Tenant representation is perhaps the most competitive arena within the commercial real estate brokerage industry. Brokerage companies large and small are all chasing the same group of space occupiers through cold calling, relationship building, networking, entertaining, etc. There is only so much business to go around, and to tenants, brokers tend to all look and sound the same. Even tenant rep only firms need to compete with the traditional brokerages that represent landlords. No matter what you call yourself as a broker, you have competition coming from every angle. Not to mention, tenants are exceedingly demanding of their service providers to deliver more solutions for lower costs. It’s really a battle out there.
What’s worse is there is a hidden layer of competition for tenant rep brokers – Landlords. Yes, that is right, landlords actually compete for tenant rep business. Not in the sense that they actually represent tenants, but in the sense that they absorb commissions that are otherwise to be earned by brokers who advise tenants on renewals, and sometimes new deals. Now I am not suggesting that this is at all wrong or unethical (in full disclosure, I represent landlords as well as tenants), but it is simply the nature of the business. If a landlord can negotiate a favorable deal without having to pay a broker, then it is in their best interest to do so, and they should. But as a tenant rep broker, you should be aware that the sales path may actually take you through the landlord.
To the tenant, a landlord is the guy that comes around and asks if everything is OK, sends you tickets to the game, offers you space when you don’t need it. To the tenant rep broker the landlord is the guy that says, “bring your tenant to my building, we love paying brokers,” or “we treat our tenants well, they will be in good hands.” What landlords don’t necessarily broadcast is that they will do anything in their power to keep rents high and deal costs low. Again, that is their business and that is completely fair.
But from the tenant rep perspective, it presents a serious challenge – explaining to a tenant why they need a broker. That is a topic for another blog post, but the basic argument from the tenant rep is that if a landlord offers a tenant a “market deal,” there should be a commission imputed into the rent. And because “market deals” typically involve brokers, landlords expect to pay a commission on every deal. That is how they underwrite their investments. So when a landlord does not pay a commission and the tenant gets a “market deal,” the commission is left on the table for the landlord, and the landlord wins. It is not stripped out of the rent or disclosed that it exists. Therefore tenants may end up paying a premium when dealing directly with their landlord.
I am not suggesting that tenants should never deal directly with their landlords in negotiation, because it is their choice to do so, I am however suggesting that this element makes it more difficult to win tenant rep business. So my message to tenant rep brokers is – stay on top of your existing relationships and learn how to sell your value proposition like Don Draper.