Why Conflicts of Interest in Brokerage Matter More than Ever

Having spent the first 17 years of my professional career as an attorney in a large firm, it continues to amaze and surprise me how the inherent conflicts of interest in brokerage are routinely accepted by clients, while these same compromised relationships would never be tolerated in law or other professions.  Why is it that most companies would never allow their attorney or law firm to represent the other side in a transaction or litigation matter, but in brokerage, dual relationships are often accepted as the normal course?  The answer is probably historical; however, two fundamental changes in real estate and brokerage over the past 20 years have made dual agency an issue that should concern tenants more than ever.

A Fundamental Change in the Role of Tenant Brokers

Until the late 1990s, there was no comprehensive database which identified current lease and sale opportunities in the marketplace similar to the Multiple Listing Service for residential properties. As a result, brokerage firms built large research departments whose job was to build current, proprietary databases of availabilities.  Thus, the primary value brokerage firms provided to tenants and buyers was market information.  In picking a broker, tenants sought out firms with the best research so they could uncover as many opportunities as possible.  Unless one were to assume that brokers were steering their tenant clients to one landlord over others, tenants had no real concern about conflicts if the value proposition was primarily market information.

Today, every brokerage firm subscribes to the same market database for commercial properties and, therefore, has access to the same information about availabilities. This service has leveled the playing field and enables smaller brokerage firms to compete with larger firms. As market information has become a commodity, tenant brokers needed to create new value that distinguished them from other brokers.  Today, real value comes from what a broker does with the available market information and how he uses it to leverage the tenant’s position and secure the most favorable deal terms.  In sum, the tenant broker needs to be a true advocate and not merely a space finder to add unique value.

While representing both landlords and tenants may not have seemed problematic when the broker’s primary role was as space finder, his evolving role as an advocate brings him on a collision course with irreconcilable conflicts.  If a tenant is engaging a broker primarily to advocate for his economic interests, how can the broker do that when his (or his firm’s) other, larger client is on the other side of the negotiating table?  Simply put, he can’t.

Concentration of Real Estate Ownership and Consolidation in the Brokerage Industry has Increased the Chances of Conflict.

Over the past 20 years, real estate ownership has become concentrated into fewer and larger institutional players such as Real Estate Investment Trusts, insurance companies and private equity firms.  In some submarkets, one or two major players can control a third or more of the inventory in a given class of asset.  Likewise, on the brokerage side, mergers and acquisitions in the industry have resulted in a smaller number of firms controlling and ever growing percentage of landlord listing assignments. Further, with these larger firms offering expanded owner services including appraisals, portfolio management, project management, institutional sales, and property management, the financial entanglements between full service brokerage firms and property owners are proliferating.  With fewer owners controlling more of the market and fewer brokers providing services to these owners, on any given engagement, there is a significantly greater chance that a tenant will find that his broker (or his broker’s firm) will have some financial relationship with the landlord on the other side of the negotiating table (or wants to have a relationship with such landlord).

If a tenant is looking for more than just a space finder and really wants his broker to advocate for its best economic interests, why would it risk hiring someone whose allegiances might be compromised?  It doesn’t make sense in the legal and other professions and, given that real estate can represent one of a company’s largest line item expenses, it surely doesn’t make sense in brokerage.

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

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