Give Them an Inch and They’ll Take a Mile

The world’s largest commercial real estate brokerage firm recently announced it had bought 1650 Market Street and United Plaza at 30 South 17th Street. The purchase represents a total of 1.2 million square feet of commercial office space or an impressive 10% of the comparable type of Class A office space from Chestnut Street to Race Street and from 15th Street to 20th Street. If these buildings were publicly traded stock, this company would now be subject to the rules against “insider” trading.

It’s actually quite remarkable. But sometimes in life you take things for granted and don’t really appreciate how incredible they are until you see it written on paper. Let’s try it out here with a sample multiple choice question.

Test Question:   You are a tenant looking for office space and you need to hire a broker to represent your interests. Which brokerage firm should you hire if you want to maximize competition and ensure you will get the best economic deal?

A.  A brokerage firm who is also representing the landlord, as listing agent, for several of the office buildings in your target market.

B.  A brokerage firm who manages, on behalf of landlords, several office buildings in your target market.

C.  A brokerage firm that actually owns several office buildings in your target market.

D.  All of the above.

E.  None of the above.

Now I’m not the world’s greatest taker of standardized tests but I’m pretty sure the answer to this question isn’t that difficult.  Given that tenants can hire any brokerage firm they want, why does any tenant struggle with the answer to this question?

For years we have been told that brokerage firms can represent both landlords and tenants in the same market or even the same transaction without a problem. We’ve even been told that it’s okay for the brokerage firm to manage all of the real estate assets of a given landlord in the United States, and that this won’t affect their objectivity or loyalties if and when they end up on the opposite side of the negotiating table from that same landlord.  Now, once again, having been given a free pass to dismiss virtually any conflict, a brokerage firm is going to the ultimate extreme: it will tell tenants not to worry if they are not just their broker but also their landlord.

What does this tell us? One of two things. Either there is no such thing as a conflict of interest or, more likely, the services being provided may not be what you thought they were. Let’s explore the three possible roles of a tenant broker and apply each one to this possible fact pattern.

Find Me Space

Some tenants believe that their broker is merely a space finder. They want a broker who knows the market and can point out appropriate places for them to locate.  They don’t look to their broker to be their negotiator or financial advisor either because they have greater skill and expertise in business negotiations than their broker or they otherwise don’t want them involved.  If this is the role the client is looking for, there is probably little concern about conflicts of interest.  The broker will print out a list of availabilities that can accommodate their needs, tour the spaces and then pick out the ones they want to negotiate with. Unless the tenant is worried that their broker may favor certain buildings, the conflict probably isn’t material.

I’ll Have the Same Deal He’s Having

Some tenants believe that an established market pricing system exists in commercial real estate and, therefore, their primary objective in a lease transaction is merely to secure a fair or “market” deal.  In this instance, the primary role of the broker is to provide data or market comparables to the client to ensure they are getting a deal at least as good as the last tenant. The data is what the data is.  Thus, it really doesn’t matter whether the broker has a significant business relationship with landlords or is even the landlord itself.  Basically the tenant is saying, “I’ll have the same deal he’s having.”

Show Me the Money

What happens, however, if the tenant wants more than just a space finder or an average deal? What if they want their broker to get them the best deal possible?  This means that the tenant’s requirement must be exposed to the market with all landlords having an equal opportunity to win the business.  If the market perceives that one landlord has an inside track because your broker has some type of business relationship with a building in the market, it will chill the bidding and minimize competition.

Getting the best deal also requires that the tenant be able to speak candidly and honestly with its broker without fear that this information or its preferences will be used against it.  How can you tell your advisor that you really want to be at Building A when they are the listing agent for Building A or, worse yet, they own Building A?

Finally, to minimize the cost of your office space, you need your broker to be your advocate at the negotiating table and use whatever leverage you have to secure the most favorable terms.  If the landlord is vulnerable, how can your broker push for your interests if he does a lot of business with that landlord or, again, is that landlord?  If you want to use Building A to create leverage with the Building B– the option you really favor–how can you do that when your broker owns Building A (or B for that matter)?  In sum, your broker cannot be your advocate if he serves two masters.

Conclusion

There’s an old saying that if you give some people an inch, they’ll take a mile. That’s what has happened in commercial real estate brokerage.  No matter how egregious the conflict of interest, brokerage firms have dismissed them and tried to convince tenants there is nothing to worry about. It’s gotten to the point where they are now claiming that they can be your landlord and still get you the best lease deal.  Really?  If your broker doesn’t see how obvious the problem is, perhaps they are giving you a level of service that is different from what you thought you were getting. When it’s time to pick a broker, pull out the sample question above and think about how you would answer it.

For more information contact Glenn Blumenfeld http://www.tactix.com/team.php#Glenn

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