Real estate brokers have long proclaimed their industry is becoming a knowledge profession — so often, in fact, that some industry watchers might be tempted to dismiss such statements as hype.
Skeptics, however, need to start paying attention. Nowadays, major corporate clients find themselves turning to brokers for advice, not just deal making, as evidence grows that the broker is morphing into a new kind of professional. This professional cultivates the client rather than focus on the deal as the end-all and be-all of doing business.
“Brokers have become a key element in strategic decision making,” says Trex Morris, director of real estate services for the Americas at Ernst & Young. “They tell us if a deal is a go or no-go,” adds the executive of the international accounting firm, which occupies 9 million sq. ft. of offices stretching from Canada to Argentina.
At United Technologies Co. (UTC), brokers execute transactions and also provide strategic services for the maker of Otis elevators, Hamilton Sundstrand aerospace products and Sikorski helicopters, according to Ronald Zappile, national director of real estate services.
Among the tasks brokers undertake for the $48 billion conglomerate are local market forecasting, global location scouting and lease renewal decisions.
Kawneer North America, an Alcoa unit that makes construction products, employs Encino, Calif.-based Marcus & Millichap Real Estate Investment Services to exclusively provide market research.
“Their knowledge of commercial real estate markets helps us to understand how cities are growing, and we have found value in that information,” says Julie Zutz, business development manager for Kawneer. Hiring a brokerage for information alone is “certainly non-traditional,” she admits.
The broker of tomorrow — or perhaps the day after tomorrow — will represent an evolutionary leap from yesterday's broker as radical as when fish first waddled onto dry land.
This 21st century broker is no longer a listing agent with a one-track mind, says Mike Colacino, president of Studley Inc. in New York. “There are still some old-school brokers out there that latch onto a deal and run with it,” he says. “Those guys are the dinosaurs of our business.”
In short, the brokerage industry is redefining itself, says Harvey Green, president and CEO of Marcus & Millichap Real Estate Investment Services. To underline that change, the company recently shortened its name from the mouth-filling Commercial Real Estate Investment Services, emphasizing the emerging role of brokers as relationship managers.
Several REITs, for example, recently hired Marcus & Millichap to evaluate “micro areas” — local submarkets in the U.S. where the publicly traded real estate operators may wish to either expand or sell.
The arrangements call for both brokerage and research, or in some cases research only. “You will see brokers become an integral part of the investor's strategic team, just like the attorney and the accountant,” says Green.
Bill Hughes, managing director of Marcus & Millichap Capital Corp., agrees. “If you look at the best brokers, they continue to have repeat business because they are helping locate the deals that bring value to clients by showing them the right assets and making appropriate suggestions,” he says.
Changes in brokerage reflect changes in commercial real estate, of course. In the past, vacancy rates and building-by-building availabilities were esoteric knowledge that gave the broker entrée to decision makers.
The advent of computers, combined with the universal availability of basic market data through real estate information services firms like CoStar and LoopNet, and the number-crunching power of specialized accounting software, means the broker must work harder to distinguish himself in the marketplace.
Tenants no longer look simply for an economic deal. They want analysis and a range of approaches and choices. “Our brokers run financial analyses from all different scenarios to determine whether we should buy something or lease something,” says Ernst & Young's Morris.
The accounting and consulting firm confers with brokers on an ongoing basis to determine what their key metrics are, which can be a problem for an organization that is constantly buying, selling, leasing or renewing leases throughout North and South America.
In short, clients have become more sophisticated. Consequently, today's broker must present different choices and permutations of the deal, according to Colacino of Studley.
“You are looking at a range of alternative strategies, which is a matrix approach,” Colacino says. “Understanding the matrix and communicating the matrix to your customer is your job.”
“This is not brokerage in the classic sense of ‘Here's the deal, take it or leave it,’” adds Colacino. Instead, Studley brokers offer their analysis and alternatives to clients.
