With national office vacancy hitting 15% by midyear, leasing brokers are fighting an uphill battle to close deals. Many aren't closing any deals at all. But the lucky few are benefiting from a spate of landlord-driven bonuses. Even Equity Office Properties Trust, the largest office landlord in the nation, has spent millions to incentivize brokers who fill their buildings with smaller tenants.
“Broker incentives have always been with us, especially in a weak leasing market,” says Al Beaudette, senior vice president of Brentwood, Calif.-based Lowe Enterprises.
Brokers should enjoy it while it lasts. During the last boom cycle, landlords rarely offered cash bonuses to brokers who delivered tenants to their buildings. And once the leasing markets heat up again the incentives craze is likely to cool off.
From a tenant's perspective, broker incentives can be a thorny issue. After all, how can tenants be certain that their broker is acting in their best interest when cash incentives are readily available?
One San Francisco-area landlord, who owns and leases more than 1 million sq. ft. of space, complains that some brokers are using the down market as a springboard to demand outrageous bonuses. “Brokers are demanding double commissions because other landlords are offering them,” says Bob Kraiss, director of corporate facilities for Adaptech Inc. “They are spending more time negotiating their commission than they are working on the tenant's deal.”
The worst part, says Kraiss, is that some brokers are even demanding a double commission just to bring their client by his building. While Kraiss is offended by this approach, he also knows full well that this cycle won't last forever. “And I've got my list of brokers who have made these demands while the market was down,” he says.
However, Sean McCourt, chairman of Ford Land, the real estate arm of Ford Motor Co., which owns and leases 125 million sq. ft. of office and industrial space across the United States, isn't as vigorously opposed to incentives. “You want to work with someone who is aligned with your best interests,” he emphasizes.
McCourt, who also serves as chairman of CoreNet Global, the national association of corporate real estate executives, has no problem with broker incentives as long as they are disclosed to tenants before the deal has closed. In the end, McCourt believes that most brokers who work on commission aren't willing to burn bridges with clients simply to close a deal.
When landlords are hemorrhaging space, incentives simply reflect the realities of the business climate, says John Igoe, vice president of real estate and site services for Milpitas, Calif.-based Palm Inc. He believes that since brokers bring together a buyer and a seller, they effectively control a commodity. “I don't love the fact that these incentives are out there, but the brokers do control the tenants so it's all about supply and demand,” says Igoe, whose firm leases 350,000 sq. ft. of office space nationwide.
REIT Rewards
Many landlords trying to fill a glut of empty office space clearly subscribe to Igoe's way of thinking. Chicago-based Equity Office Properties Trust's “Think Small” promotion, for example, offers a $2,003 bonus for any broker who closes a lease under 5,000 sq. ft. at one of its properties. One additional incentive: Equity Office, the country's largest office real estate investment trust (REIT), is paying commissions within 48 hours.
Barry Spizer, a broker since 1981 and principal with New Orleans-based commercial brokerage SRSA Commercial, has brokered 125,000 sq. ft. of leases at Equity Office buildings over the last year. That's largely because Equity Office is so dominant in the metro area, where it owns more than 2 million sq. ft. of Class-A space. According to Spizer, Class-A office space in downtown New Orleans averages about $15 per sq. ft. these days, with the suburban rate a bit higher at $20 per sq. ft.
“They are very broker friendly at Equity Office,” says Spizer. Indeed, Equity Office in March invited its top 100 brokers of 2002 to The Boulders, a swanky desert resort in Arizona. The all-expense paid weekend included massages, golf, breakfast with chairman Sam Zell and Humvee tours of the desert. Spouses also were encouraged to attend. “It's rare to see something that was so extreme,” says Spizer.
According to Spizer, Equity Office's broker summit for top producers is slated to take place again next year at the Boulders. “I just hope I'm there to attend.” Spizer believes that Equity Office's generous approach is a smart move because it will lead to more leasing deals by motivated brokers such as himself.
Equity Office declined to comment on its broker incentives. But it's clear why the incentives are necessary. Equity Office's portfolio-wide vacancy increased by 2.9 percentage points between the end of the second quarter of 2002 and 2003 and now stands at 87.2%. The company's total revenues for the second quarter of 2003 were $811 million, down about 6% from $861.9 million during the same period a year ago.
New Orleans brokers aren't the only ones getting greased by incentives. In Dallas, for example, landlords are treating brokers to lunch — and even paying them to show up. “I've heard of Dallas landlords offering a $100 gift certificate to the mall to anyone who toured their office space, with or without a potential tenant,” says Jay Lucas, president of office and investment for Dallas-based Harry B. Lucas Co.
It wasn't always this way. “Back in 1979 there was one landlord lunch a month,” Lucas recalls. “Now I can go to a different landlord-sponsored lunch a few times a week.”
Differing Perspectives
The current wave of incentives also brings to light the philosophical differences among leading brokerages about whether a commission or salary structure is the ideal compensation model.
“There is a salary model that may be more attractive to brokers in difficult times. But the commission structure is still intact,” says Michael Herzberg, chairman and CEO of consulting firm FPL Associates. Herzberg has completed over 125 consulting assignments involving real estate brokerage compensation.
“In this business, if the client doesn't feel that the broker did a good job, the client won't give that broker any repeat business,” says Herzberg. Despite changes he's observed in the brokerage industry over the years, Herzberg doesn't believe that the popularity of the commission-based approach is likely to wane.
But one of the nation's most powerful real estate service providers takes a much different view of the compensation issue. Recognizing the potential pitfalls of the commission structure, Jones Lang LaSalle long ago implemented a salary-plus-bonus compensation model for its brokers. The Chicago-based firm, which manages 735 million sq. ft. of office property worldwide, is a rare breed in that regard. Jones Lang LaSalle's largest brokerage rivals all use a commissioned model for their brokers.
