For over a century, commercial real estate brokers have had their familiar “For Lease” signs on buildings, marketing vacant space for building owners. Even deeper in their service offering to landlords, these firms manage the buildings, help with financing, co-invest in the real estate (and often own the real estate themselves) and advise property owners in the purchasing and selling of real estate.
Commercial real estate brokerage firms like Jones Lang LaSalle, Cushman & Wakefield, CBRE, Newmark Knight Frank and Cassidy Turley are the outsourced sales and marketing departments for landlords. The landlord is king, and a brokerage firm’s business is that of the palace guard.
The objectives of the tenant in a commercial lease transaction are often diametrically opposed to those of the landlord. While the landlord will want the longest lease, at the highest rent with the least concessions, in virtually every transaction the tenant wants exactly the opposite.
In a recovering market like we have today, the pendulum is swinging back to the landlords’ benefit, and the property owners are getting tougher on issuing the orders of the day, and having their listing brokers carry them out. Asking rents are spiking all over Southern California, and property owners are working with their landlord brokers to see how much tenants will really pay, testing the ceiling of the market every day.
Tenants falsely think it’s the market that sets the terms between the landlord and tenant, and that “asking rents” bare some relationship to where deals can be cut. But the commercial real estate market is inherently inefficient — every property is unique and each landlord’s circumstance is different. It isn’t like the stock market, with millions of buyers and sellers trading with open information and resetting the market price with every buy or sell order.
Furthermore, information about actual lease transactions is typically held privately between the parties to the lease transaction. There is no public database of lease comps, nor will there ever be. If a tenant does ask to see comps, a landlord’s broker representing a tenant in the same transaction often uses a subset of the most expensive market comps to justify the high lease costs to the tenant.
I see this all the time, where the listing broker uses a comp from a tenant that renewed on their own, or used the landlord’s broker, and grossly overpaid to renew in place, as that tenant didn’t shop the market and understand what their options were. The landlord says “Since you aren’t using a tenant rep broker, I will give you 5% off my asking rate,” when, in fact, we are doing leases in that same building at 10% off (plus free rent and tenant improvement concessions). Or sometimes the tenant pays even more due to their lack of leverage and lack of information.
Instinctually, a business owner understands that those companies with “For Lease” signs up in front of buildings are representing the building owners. But when you are a business owner that needs space, or the management team member that has been tasked with the real estate function in your company, does it make sense to call the listing broker on a sign for help with your expansion? Or do you start calling dozens of landlords’ listing brokers trying to find out what’s available, what the market is, and play them off against each other?
When I got into this business in the 1980s, that’s what busy executives often wasted their time doing, and the end result was often a lease at 10 percent to 20 percent above market deals we were doing, when you consider all of the concessions we negotiated. Worse yet, tenants often miss great subleases in buildings, as they generally are listed with different brokers than the listing broker who has a sign in front of the building.
Another problem with traditional landlord brokerage firms arises when it comes to choosing which buildings to show to a client. Of course the tenant wants to know that they have seen all of the good options. But, when a tenant is working with a landlord’s broker, that broker’s primary fiduciary duty is to represent the landlord’s interests. The landlord is seen as the long-term customer, and not the tenant.
So what options can a tenant expect to see when working with a landlord’s broker? Unfortunately, they are often presented the listings of that broker first, and then of that broker’s company second. Next, other listings may be presented from other brokerage firms if those don’t work. Lastly, subleases might be presented if the landlords’ listings don’t work, but only as a last resort, as subleases don’t support the brokerage firm’s mission of advocating for landlords with vacant space. In fact, when there is a sublease in a building, the landlord’s listing broker is generally forbidden from taking the listing on that sublease, as the landlord wants their broker pushing the landlord’s space first.
Worse yet is the massive financial conflict of interest, whereby brokers with listings earn the “full commission” if they can represent the landlord and tenant in the same transaction, often called the “full pop!” by brokers. There is just too much money on the table for brokers not to be motivated to chase their “full pop” opportunity – often tens of thousands of dollars … or a lot more.
When I started representing tenants exclusively over two decades ago, all of the landlord brokers told me it was just a fad, and that the soft market in the early 1990s was the only reason a tenant representative could be effective. Brokers forecasted that tenant representation would go away once it became a landlord’s market again.
But as vacancy rates went down, making building choices fewer and rents more expensive, the role of a tenant’s advocate only became more valuable. Creating leverage and developing quality options for tenants became more critical than ever. But like any paradigm shift, it took several years to educate the market about this new way of doing business.
Tenant representation has become the gold standard by which sophisticated corporate executives, partners in law firms and other private business owners seek out independent representation for their corporate real estate transactions. When logic is applied, tenants want independence in their legal counsel, accounting treatment, financial advisory and insurance services … and now in their commercial real estate services as well.
Business owners want to sleep at night knowing that their interests have not been compromised, that they have seen all of their options, and that they have the bottom line on a transaction to lease or purchase a property. Free from the shackles and chains of landlord listings, tenant representation service providers like Hughes Marino are able to deliver that comfort, saving our clients time, risk, and money, so they can get back to running their businesses.