Can the Stars align in 2024?

It’s been a tough year for many star real estate managers, and the shine has come off even for the most celebrated real estate agents. We explore what lessons can be learned from different industries regarding the recruitment and management of star talent and its applicability to the real estate industry.

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Research conducted at AT&T's Bell Laboratories sought to uncover what differentiates top performers in the fields of (engineering and computer science) from their peers. Contrary to focusing on innate abilities, this study zeroed in on actionable work strategies, critically examining productivity measures and the challenge of defining productivity in knowledge-based roles. It debunked the expectation that technological advancements are the primary drivers of performance enhancement, highlighting instead the transformative impact of changing work methodologies.

In the early 1980s, for example, much commentary was published about peak performance, best encapsulated in an HBR article. Many researchers interviewed Olympic champions, who dutifully recounted this typical daily regimen: they woke at dawn, stretched out, ate their Wheaties, spent an hour visualizing their success, and practiced their sport for three hours. After enough champions had described the same regimen, a spate of books hit the market on how to become a peak performer in sports, sales, or management. But what about the Olympic contenders who didn’t win? Chances are these athletes also woke at dawn, stretched out, ate their Wheaties, spent an hour visualizing success, and practiced their sport for three hours. In other words, it’s not enough to ask the stars what works; researchers must compare the regimens of star performers to those of the also-rans and then target the differences.?

Manfred Kets de Vries, an INSEAD Clinical Professor of Leadership and Organisational Change, draws on two decades of research and management training with CEOs in his white paper, “Star Performers: Paradoxes Wrapped Up in Enigmas.” He notes, "Star performers are often a study in paradoxes – they embody walking contradictions.” According to Kets de Vries, top-performing CEOs blend the qualities of superheroes with the nuances of paradoxes. They possess the ability to strategize for the long term while excelling in short-term execution, navigate risks with calculated precision, and take full responsibility for their outcomes. They harmonise optimism with realism, displaying remarkable tenacity and boundless energy. He emphasises the importance of framing situations positively.?The value of high-performing employees is unmistakable, particularly in roles of high complexity. Research has shown that the top 1% of workers can outperform their average counterparts by a wide margin: 127% in complex jobs, with star computer programmers being eight times as productive as average ones, and the most prolific inventors outdoing their peers by a factor of five to ten. This pattern of disproportionate productivity holds across nearly all sectors, underscoring the immense impact of top-tier talent.

It's no wonder therefore that organisations strive to attract and retain these exceptional individuals. However, the challenge doesn't end with identifying and hiring these stars, the question is whether they will continue to excel and remain committed to their new organisation long enough to justify their investment? The increasing mobility of employees across industries complicates this matter. The concept of "free agency," initially applied in sport, aptly describes today's workforce, encompassing not only knowledge workers like management consultants, investment bankers, real estate professionals and executives but also skilled tradespeople such as hair stylists and chefs. These professionals can easily transfer their talents and loyal client bases from one environment to another, highlighting the need for organisations to not only attract but also meaningfully engage and retain their star performers.

Research from the University of Cambridge highlights several factors why recruiting star performers might actually have a negative impact. Firstly, past performance is no guarantee of future performance, a star's previous successes could have been influenced by their former employer's robust processes, the talents of their colleagues, or simply luck. Secondly, the lucrative compensation packages typical for star performers, as well as leading to jealousy from colleagues, may promote riskier behaviour as Professor Raghavendra Rau, Sir Evelyn de Rothschild Professor of Finance at CJBS puts it: “Star CEOs seeking to get the most out of their share options may make reckless decisions, possibly even extending to initiating damaging corporate activity.” In either case, the nature of their compensation may tempt individuals to focus on short-term gains rather than the long-term health of the company. Even worse, star performers may also be over-confident leading to both more risky and value-destroying behaviour and even a temptation to bend the rules. This risk is enhanced by a risk that oversight of star performers may be more lenient.

Research from Harvard examining the portability of star security analysts' performance revealed that star analysts experiencing a change of employers typically faced an immediate decline in performance, lasting for at least five years. The study also looked at whether the new firm was larger or smaller than the previous employers and found that the downturn in performance was especially sharp for star analysts moving to firms with inferior capabilities or those making the transition alone, without their team members.?Conversely, analysts who transferred between firms of equal capabilities saw a decrease in performance too, though this effect faded after two years. Those who moved to more capable firms or with their team members maintained their performance levels, showing no significant drop either in the short or long term.?Furthermore, the study observed that firms acquiring star analysts from more prestigious competitors encountered more severe negative reactions in the stock market compared to those hiring from peers or less capable firms. This suggests that the market may view the acquisition of stars as potentially value-diminishing rather than a strategic advantage.