“With commissions it is all about closing deals. The commission structure misaligns the client/broker relationship,” says Peter Roberts, COO of Jones Lang LaSalle. “People who are only motivated by closing deals aren't interested in maximizing the client relationship.” In the 1970s, Jones Lang LaSalle switched from a commission model to the salary-plus-bonus approach to address potential conflicts.
The latest trend is for brokerages to hire salaried professionals and promote their “full-service platforms.” Appraisal, advisory and other consulting-type functions are now standard issue at brokerages. Roberts believes the blended approach with brokers on commission and corporate services staff on salary is popular because that makes sense.
“Companies that have had commission structures for years now have corporate services staff on salary. It's all about broadening the services that a brokerage can offer, and it allows us to work with clients across their entire portfolio,” Roberts says.
The team approach has grown more popular recently, particularly at firms that have added corporate services staff to supplement their brokers' skills. Teams of brokers are also splitting commissions more often than ever before, as corporations are placing greater demands on brokers.
“I think in many ways the team approach benefits clients rather than a single cowboy broker out there doing the deal,” says Lynn Schenk, vice president of St. Louis-based Grubb & Ellis Krombach Partners and president of the Society of Industrial and Office Realtors.
Schenk believes that the corporate real estate model has shifted over the years, as corporations have become more savvy about making real estate decisions. They also expect something from their broker. What they demand, says Schenk, is consistency over time rather than transactional wizardry on a single deal. “This also saves the corporations from spending a lot of time trying to find new brokers on every deal,” she says.
Still, most brokerages rely on commissions to fill their empty spaces. Mitchell Rudin, CB Richard Ellis' president of U.S brokerage, says that the entrepreneurial nature of commissioned work is the reason so many people aspire to be brokers. “Our people are driven by the revenue opportunities that exist out there, and we have an absolute commitment to the commission structure,” says Rudin, who would not discuss how CB Richard Ellis structures its splits.
The leasing downturn has made life miserable for commissioned brokers, who risk going without a paycheck, if they can't find deals. But, “the flat salary just isn't a draw, even in the weak leasing market,” says David Frosh, president of Irvine, Calif.-based brokerage Sperry Van Ness. “Some of the highest paid people in the world are commercial real estate brokers.”
In other words, the appeal of working as a broker lies in the risk/reward nature of the work — and the upside potential of making a killing in commissions.
The Split Factor
Historically, leasing brokers split their commission 50/50 with the brokerage firm they work for, but that standard also has changed in recent years. Nowadays most brokers receive 60% of the commission, and the remainder goes to the house.
In a healthier market with lower vacancy, few brokers will pocket 90% of the gross commission on a large lease transaction. But that's the split Seattle-based brokerage GVA Kidder Matthews offers its brokers — 90% to the broker, 10% for the house on gross commissions above $100,000. So, on a 50,000 sq. ft. deal that pays $5 per sq. ft. in broker commission, this split translates into broker pay dirt: a staggering $225,000 of that $250,000 goes to the broker.
“That provides an incentive for our leasing brokers to work hard, and under this split our brokers can get by on fewer deals,” says Jeffrey Lyon, president and CEO of GVA Kidder Matthews, Seattle's largest commercial brokerage. Lyon believes that the 90/10 split gives his brokers added motivation to close deals, since the reward for doing so is so rich.
At GVA Kidder Matthews, the split reverts to 50/50 below $80,000 in gross fees with a 70/30 split on fees earned between $80,000 and $100,000 (see chart page 62). “The ones who can do this 90/10 split are the boutique firms like us. The national firms just have too much overhead,” says Lyon of GVA Kidder Matthews.
Splits may vary between firms and individual brokers, but many corporations demand consistency on another level: service. This is especially true outside of the U.S, where corporations are aligning with one or two brokerages over a long period of time.
There's also another difference between domestic and offshore brokerages — most of the latter rely on a salary-plus-bonus model for their brokers like Jones Lang LaSalle.
But as Ford Land's Sean McCourt says, there's a rub. “Many of the brokers in Europe tend to be consultants. But the problem is, you don't get the extremely high level of service from them the way you do here,” he says.
McCourt believes that because the “pie is being divided up among more people” in Europe, there is less incentive for the broker to work tirelessly to close the deal and ultimately satisfy the client.
But will this team approach mean the demise of commissioned brokers? Don't bet on it, even if some find it unsavory. “The fundamental model permits so many conflicts of interest,” says Peter Kitchak, president of Minneapolis, Minn.-based Keewaydin Real Estate Advisors. His brokers are all salary based.
“People are asking their investment bankers about conflicts, so maybe they will start to question their real estate brokers next.”
GOOD THINGS IN SMALL PACKAGES
In July, office REIT Equity Office Properties Trust launched a broker incentives promotion called “Think Small,” which rewards pint-size leasing deals at their properties.
Here's how it works:
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Brokers who close leasing deals up to 5,000 sq. ft. receive a $2,003 bonus per deal.
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Equity Office delivers 100% of the commission check within 48 hours of the lease signing.
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The program does not include renewals or expansions.
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Expires Dec. 31, 2003.
Source: Equity Office Properties Trust
JACKPOT!
For a GVA Kidder Matthews broker who earns over $100,000 in gross fees, the returns are huge. As the gross commission falls, however, so does the broker's share of it.
| Split | Gross Fees | Broker's Cut | Brokerage Cut |
|---|---|---|---|
| 90/10 | $200,000 | $180,000 | $20,000 |
| 70/30 | $90,000 | $63,000 | $27,000 |
| 50/50 | $70,000 | $35,000 | $35,000 |
| Source: GVA Kidder Matthews | |||