Succession in real estate: Why your firm needs a balanced succession plan
Most business owners don’t jump out of bed with excitement at the thought of making a succession plan. And small wonder — laying the foundation to transition a firm to a new generation of leadership can take years of time and effort.
But succession in real estate can be even more complicated. Many firms have multiple owners or partners or use complex tax structures, and the value of the firm is often closely linked to existing leadership.
That makes it all the more imperative for commercial real estate leaders to start succession planning well ahead of the moment when it’s time to make a change.
So, where to begin? Based on interviews with leaders at 22 commercial real estate firms conducted by Wipfli and the NAIOP Research Foundation, here are some essential elements of succession planning strategies.
Why balance is the key to succession planning for real estate firms
Real estate succession planning is more of an art than a science. You’ll have to balance competing factors in five different areas in order to find a path that meets the unique needs of your firm.
In the words of the president of a family-owned firm:
“You are having to negotiate and come to an agreement around things, and I think that’s challenging. Coming together and having a thoughtful and honest conversation about where the middle ground is and how we come up with something that works for everybody is important.”
Here’s what real estate firm leaders need to consider:
1. Short-term vs. long-term goals
Succession planning for real estate often involves balancing short-term and long-term goals. For example, you may want to establish a leadership successor now who can quickly take over in the event of an unexpected life event, but also create a plan for how your firm’s leader can exit in a decade if all goes as planned.
And you might not want the same person to take over leadership duties under both of those circumstances.
That’s why it’s a good idea to plan for different contingencies. This can include selecting interim leadership options or cultivating frameworks that allow for different successors to meet the evolving needs of your business both now and in the future.
2. Formal structure vs. agility
No matter how good your succession plan is, it can’t cover every eventuality. So, ideally, you want to develop a plan that lays out a clear framework for your leadership transition but isn’t so rigid that it can’t adapt to fit changing circumstances.
For example, you might think that Candidate A is the best fit to take over one day. But it may not be the best idea to write that so in stone that you rule out the possibility of a Candidate B entirely.
Otherwise, you might find yourself locked into a plan that ends up hurting your firm if it turns out that Candidate A doesn’t have the right skill set to meet a sudden shift in the business model or changing leadership expectations.
As one industry veteran observed, “You can plan, plan, plan all you want, but [...] like D-Day, what they found out was 80% of what they planned was wrong. So, you have to adjust.”
This is not to say that the planning isn’t worth doing — just that if you want to maximize value, your plan needs to be flexible too.
3. Internal knowledge vs. external expertise
When building a succession plan, do you rely on internal knowledge or outsource to an external expert? Your best bet is probably a mix of both.
It’s a good idea to consult outside advisors on best practices. This can help you understand what other firms in the space are doing and has the added benefit of giving you a perspective unbiased by internal politics.
But you also shouldn’t discount your own institutional experience. You and your team know your business better than anyone else — so consider any outside advice in the context of your own culture and understanding.
4. New vs. existing talent
Many firms will develop a succession plan with an eye toward handing over leadership to an internal candidate. And that is often the right move.
But that doesn’t mean you should write off the idea of external leadership candidates either.
Ideally, consider the mix of skills that your next generation of leaders needs and would benefit from. This can help you develop your internal talent while leaving the door open to newcomers with an exceptional skillset.
5. Family vs. business interests
Succession planning for a family business can be especially challenging. Leaders of family-owned firms know that business interests and family harmony may not always coincide.
Your best bet here is to be honest with yourself about both, and then as transparent as possible over the course of your succession planning.
The fewer surprises here, the better. As one real estate leader interviewed noted: “Most of the frustrations [around succession planning] are born out of a lack of communication.”
Succession planning is an unavoidable part of real estate leadership — but has clear benefits too
A clear succession plan will help your business thrive. Commercial real estate firms that have a succession plan in place enjoy several key benefits over their competitors.
A succession plan allows you to:
1. More easily attract and retain talent
Most people want to feel like they have some room to grow in their jobs. This goes doubly so for top talent, as they will often be quick to leave for greener pastures.
By developing a succession plan, you give opportunities for some of your most capable team members to evolve into leadership roles over time. This gives you a leg up in recruiting, too, as you can pitch high-level talent on the ability to transition into leadership.
You’ll also create a sense of greater stability within your firm. Your whole team will know that the business is an institution that’s bigger than any one particular leader and doesn’t rely on one person’s talents to exist.
This matters to everyone — including team members who may not have any interest in joining leadership but whose buy-in matters a great deal to your success.
As one partner in a real estate firm observed:
“It’s very important for the people I hire to know that in five years or 10 years, they aren’t going to be looking for another job. [...] It’s part of setting a path forward that helps me attract top talent.”
2. Maintain better business continuity
Life constantly delivers the unexpected. For your firm, a sudden death or major illness can throw your operations into chaos.
For example, a key leader retiring for health reasons while your firm is in the later stages of a big deal could result in your deal partners reassessing whether to go through with it. Or worse — your own investors or creditors might get nervous, potentially putting your entire business on shaky ground.
However, if you’ve already begun developing your next generation of leaders, that same retirement doesn’t have to be a crisis. Under an effective succession plan, your deal partners, investors, and creditors will all be familiar with the person or people next in line to fill a leadership vacancy and know they’ve been prepared to take over.
That will help everyone feel more confident in the viability of your business moving forward.
3. Avoid family strife
Finally, for family-owned firms, a clear succession plan can help avoid infighting. Business and personal relationships are often a complicated mix, especially when those dynamics involve one generation passing down ownership to another.
Again, do as much of this as you can well ahead of time. Clear expectations set today can help you steer clear of conflict down the road.
Where can you learn more about succession planning?
Wipfli and the NAIOP Research Foundation wrote a report to guide commercial real estate firm leaders in succession planning. The team interviewed leaders at 22 different commercial real estate firms that ranged in size from $1.5 million to $5 billion in annual revenue in order to discover how they had tackled succession planning and what had worked best for their businesses.
Wipfli advises commercial real estate leaders on how to develop effective succession plans. Work with our team to identify your firm’s unique needs and create a balanced plan to help ensure the lasting success of your business. Get started today.
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