Occupiers ‘Future Proof’ Portfolios
Amid a corporate real estate environment in which global economic uncertainty looms large among the chief concerns, executives are bolstering portfolio agility and enhancing user experiences to “future proof” their real estate against changes in the
economy, technology and labor markets. That’s among the findings of a survey of more than 350 corporate real estate executives
CBRE conducted in partnership with CoreNet Global.
“We are advising our clients to be cycle-aware,” says Julie Whelan,
head of occupier research in the Americas for CBRE. “Smart real
estate decisions can be made by any industry, in any property mar-
ket, and any economic environment with strategies and solutions
ranging from opportunistic to reactive, from agile to committed.”
Adds Brandon Forde, executive managing director of advisory &
transaction services, “Sophisticated occupiers seek ways to create
flexibility with the goal of ‘de-risking’ their portfolios.”
More than half of respondents cited economic uncertainty
among their top three concerns, including 52% of respondents
from the Americas, 64% of those in EMEA and 68% in APAC. For
the Americas and EMEA regions, these concerns were up 16 per-
centage points and six percentage points, respectively, over last
year, while in APAC they remained consistent.
Future-proofing strategies cited in the CBRE/CoreNet Global
survey include the adoption of a shared-workplace model. Forty-five percent of respondents cited reducing costs as the primary
reason for implementing such a model, followed by reduced term
needs (42%) and increased flexibility (41%).
In the interests of achieving greater agility with lower risk, occupiers are simultaneously implementing strategies to increase’the
overall experience within the core workspace. This includes reinventing or adapting workplace standards, cited by 86% of Americas
respondents, pursuing WELL-certified buildings (72% in EMEA)
and implementing activity-based working (53% in APAC).
Where portfolio shifts were cited, respondents are slightly more
inclined to anticipate expansion than contraction in 11 of 13
global markets. The survey found them most bullish on India and
China, with more than 30% and 20%, respectively, predicting net
expansion in those countries. Meanwhile, the anticipation of mild
net space contraction was strongest in the established markets of
Western Europe and North America.—Paul Bubny ◆
Annual REIT CEO pay increases have been muted over the past
several years, which can in part be attributable to the increased
prevalence of companies expanding their reliance on performance-based equity to reinforce their pay-for-performance philosophy. In 2010, only 40% of REITs granted performance-based equity
awards, which are earned (or vested) dependent on company performance (often measured using total shareholder return, or
“TSR”) versus pre-determined goals. For 2016, the number of
REITs utilizing performance-based equity awards has more than
doubled; upwards of 80% of REITs now award this equity vehicle.
The rate of annual pay increases for CEOs at the largest 50
REITs (by total cap) has trended toward a steady decline: dropping
from median increases of 14% increases in 2010 to 3% in 2016.
Back in 2010, positive TSR performance was primarily rewarded
through the increase in the grant date value (i.e., accounting value)
of equity awards. This fact was a prime reason why the magnitude of
annual increases was larger in that time frame. Today, performance-
based equity vests in accordance with the success (or lack thereof)
of a REIT’s stock price and growth in dividends. Accordingly, many
REIT compensation committees no longer need to significantly
increase the grant size of equity awards to reward management for
shareholder value creation due to the fact that the structure of
performance-based awards accomplish this in a more formulaic way.
“Realized” compensation based on equity earned (not granted)
generally reflects stronger pay-TSR correlation and is a better
indicator of a company’s pay-for-performance alignment.
Accordingly, the “realized” or “take-home” compensation for a
CEO varies significantly in any given year, dependent on the
percentage of equity earned (or vested) versus forfeited. Pay
disclosure (as required by the SEC) has not properly addressed this
new compensation paradigm. The SEC-required disclosure
continues to be more reliant on accounting values and, as a result,
investors often have a more difficult time analyzing the real
effectiveness of a company’s compensation program.
This past year, there was also a noteworthy amount of CEO
turnover among the largest 50 REITs, as over 20% replaced the top
leadership position. Of those that promoted an internal candidate,
total compensation generally declined (by 25%, on average) in the
transition from former to new CEO. This decline in pay is expected
and reflective of the pay disparity for a more seasoned individual as
compared to the cost of a less tenured CEO. In contrast, the cost of
recruiting a CEO from outside an organization was significantly
more expensive, resulting in a pay increase of some 45%. At this
group of REITs, CEO pay variance was much more pronounced
and highlighted the importance of succession planning.
Katie Gaynor and Jarret Sues are managing directors in the executive
compensation and corporate governance solutions practice at FTI Consulting.
They may be contacted at firstname.lastname@example.org and jarret.sues@
fticonsulting.com. Tbe views expressed here are the authors’ own.
REITs: Muted Pay Increases and CEO Turnover
BY THE NUMBERS
BY KATIE GAYNOR AND JARRET SUES
Median Change in Annual CEO Pay at largest 50 REITs (by total cap)
Source: FTI Consulting