The corporate types say commercial real estateis a service best delivered by large companies working with a national or global frame of reference. These pundits are backing up what they say by investing in, opening and/or buying more offices all the time.
Others maintain that brokerage is a business where clients get the best service from localized organizations. The smaller, more entrepreneurial, "boutique" firms are attractive to this second group because they embody the same qualities of those individuals who have historically excelled in the field overall.
And yet there is a third group (whose total demise has been predicted, but not realized, for nearly a decade now) that falls somewhere in the middle. This group is drawn to brokerage organizations that are regional in scope yet combine the best features of both their corporate and boutique competition.
These days, all of the aforementioned groups can claim they are accurate in their estimates. After all, business is booming more than ever before, thanks to (in no particular order) the economy, Providence and Alan Greenspan. But that does not keep the top brass of each of the nation's top brokerage firms from disagreeing on what structure and strategies it takes to meet demands imposed by today's commercial real estate marketplace.
Bigger = better? The service demands made by today's clients, particularly those of the corporate variety, require the resources of a large firm, according to Brett White, chairman, North America, of Los Angeles-based CB Richard Ellis. "During the past four or five years, clients have really begun to demand a certain menu of services and a level of support and infrastructure for their accounts that simply cannot be supplied by a small firm," he says.
For example, a major corporate user these days is typically going to hire one national brokerage firm to handle its space needs on a national or regional basis, explains White. To successfully handle the account, the brokerage firm "is going to have to build a support infrastructure with an investment in people and technology that is almost impossible to afford without the economies of scale offered by size," he says.
The lure of economies of scale is just one of the advantages of size in the brokerage business - advantages which have been leading to a dwindling number, but an increase in size of, industry players. "As with banking and accounting, commercial real estate brokerage has been undergoing a tremendous and rapid consolidation," says Thomas Falus, president of New York-based Cushman & Wakefield. "A big company has better access to capital along with a longer geographic reach than the little guys."
The heavy price of entry into the business of providing real estate services to corporate America is accelerating the consolidation among brokerage firms. According to John Shlesinger, executive managing director of New York-based Insignia/ESG, the big, national-oriented firms win out and become more attractive because of the perception that bigger ensures better service.
"We see things boiling down to a mix that includes a number of big national companies," along with a few local boutiques, he says. "Ever since outsourcing began [in the late 1980s], a lot of corporations will only look at the big, national shops for their real estate services needs."
A common delivery Insignia/ESG's current growth program has, in many instances, involved acquiring existing firms in markets where the company wishes to establish a presence. "We foresaw a change in the demands of clients some years ago," says Mitch Rudin, Insignia/ESG executive managing director. "We saw that there was going to be a need for a greater depth of service and a delivery system that expanded to cover a greater geography." Also important to clients, says Rudin, "is an overall commonality in the delivery of services delivered across markets, no matter what the office location."
"Commonality" does not necessarily mean "homogeneity" in the Insignia/ESG scheme of things, however. "The most critical component of service 'commonality' is to make sure that the client receives the highest level of service possible," says Rudin. "And the people who deliver these services, and the manner in which they do it, can surely differ from market to market."
In a similar vein, Jim Underhill, Eastern Region COO of The Staubach Co., Dallas, says consistency of service delivery across markets is a key concern of corporate clients - and should also be one for growing national and international brokerage players.
"There is a race by a lot of firms to be the biggest global services provider, What we have heard from a lot of clients, though, it that a lot of the mergers have not been 'digested' as well as they could have been. A firm may be large, but if it doesn't have the systems in place to provide consistency across the country and around the world, the quality of service can really be compromised. Big is not necessarily better, if your resources are not managed closely."
A less rosy picture is painted by Bill Lee, founder and president of City of Industry, Calif.-based Lee & Associates. When he looks at a number of the large, national brokerage firms, "I see chaos," he says. "I see compensation plans that have made most of their brokers either unhappy or resentful. These companies are telling their brokers with whom they can do business, and how they can do it. As a result, they are losing people throughout our region."
With 18 offices in California, Arizona, and Nevada, Lee & Associates is a regional brokerage - considered by many to be an endangered species. "If smaller was better, you wouldn't see virtually every regional firm out there either on sale or in the process of being bought," says CB Richard Ellis' Brett White. "Eighty % of the regional firms out there are in play, or have already [been] moved."
Lee says his company's revenues increased from $44 million to $75 million between 1996 and 1998. "The real reason for this growth is that quality brokers have changed their affiliations and joined us," he says. "There is a huge disparity between a weak-sister, average broker and a quality broker," notes Lee, adding that, while it is hard to determine exactly why quality brokers are three times better than the others, "they do indeed tend to make three times as much money."
