In the next decade, 59% of C-suite executives in the real estate industry will reach retirement age, making way for the next generation of leaders. 

This shift has been referred to as “the succession wave.” However, Shelley Balanda argues that the wave that’s coming to commercial real estate is actually a larger transfer wave, in which a company needs to ensure that its operating system and practices — and thereby its value — can survive the founder. While this includes succession, it’s only “part of the pie.”

Balanda is the founder of Footprynt, an operational leadership practice that helps founder-led and second-generation CRE companies turn the judgment and decision-making that a founder accumulates — much of which is undocumented — into a transferable operating system.

“Succession asks who takes the chair, while transfer asks whether the aspects that made the company work are movable beyond the founder,” Balanda said. “Transfer asks where the business’s operations actually live.”

She said the problem is rarely the company’s organizational chart. It's that every decision, critical or not, still flows through the founder, which doesn't scale nor does it transfer.

The 2 Numbers That Don't Match

The amount a company’s buildings are worth and the amount a company is worth are two different numbers, Balanda said.

“Enterprise value isn't what a company owns. It’s whether it can keep running over the next cycle without the person who built it,” she said. "The transfer gap is the distance between what your buildings are worth and what your company is worth. Most owners never collect it.”

She said over the last 15 years, the deal thesis was the strategy: Buy well, ride the market and distribute — which worked when returns were free. The next cycle, however, asks a question the deal thesis never had to answer: Can the company keep producing when the founder isn’t the one making every call?

The difference between then and now is that founder-led owners and operators need to work harder to recognize that value, she said.

In CRE, operational alpha has always meant the return an owner pulls out of the properties: better leasing, tighter expenses and sharper management. That number is already priced, and it already sits in the returns, Balanda said.

“Everyone measures operational alpha on the assets, but many founders fail to consider the engine that produces it, and that’s where it shows up,” Balanda said.

However, it becomes difficult for a company to capture its own value if it doesn’t have its internal systems codified, she said.

When companies think about how they’re driving their own value internally, it should start with considering their judgment calls, something that is rarely documented, Balanda said.

“Having conviction in things like the market the assets are in, the relationships we’ve built and the way we interact with our community lives within a company’s C-Suite executives,” she said. “Companies need to consider how they can get this judgment call into systems and processes that can be carried forward.”

She said a company’s judgment is its most valuable asset, which doesn’t show up on the books or balance sheet.

What Capital Is Already Pricing

Private capital has already started pricing this operational alpha, Balanda said. When a management company raises a fund, takes general partner-stake capital, brings in a partner, or borrows against the company rather than the buildings, the company's own value goes on the table. 

The buyers writing checks are underwriting for leadership continuity now, rather than last year's returns, she said. In diligence, they flag the managers whose operations still run entirely through the founder.

Also, 85% of institutional limited partners will turn away from the opportunity to invest if they are hesitant about operations. 

"They're pricing whether the earnings survive you," Balanda said. "Operational alpha you can't document is operational alpha you can't raise money on."

She said every one of those events asks the same question: Can the company keep operating when the person who built it isn't the one deciding? 

Why Readiness Is Everything

Some of the challenges in today’s market are that there won't be enough professionals to replace those who will be retiring, and that artificial intelligence is absorbing junior work where operating judgment used to be built, so that when the next generation arrives, they won’t have that judgment, Balanda said. 

These aspects can make codifying practices feel difficult or overwhelming. However, Balanda emphasized the importance of companies documenting their “secret sauce.”

While in the past this process was a task to complete before retirement or a capital event, now readiness becomes “an asset that you either hold or don’t,” she said.

“How a company gets ready for the next steps is an asset that contributes to its value and is either something a company is on top of or not,” she said. “It comes down to codifying your secret sauce, having conviction in what works for your company, and then investing in how to carry it forward.”

Footprynt helps companies assess and document their structures and practices so they are prepared ahead of their transfer events.

Balanda recommended that companies start by naming what must survive them and the judgment that produces it. 

Extending authority before codifying it means handing more people the same undocumented problem, she said. However, when the judgment is documented, it lets leadership extend real authority to its team and have it hold. 

"Make the judgment transferable, and you haven't just protected the company, you've raised what it's worth," Balanda said.

This article was produced in collaboration between Footprynt and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.