Does Strategy Determine Culture in a CRE Firm? Or Is It the Other Way Around?

Many CRE organizations were started by one or a group of entrepreneurs or spun off from a larger corporate type of organization. These organizations include private real estate equity firms, brokerage firms, development firms and consulting and advisory firms. Many of these firms have well established operating and investment strategies that guide the firm. For example, a private equity firm may raise funds from institutional investors and invest in core, core-plus, value-added, and opportunistic apartments, office buildings, retail properties industrial warehouses, hotels, and senior housing deals or in distressed debt. Another may be a local brokerage firm that specializes in the sale of net lease investment projects and another may be a national real estate development firm building office buildings or a pension consulting and advisory firm. 

As real estate firms grow from one or a small group of entrepreneurial founders, they evolve with an established business strategy and a certain business culture. In analyzing the operations of these firms, many think that the strategy of the company determines its culture. However, I posit that it is the other way around. The structure or culture of a firm determines its strategy. That is, the culture embedded in the firm dictates its business model, growth, hiring, management policies, operational strategy, and real estate program. This may sound counter-intuitive, but it is true in many instances, especially with real estate investment, development, and service type firms. As real estate firms grow and their strategy becomes successful, they often build up a corporate structure that gets more and more consistent, but eventually inflexible, and inefficient. Even though the company is growing and profitable its operations and personnel policies become insular. How many times have you heard executives at a real estate company say, “this is how we do things here” or “it’s our way or the highway” or “we only buy core properties in core markets” or “we only hire the top students from Ivy League schools?”

This insular culture and the static corporate strategy feed on themselves and get celebrated and codified throughout the organization from its hiring and personnel policies to its compensation program. The company only hires people who have the same values, points of view, education, interests, and ones that follow the corporate mantra. Many times, the senior managers hire only individuals who look just like them. Anyone remember IBM’s hiring and dress policies in the 1970s and 1980s, requiring all men to only wear white shirts with dark ties and suits? If the CEO or managing partner of the real estate firm went to Harvard, then the firm only hires Harvard grads or if the management team came out of the pension advisory industry, they only hire individuals from that sector. Firms caught up in this culture trap do not want alternative points of view or dissenting strategies. Many real estate firms that were tops in their business before the 2007 crash are now out of business, in dire straits or bankrupt, including, Grubb & Ellis, Capmark Financial, Icap, Lehman Brothers, GMAC, General Growth Properties, TNNN Properties and William Lyon Cos., just to name a few.

During my career, I have seen this situation many times. A familiar example is when an entrepreneurial firm enters into a joint venture with a notable investment management firm to raise capital in a private placement real estate fund offering. The entrepreneur is the managing partner of the fund and the joint venture partner is responsible for infrastructure including office services, personnel, and start-up capital. Many times, the investment firm is so inward-focused, that they do not approve of anything for the fund that was not developed by them internally. The senior marketing and management personnel at the investment firm, who do not know anything about CRE, try to dictate the real estate provisions of the private placement memorandum and real estate investment program. This inevitably leads to major disagreements and arguments between the entrepreneur and the investment firm about the joint venture, real estate investment strategy and partner compensation and in many cases doom the success of the joint venture.

Over time, the employees in these insular firms seek to protect their jobs, compensation and perks, organization structure and established practices, which further reinforce the company’s rigidity. Since the company is managed by those who are internally focused and care less and less about developing new strategies, the company does not see or adopt new technologies, business processes or investment programs. Most innovations in corporate America are not discovered by companies in the industry, but by start-ups and firms from outside the industry, who seek to solve a product or service industry problem. Think again about the firms above and the large number of other real estate private equity funds that would not change or adjust their strategy before the Great Recession of 2007 and continued to make overpriced and foolish investments. Eventually, the company’s structure or culture becomes too confining and out of touch with its customers and market and it falters, taking the company down with it. The structure and culture of a real estate company, therefore, determine its strategy. This organizational culture damage is prevalent in many real estate organizations, especially today. The remedy for this culture determines strategy conundrum is to create an open and diverse organization and culture, which encompasses dissenting opinions, new ideas and includes individuals with diverse education, financial and investment backgrounds. Real estate firms that adopt these policies will be more market-oriented, profitable, and successful over long periods of time.

Joseph J. Ori is Executive Managing Director of Paramount Capital Corp.