In discussing Canada’s advantageous
position pre- and post-crisis, real estate
executives profiled never took a “we
told you so attitude” (which, in itself, is
the conservative Canadian
tends to focus on the
job to be done rather
than bragging about
it). Nonetheless, conversations with these
leadership lessons that might be viewed as
truisms—except that consistency in execution and deep influence on corporate culture make them truly notable.
Leadership has clearly made a difference in Canadian real estate, in which
there are fewer players than in larger markets such as the U.S. Because the Canadian
industry is a more intimate community, a
tremendous value is placed on integrity
and fair dealing. Those who do not treat
others well will not be accepted and, as a
result, will not be successful.
Mistakes have been made over the
years, to be sure, including back in the
“cowboy days” of land speculation and
development. By readily admitting those
mistakes of the past, however, the Canadian
industry has evolved with a mindset that
emphasizes analysis, particularly around
risk, and an attitude of investing as if one’s
own money is involved (which oftentimes
it is, right along with investor funds).
The most stunning differences between
the U.S. and Canada emerged pre-crisis.
While the U.S. went on a commercial mort-gage-backed securities (CMBS) securitization binge—creating demand for more
leverage, which resulted in too much lending to under-qualified borrowers—Canada
followed a far more conservative course.
For example, Canada had a lower rate of
loan originations by mortgage brokers,
less mortgage securitization, and a smaller
subprime mortgage market. In addition,
banks in Canada retain on their own balance sheets and service nearly 70 percent
of the mortgages they originate, which
encourages prudent lending practices.
Other significant differences include
full recourse loans in Canada, obliging
the borrower to remain fully responsible for the mortgage even in the case of
foreclosure; shorter-term fixed rates of a
maximum of five years; widespread use of
mortgage insurance, amounting to about
half of mortgages (versus about 25-30 percent in the U.S. now and 15 percent pre-crisis) according to Mortgage Insurance
Company of America; no tax deductibility
for mortgage interest, which has not
hurt home ownership
( higher in Canada
than in the U.S.;70
percent according to
CBC News, versus
U.S. Census Bureau’s
65. 4 percent, respectively); and higher
prepayment penalties, which discouraged
the kind of refinancing that occurred frequently in the U.S. pre-crisis.
Taken together, the features and regulations in the Canadian banking sector
resulted in a healthier and sound pro-lender
environment in Canada pre-crisis, whereas
the U.S. banking system encouraged
excessive lending to risky borrowers.
At the same time, this same conservatism can be found in the mindset of many
Canadian real estate leaders, particularly
with regard to risk. Canadian real estate
firms understand that reasonable leverage is necessary to drive growth, and
also appreciate that a viable operating
platform and philosophy are fundamental to success. Risks tend to be evaluated
realistically with an eye toward identifying what could go wrong, while not putting on the brakes excessively and thus
preventing a solid return from taking an
Although evaluating risk and reward
is part of risk management 101, my
analysis of what went wrong in the U.S.
real estate sector uncovered
how fundamental leadership
and management tenets were
consistently violated. In the
U.S., unfettered risk kept the
“bubble inflated,” which led
to widespread risk imbalance.
People were paid to generate
volume, not to underwrite risk.
Employees were encouraged
to compete, not collaborate,
and there was a focus more
on individual objectives rather
than company performance.
Another risky practice was
hiring “rock star” performers, instead of putting precedence on the company and
Other leadership mistakes made in the
U.S. real estate industry pre-crisis were:
letting one’s ego get in the way, with
some leaders sporting high-profile public personas that proved distracting and
counterproductive; pretending to have
all the answers, resulting in know-it-all
CEOs who drove organizational opposition underground; avoiding change, which
allowed deadly complacency to take root;
allowing lax management to become a
business strategy, instead of pursuing one’s
entrepreneurial instincts, buffering up the
strengths of one’s management team and
re-underwriting one’s well-conceived
strategy; and avoiding responsibility for
mistakes, which undermines accountability and a strong value system.
The mistakes that were made in the
U.S. serve to accentuate the competencies found among Canada’s real estate
leaders, who with fiscal conservatism,
disciplined risk management, and solid
leadership principles have been able to
grow their business—and even to expand
beyond their borders, including in the U.S.
Entrepreneurs by spirit. Canadian leaders are always in growth mode, but with
a strong understanding of their sources of
capital and the associated costs and risks.
Thus, Canadian real estate executives
have distinguished themselves not only
by what they’ve done, but also by how
they’ve done it—demonstrating a commitment to leadership values and integrity,
and with a close watch kept on risk at all
William J. Ferguson, chairman and CEO of FergusonPartnersLtd.,and co-chairman and co-CEO of FPL Advisory Group. Ferguson is the author of Market Discipline: The Competitive Advantage, Lessons from Canada’s Real Estate Leaders (2012), and Keepers of the Castle: Real Estate
Executives on Leadership
and Management (2009).