view it as a problem … not getting the recognition. The only place it might be a factor is, there are not as many young people coming out of school thinking, “I’m going to get in real estate.” At the same time, there are much bigger and better programs today. The University of Texas has a fantastic real estate program. I spoke at a University of Southern California function last week—they have a great real estate program, too. So the biggest impact on the industry, that lack of recognition, is attracting the next generation.
On the investor side, we have more capital than we can deal with anyway, and I think allocations will continue to rise over time. Mike’s point is accurate. Real estate is not any riskier an investment class as some of the others. It’s less liquid, depending on how you invest in it. It’s not as easy or efficient for individuals to invest, but maybe that’s good, too. Because in the more entrepreneurial pieces where they might like to invest, you’ve got to be knowledgeable to do that. So, [the industry’s lack of recognition] feels OK to me, except for the recruiting and attraction of young people.
We hear that there’s more global investment coming to this region. Is that what you’re seeing? Do international investors seem to understand the true opportunity here?
EVERBACH: Foreign investment, thankfully, is increasing. I got into business in 1985. Back then, it was primarily a local business, with local developers and local capital. A lot of oil and gas money was going into real estate. That came to an abrupt halt in 1987 and 1988. We just had a capital markets group go over to the Middle East, meeting with foreign investors in a number of different countries. The investor had a list of their top 10 investment markets in the U.S., and Texas was one of the top 10.
From their view, Dallas and Houston are somewhat interchangeable. Because of the energy influence, Houston has been a bit more attractive than Dallas-Fort Worth. That perception has changed in the last six months. We’ve seen a lot of foreign investment activity here, and we’re starting to see more foreign buyers. We think that’s going to continue. Dallas offers a very, very stable economy, whether you’re a national or international investor right now, and Texas is the epicenter of growth in the U.S.
The U.S. is obviously referred to and always thought of as a very stable economic environment and political situation. We see nothing but good things for the Dallas-Fort Worth area going forward. The fundamentals here are wonderful, and we don’t see that changing anytime soon. We’re somewhat insulated and will continue to be insulated because we’re still in a nice demand-and-supply balance from an overall perspective in real estate. For all of those reasons, Texas—and Dallas specifically—is going to see increased investment going forward.
GATES: The short answer is yes. The longer answers are: historically, in the office product sector, eight to 10 percent of trades were international capital of some magnitude. It’s 20 percent right now, and in the core markets, it’s as high as 40 percent to 45 percent. So there has been a drastic increase in capital flow. Dallas and Texas has better recognition than it used to. I would imagine a couple of years ago when Mike took a global job and started traveling, he told people what he did and his title in other parts of the world, they would say, ‘You live in New York then, right?’ It’s almost reflexive. Just like Americans don’t completely understand other countries as well as we probably think we do—no one can name the top 10 cities in China, for example. Yet, they’re all massive economies in and of themselves. Money always flows to the big core markets first: New York, Washington D.C., Boston, the West Coast. Because [foreign investors] know those names.
EVERBACH: I pulled a study from our capital markets group on cross-border investment, for 2007 to 2011 and then for 2011 to 2014. There was a 67 percent increase in the last four years over the preceding four years. That speaks for itself.
GATES: It’s also pushing out of the office sector, too. We’ve seen some big trades in the industrial sector, some big portfolio trades. Then there’s this phenomenon around multifamily; the marketplace that exists in other parts of the world is just starting to emerge here.
LAFITTE: It used to be that nine to 10 percent of all trades in the U.S., commercially, were foreign capital. Year to-date, it’s 14 percent. So that number is increasing. For markets like Dallas, it’s not as obvious and as apparent, because they’re not doing it in a direct way. They’re doing it through advisors and funds and they’re doing it through large transactions. Canada is at the top of the list in terms of foreign investors here, and has been, historically. We consider that, obviously, North America, so it doesn’t sound and feel as much like foreign capital.
Our New York brokers, our capital markets team, would say one out of every four bidders on a transaction, if it’s $100 million or greater, will be Asian capital. It’s phenomenal. Germany is extremely active. Certainly, the U.K.. But the Asian capital is coming in waves. There are some restrictions, though. There’s a thing called FIRPTA (Foreign Investment in Real Property Tax Act), where we, as a government, tax foreign investment. So they’re coming in through ventures, through advisors and/or through bigger portfolio sales. It’s not as obvious in a headline that a building is now owned by this foreign entity. You just don’t realize it.
GATES: As it relates to Dallas, too, some of the newer wave of capital comes from a category of “sovereigns.” They’re looking for big trades, and there are very few. If you’re looking for a $500 million trade, there are none. It’s not going to happen here, so it has to go to New York or it has to go somewhere else first.
LAFITTE: In terms of Korean money and Japanese money, industrial seems to be at the top of the list. We recently did a U.S. investment interest survey, and Dallas came in third, behind San Francisco and New York. There are third-tier cities, too, smaller markets. But the gateway markets have gotten the vast majority of the capital. The core investment yields are just incredible.
EVERBACH: Dallas is a Cowboy-type market and, historically, we’ve proven that with the boom and bust cycle. But I tell you, with all of the public and private investment that’s occurred here over the last 10 to 15 years— case in point being the Arts District—when you get people here, whether it’s a company leader or an investor, the city is markedly different and improved from 15, 20, 25, 30 years ago when I moved here. I remember going downtown, thinking that’s the epicenter of every city, and there was no one down there. I go downtown now, and to the Arts District, and it is a tremendous asset for us to show o ff. The cultural development, along with everything else that’s occurred, puts Dallas on the map now in a big way.
Click here to read the full roundtable discussion, which originally appeared in the Summer 2015 edition of the Dallas-Fort Worth Real Estate Review, quarterly magazines published by D for the Dallas Regional Chamber and The Real Estate Council. In the expanded version, the executives discuss global competition strategies, growth targets, the climate for ongoing mergers in the industry, benchmarks they track, the biggest challenges they face, and their predictions for the future.