Another company training its brokers to be strategic thinkers is CB Richard Ellis. CBRE President Christopher Ludeman says that in an age of rapid information flow, clients are increasingly demanding. The volume of information that brokers must absorb can seem overwhelming. Then there is the problem of synthesizing the data.
“Our clients are telling us their time is precious and they have very little of it,” Ludeman explains. “They are looking for the most successful prospects. They need leadership in some cases, and ‘followership’ at other times.”
Ludeman says brokerage must emerge from being an “episodic” service to contingency planning and managing ahead. “To me, that defines a consultant,” adds Ludeman.
The expanding role of the brokerage, if not the individual broker, is being thrust on the brokerage industry by Corporate America, according to Ludeman.
He tells of dining recently with the real estate manager of a Fortune 1000 corporation. “I need you in Latin America to do project management for a substantial addition to our distribution system,” the corporate manager told the brokerage chief.
Five years ago, Ludeman observes, “We were not doing those kinds of distant project management deals, but the client knows that we have built up these disciplines, and that we can recapitalize an asset from the ground up, manage construction, and monetize their balance sheet.”
Inherent conflict of interest?
One veteran observer, however, pours cold water on the notion of the broker becoming a consultant who holds a distinct role from that of the commissioned salesman.
“I can't believe the real estate brokerage is morphing itself into the investment advisory business,” says Lawrence Fiedler, president of New York-based JRM Development Enterprises.
Fiedler is skeptical as to whether brokers can add advisory services to their personal menus. “You can't be taking money on both sides of the equation,” he says. For brokerage and advisory services — whether that advisor is the broker herself or another person in the same firm — there is inherently a conflict of interest.
Fiedler, who is also an adjunct professor at New York University's Real Estate Institute, is dismissive of the idea that a broker can even serve as a point person for different experts such as investment advisors inside the same firm.
“You can't be an advisor to a bunch of people and represent a buyer to a bunch of people at the same time,” he says.
The problem is that the firm that performs both functions loses credibility, according to Fiedler. “The clients just turn on you because they don't know if you are giving the best advice on any function.”
CBRE has given some thought to potential conflicts of interest. The firm has instituted strict policies and procedures — both institutionally and on the Internet — that talk about disclosure and how the company manages conflict when the perception of conflict arises.
The separation includes an in-house compliance officer, plus a hotline to a third-party expert, who callers can speak to on an anonymous basis.
In most brokerage shops, in fact, a kind of firewall exists between brokers and in-house consultants who provide services like tax advice or financing. The broker's client is unlikely to be snookered into using a firm's services simply because he or she has hired a broker from the same firm, explains Green of Marcus & Millichap.
“Unlike the securities industry, for instance, there is very little place for real estate companies to hide information,” explains Green. Any investor who is “at least half-awake,” will be able to verify any claims by any real estate professional, by comparing them with the asset and its performance. In the current competitive marketplace, Green expects clients to shop and compare.
The market itself — or reality itself — can go a long way toward keeping a broker honest. “Anything you do over time, the results of those actions will surface,” Green says.
Perhaps a more general definition of consultant would make more sense here, suggests Studley's Colacino. “In the Latin sense of the word, a consultant is an advisor, and the broker is a consultant in that sense,” he says.
More to the point, it is unlikely that brokers will ever want to charge fees simply for advising, because the big money remains in brokerage.
“Real estate brokers are not going to change their stripes and start doing consulting instead of brokerage,” insists Rand Sperry, co-founder and CEO of brokerage Sperry Van Ness. “The only time you see that is when the market tanks,” he says. Otherwise, “the broker, as always, is out to bag the big elephant.”
One unchanging truth is that money will always be better in brokerage sales and leasing commissions than in consulting. “There is a ceiling on what you can make from consulting,” Sperry says, “but there is no ceiling on the money you can make in brokerage.”
Morris Newman is a Los Angeles-based writer.