Industry Overview: Real Estate
Of course, the basics are still the same. The real estate industry's pared-down definition is land. However, it's much more complicated than that. The industry involves the buying, selling, renting, leasing, and management of commercial, residential, agricultural, and other kinds of property, including all the functions that support such activity, such as appraising and financing. The successful realtor is necessarily a shrewd salesperson with a deep knowledge of real estate markets and a broad understanding of the contracts, laws, and tax regulations that apply to real estate transactions.
Thinking big is part and parcel of the real estate industry, and grandiose speculation has created some of America's greatest fortunes. John Jacob Astor traded in his empire of beaver pelts for a gamble on uptown Manhattan real estate and in the process became the richest man in America. Arthur Levitt's own development virtually created that fixture of American life: the suburbs. More recently, moguls like Sam "the grave dancer" Zell and the perennially overreaching Donald Trump have made fantastic fortunes on real estate gambles. Even for non-billionaires in the industry, the thrill of deal making, the promise of financial reward, the potential to have a lasting impact on cities and communities, and the sociability make real estate a rewarding profession.
Subprime Mortgage Crisis
Subprime mortgages, which are mortgages given to borrowers who do not meet typical lending criteria, generally upon which little or no down payments are made, had been increasingly popular through the early 2000s. Several lenders led people with questionable credit into these loans by giving them a low interest rate for the first few years. But when those years ended and interest rates skyrocketed, the homeowners who had entered into these subprime mortgages were no longer able to pay. Starting in late 2006, the real estate industry saw sweeping foreclosures, tighter requirements for mortgages, and bankruptcies of more than two dozen subprime mortgage lenders, including major government financers Fanny Mae and Freddy Mac. Though several properties became vacant, it was harder for buyers to get money to buy those properties and the markets became stagnant.
In early 2009, President Barack Obama's stimulus package offered benefits, such as tax credits and home-improvement incentives, to help homeowners recoup their losses and encourage new homebuyers to enter the real estate market. Foreclosure rates continue to grow (they were up 4.6 percent in June 2009 over May) as record unemployment and the down economy render people unable to pay their mortgages. The problem is spreading quickly through the commercial real estate market as well. As of July 2009, there were $108 billion worth of distressed commercial properties in the U.S., and experts predict commercial real estate prices will tumble 40 or 50 percent below their peak in 2007 before the crisis subsides.
The Housing Bubble Burst
A housing bubble is a type of economic bubble characterized by fast increases in the value of property until they reach unsustainable levels. Housing prices in the U.S. peaked in 2005, and shortly thereafter the bubble "burst," which led to the mortgage meltdown and significant negative effects on the economy.
A report by National City Corporation's chief economist Richard DeKaser released in March 2008 found that property values are overvalued in more than 20 U.S. key housing markets. He defined a market as overvalued if real estate prices are 32 percent higher than they should be, when significant markers (historic price information, mortgage rates, population, etc.) are taken into account. Because of this, and the housing crisis of 2007 and 2008, home prices have lowered significantly-about 30 percent from their peak in 2006. Though some experts believe that these drops will lead to more realistic prices, others believe prices are still inflated.
How It Breaks Down:
Job opportunities in the industry are divided into four distinct fields: sales, management, development, and acquisition and analysis. Although crossover among these sectors is possible, most people start out specializing in a specific area.
Sales and Leasing
This segment includes everything from residential real estate brokers such as Century 21 and Coldwell Banker to larger corporations that broker bigger commercial properties such as office towers. Grubb & Ellis has one of the largest global brokerage divisions, offering sales and leasing services in many U.S. markets and in Europe. Cushman & Wakefield is another giant, with offices nationwide. Its clients are primarily corporations and other institutions, for which it negotiates sales and leases.
Property managers are responsible for maintaining property values. They deal with tenants, manage finances, and physically tend to the property. Of all the segments of the industry, this one has been hit hardest by the wave of mergers and acquisitions sweeping the industry.
Developers are responsible for taking a property idea and making it a reality. This is a complex process involving architects, engineers, zoning officials, builders, lenders, and prospective tenants. Development is not always the gravy train some make it out to be, especially in a down economy when financing is hard to come by and home values are falling. In April 2009, housing starts (new homes being constructed) were down a record 54.2 percent from the year before and new building permits were down 50.2 percent.
Acquisition and Analysis
Any kind of investing in real estate requires a thorough understanding of how to analyze the value of a property and navigate the maze of land-use regulations, zoning laws, environmental impact reports, financing realities, and other barriers to buying and developing a property. The people who develop, market, and manage REITs and other real estate investments are financial types, often MBAs, who are charged with evaluating and arranging for the purchase of properties.
The real estate market is tied to the rest of the economy; when the economy thrives, so too does real estate. But recently, much like the rest of the economy, the real estate industry has suffered. Therefore, employment in the real estate sector is likely to decline with the economy, at least for the foreseeable future. However, according to the Bureau of Labor and Statistics, employment of real estate brokers and sales agents is expected to grow 11 percent between 2006 and 2016.
While some consider the industry easy to enter because of its flexible working hours, without solid connections in the industry, you may have a hard time establishing yourself. Real estate veterans rely on the advice of contacts to help make recruiting decisions. Rather than using traditional recruiting processes, firms often bring on new talent through personal networks and word of mouth. It's even harder to break into the elite club of real estate investment finance.