There is an enduring value around star traders, who sometimes manage to thrive despite poor performance. ARK Investment Management has remained a notable exception in the realm of mutual funds and exchange-traded funds (ETFs) despite poor performance under Cathie Wood. As of 2023, ARK's ETF family, managing approximately $16bn, was reported by Morningstar Inc. to have erased $14.3bn in shareholder value over the past decade. Miraculously, investor loyalty remained strong, with minimal withdrawals despite significant inflows in 2020 and 2021. This steadfast investor base is largely attributed to Wood's compelling investment narratives, such as her consistent investment in Tesla Inc. amidst a declining demand for electric vehicles and increasing market competition. Wood's successful prediction in 2018 has further cemented her reputation, suggesting her current strategies might once again bear fruit.

This is all prescient, given the dire year much of the real estate industry experienced in 2023, and as React News reported, the abrupt departure of one of JLL’s best known investment agents in New York says a lot about the changing position of star brokers at the big firms.?Bob Knakal was let go recently, days after the New York Times published a glowing profile of the dealmaker in which JLL was mentioned just once. As React reported, the article irked JLL’s management so much that the firm put out a statement making its thoughts clear: “At JLL the client comes first, JLL comes second and the individuals come third. That is the true recipe for success.” This isn’t unusual, given the prominence and celebrity many real estate professionals have cultivated for themselves, often by minimising the importance of their employer.?This isn’t unusual, given the prominence and celebrity many real estate professionals (Ryan Serhant?) have cultivated for themselves, occasionally by minimising the importance of their employer.?

Although each example is situational, there are clearly many parallels to current events in the market.?Adam Neumann's re-emergence as a prospective acquirer of his former business presages a potential return to stardom, embodying the adage by Nathan Mayer Rothschild: "the time to buy is when there is blood in the streets." In a period where the office real estate market faces what Barry Sternlicht describes as an "existential crisis," with significant financial distress evident in the dramatic discount sale of a Canary Wharf building and the drop in shares of New York Community Bancorp, Neumann's audacious move to reacquire WeWork or its assets could be seen as strikingly prescient. Despite his tumultuous exit from WeWork in 2019, his recent actions suggest a bold belief in the resurgence of office spaces, catalysed by a shift towards hybrid work models. With WeWork planning to emerge from bankruptcy with a leaner operation, and major developers eyeing distressed office properties as golden opportunities, Neumann's re-entry, supported by Marc Andreessen's substantial investment in his new venture, Flow, could signify a visionary bet on the evolving landscape of work.

The stars are realigning in the investment world too. A previous Blackstone real estate star is on pace to raise a $1bn fund at his new firm, in what analysts say would be one of the largest hauls ever for a first-time property fund. The new firm was co-founded by Blackstone’s former head of real estate acquisitions in the Americas, Tyler Henritze. Henritze was one of Blackstone’s most prolific deal makers and was involved in over $100bn investments during his career at Blackstone.?Likewise, former head of real estate in Europe, Chad Pike, launched his own firm, Makarora, targeting US opportunities in private debt, equity and public markets having worked at Blackstone for 25 years, and from London was co-head of real estate globally between 2005 and 2011 and latterly headed the firm's Tactical Opportunities division.

Crises, similar to those that launched the careers of Thomas Barrack and others after the US Saving & Loans crises, has always created opportunities for luminaries to shine independently. The question is, as the research above illustrates, can these stars replicate their successes laterally too? Starwood Capital Group clearly hope so, hiring Jonathan Pollack as its president, starting in 2025. Pollack joins from Blackstone, where he was global head of the real estate credit business (BREDS) since 2016, and was also a member of Blackstone’s real estate executive committee and investment committee, as well as Blackstone’s operating committee. Prior to joining Blackstone in 2015, Pollack was the global head of commercial real estate at Deutsche Bank having also spent eight years in Deutsche Bank’s London headquarters helping to build the European commercial real estate business.

The potential rewards of effectively leveraging star performers are substantial for individuals, organisations, and, most critically, investors. However, achieving success is far from guaranteed. In the Japanese art of Sashimono, individual wooden pieces are meticulously joined to create a harmonious and durable structure without the use of any nails. This art form embodies the essential principle that in the realms of business and investment, the synergy of partners working together often outweighs the allure of maverick star managers. Just as each piece in Sashimono contributes to the integrity and beauty of the final product, the strength and sustainability of an enterprise are best achieved through the seamless integration of its parts not the singular ambition of star managers.