Mickey Ashmore, president and CEO of Dallas-based United Commercial Realty (UCR), a regional retail brokerage firm, is not particularly beleaguered when he reports that UCR had its most profitable year in 1998, enjoying a 28% increase in revenue.
"Brokerage is very much a localized business," he says, adding that UCR is not at any sort of disadvantage with respect to the large, full-service, national firms. "We also have national capabilities through San Antonio-based Chain Links Retail Advisors," which Ashmore (the organization's chairman) describes as more of an alliance than a network. Working through Chain Links, he says, United Commercial Realty is able to "offer complete coverage for companies that need brokerage services on the national level."
Ashmore adds that independently owned regional firms offer several advantages. "These companies are more focused on their discipline and are able to move very quickly," he says, adding that respective owners of these firms are actively involved in the businesses. "They can provide a level of service that is as intense as you can possibly get."
Information Sharing Lee points to his firm's structure (it is owned by some 170 of its 288 brokers) which helps to foster the all-important, but rarely achieved, pooling of information among brokers within a company. He says clients look for firms that reflect a true collection of talent - where multiple heads are better than few.
"Our clients look to us to provide them with an understanding of the marketplace," says Lee. "Clients need their brokers to volunteer what they know, and contribute to a greater pool of information."
The traditional broker-as-independent contractor, of course, has been notoriously loath to share information. But, in a company where, in addition to being part owners, senior brokers also receive bonuses (about 80% of a typical broker's gross) based on company performance, the information flows easily and freely.
"[This bonus system] forges a direct link between contributing information and a substantial annual bonus," says Lee. "It creates a vested interest on the part of the broker in the performance of the person sitting next to him - and the better everyone does, the bigger the bonus check at the end of the year."
The boutique bailiwick All in all, it appears that at least a few regional brokerage firms are making it in today's marketplace - with all eyes on the smaller, boutique firms. "I think the regionals are doing pretty well," says Lee. "I think the boutiques are the ones feeling the real pressure."
The pressure does not seem to have affected Richard Rome, president of The Rome Group Inc., Washington, D.C., and chairman of the Commercial Real Estate Services Alliance (CRESA). Rome describes his 25-person firm as a boutique company that only represents office and industrial users, tenants and owner-occupants.
"Clients choose our firm most often because we give more responsive, personalized service," says Rome, adding that the role of tenant representative can vary greatly between various-sized firms. "I've talked with a number of people who have worked with the big, brand-name nationals in the past, and they have said that they couldn't get the company's attention or interest in anything other than the most sizable requirements.
"A national company can have many more conflicts of interest, where they are also representing clients on the developer/owner side of the business," he adds. "We've seen national companies be precluded from representing major tenants in the D.C. market just because of their landlord relationships that involve a tenant's current building or their likely relocation options."
Speaking of tenant representatives, their services remain in high demand in at least one of the nation's hotter leasing markets. "Some 90% to 95% of allof more than 3,000 sq. ft. in Houston are broker-represented," says John Spafford, vice president of leasing for Houston-based PM Realty Group.
Activity in the Houston office leasing market has surged in the past 24 months, according to Spafford. "We've seen rental rates jump 40% to 50% in some area submarkets."
And while a few large space users have established their own, in-house real estate departments to handle their office leasing needs, "The third-party tenant-rep broker is still very much a part of the business," adds Spafford. "It is very important for us as landlord representatives to maintain good relationships with these brokers, given the volume of deals they are involved in."
Going global >From Latin America to Asia's Pacific Rim, brokerage businesses are >increasing their activities worldwide. Jeffrey Finn, president of >Hightstown, N.J.-based New America International (NAI), says global >readiness depends greatly on internal streamlining. "As a rapidly changing >business world becomes more global in structure, brokerages have to have >the people, processes and systems in place to efficiently provide services >on a global basis."
"Everybody wants to go worldwide now," adds Herb Rothschild, industry veteran and head of H.F. Rothschild Co., the international brokerage component of The Alter Group, Lincolnwood, Ill. He reports having completed tenant representation work in England, Sweden, Germany, Canada, and Australia. Further, Rothschild is a firm believer that a brokerage firm's road to global expansion should not entail purchasing existing companies in other countries.
"I don't believe in ownership," he asserts, adding that a network approach provides a better route to success. "We could certainly well afford [ownership], but I like the flexibility of finding the best brokers I can in every particular market. And if a broker turns out to be not so good, I am always able to go out and get a better one."