If you don't aspire to join the elite ranks of real estate investment management, you still have before you a wealth of rewarding positions in property management, real estate services, and residential brokerages, as well as very challenging development roles in corporate real estate. Beware though: Skills in one real estate market aren't necessarily transferable to other markets. Select your location carefully. And once you're in, be prepared to ride the roller coaster of a cyclical industry.
The industry is laden with independent business people and bound together by relationships that tie people together between companies rather than just within them. This fosters a culture that the freewheeling spirits of real estate heartily endorse: Professionals work flexible hours and conduct business in pleasurable environments like the golf course or over dinner.
Building the Future
Real estate, and especially development, gives you the opportunity to put a mark on the world and leave a legacy. On a grand scale, Donald Trump's buildings that litter Manhattan's skyline bear this out. As does Arthur Levitt's Levittown. On a smaller scale, one insider we talked to said there was something very cool about naming a street in a subdivision after himself: "Go on Yahoo! Maps, type in my name, comma, Tucson Arizona." Sure enough, Yahoo! pinpointed the street bearing his name.
The Real in Real Estate
Insiders like the fact that they deal with tangible products. They get satisfaction in being able to walk into the thing they've built, financed, sold, or project managed.
What's To Hate:
Testing the Virtue of Patience
Real estate projects rival Russian novels in length. Commercial brokers might spend years cultivating a relationship with a client before ever, if at all, fulfilling a deal with them. Real estate investment firms often hold portfolio properties at least 3 to 5 years. Building a track record or establishing a practice entails having the endurance to see a multitude of deals through to fruition.
Industry insiders carp about the hours they keep, though the complaints vary depending on sector. Asset managers note that their work becomes extremely hectic when they purchase or dispose of a new property. Commercial brokers say that they keep long hours, with 12-hour days being commonplace, when they are building their practices. Mortgage brokers and residential brokers say that they are "always on."
Paving Over Paradise
Though the more eco-friendly developments have taken hold, those who are squeamish about putting a strip mall on a newt breeding ground, for example, might work in conflict with their ideals. Put more bluntly, one insider says, "Most developers aren't into sustainable development; if it doesn't help the bottom line, we won't do it."
Residential or Commercial Agent or Broker
Agents are individual sales professionals who provide their services to a broker for a commission, usually 6 percent. To be an agent, you must be 18 years old and have graduated from high school and passed a written test on property laws and real estate transactions. Some states require additional classroom training. To become a broker, you need a broker's license, which allows you to open your own agency. A commercial sales professional typically specializes in a specific property type: apartments, retail, office, and so on. The majority of real estate salespeople are paid through commissions, so your earnings will depend on how successful you are and the types of properties you sell.
Salary range: $30,000 to $110,000 or more.
A real estate appraiser estimates the value of properties for taxation or valuation purposes using a series of standard methodologies. Though relatively immune to the cycles of the industry, an appraisal position is somewhat insular within the industry and doesn't offer the mobility across functions as do other positions.
Salary range: $50,000 to $80,000.
A property manager manages and leases properties for owners. Day-to-day duties include a broad spectrum of activities including leasing property to tenants, handling tenant relations, maintaining occupancy levels and lease rates, preparing reports and budgets for property owners, hiring service employees, collecting rents, paying bills, negotiating contracts, and maintaining and repairing property. A property manager often arrives at his or her position through previous work as a leasing agent tenant services representative, assistant property manager, or other specialist within the property management field. Entry-level assistant property manager salaries range from $30,000 to $50,000.
Salary range for property manager: $55,000 to $90,000, depending on geography.
Consultant or Advisor
With the increase in institutional investing, demand for this type of expert has risen. Prior experience in investing or management is necessary. A real estate advisor is generally good with statistics and excels at dealing with clients.
Salary range: $55,000 and up.
A developer makes property plans come to life. To become a developer, you'll need excellent communication skills and a strong understanding of all aspects of the real estate industry. Most developers start out in entry-level positions with a developer or contractor and then work their way up.
Salary range: $70,000 to $100,000 or more.
In real estate, you start at the bottom and work your way up. Whether it's as an assistant sales agent or in an entry-level position with a developer or property management company, that initial experience is generally a springboard to your first sale or promotion. Exhibiting strong motivation and communication skills will help speed up that process. Almost all real estate companies look for three things in a potential hire: people skills, an entrepreneurial bent, and a constitution to weather bad times. Note that many people enter real estate after several years in another profession and that making a few investments on your own is a good way to gain experience in the industry. If you're interested in getting into real estate, keep the following in mind:
. Check with brokerage, management, and development firms about internship programs. After you get one, be open, enthusiastic, and willing to learn. Much of the real estate industry revolves around relationships. If people like you and know you can do the job, they'll hire you.
. Try to get an entry-level paid position with a property management or development company. This will save you the stress and pressure of working on commission while you're just starting out.
. Find a mentor who can show you the ropes of the industry and help you make contacts. Working under someone is the ideal way to learn the industry and develop contacts. Be persistent, unassuming, and willing to take rejection. You can't assume anything about real estate without making an effort first.