Earlier this week I found some papers at home I had been procrastinating reading. Recently, I came across two articles dealing with the issue of tenant representation and whether or not full-service brokers are fair to tenants. I read the articles, which stated the usual arguments, put them aside and went about taking a break from work.
I actually decided to write this article after going to the movies and seeing Birdman. I found the movie extremely well done, and in the end the metaphoric question, “Can man really fly?” was left to the viewers. In my mind, there’s a similar question regarding tenant representation; can a multi-service firm really represent a tenant without conflict?
In the beginning of my career, I worked in the tenant representation division at Arthur Rubloff & Company, one of the three major full-service real estate companies in Chicago. At the time, I soon realized that when making small deals there was never any real issue, but when I made my first “large” deal in a property not owned or managed by my firm, I saw firsthand how things worked. I was called into my manager’s office and told that I obviously didn’t understand the business. Why? My manager informed me that the bulk of the company’s income did not come from commissions, but from management fees, ancillary services provided to owners and sales fees, and that is where my allegiance should be. As you can imagine, this didn’t sound right to me, so I founded my own tenant representation firm soon thereafter to “even” the playing field.
Of the two articles, the first one was commissioned by Boston-based CRESA, a well-established competitor. In the first part of the article, Are Full Service Brokers Fair to Tenants?, the author indicates that the FASB regulates and governs accounting firms, no different than how the securities and exchange commission regulates the securities industry. That said, residential real estate is somewhat regulated through local real estate boards, but nowhere in commercial real estate are firms ever asked to reveal the fact that they are dual agents. One might ask, why? And the person who asks why should clearly know the answer. Peter Smirniotopoulos, Founder & Principal of Petersgroup Consulting and a Professor of Real Estate at George Washington University identified four issues in this article, the most important being that “The US commercial leasing market lacks transparency and is characterized by asymmetric information – that is, more information flowing to landlords – and therefore skewing outcomes”. The rebuttal to the findings by Smirniotopoulos are in the article, CBRE Puts Emphasis on ‘Advantage’. A senior executive at one of the major public multi-service firms talks about a new positioning that has been created and that this positioning, “supports our core strategy of producing distinct advantages for all our stakeholders”. Interestingly enough, these “advantages” are not discussed in the article. Their goal is to be known as a “world class real estate services and investment firm”. That said, nowhere does the article discuss putting the client first, nor define who exactly the client is…the stockholders or the real estate users being represented.
In my opinion, most full-service firms are full of great talent, but if the firms are asked who their clients really are, all one has to do is look at where the bulk of their revenue comes from – owners of real-estate and investment sales…not tenant representation. It is my belief that in the largest real estate brokerages, ¾ of the revenue derives from owners and investors, and only about ¼ of the revenue derives from space occupiers. Now really, WHO do you think these representatives are worried about serving most?
Over the years, many of you have heard me speak quite often about this conflict and historically it has fallen on deaf ears. After reading these and other articles, it appears that tenants are becoming more curious about with WHOM they are dealing or doing business with. That said, any tenant, large or small who still believes there is not a conflict can check this pretty easily. A simple test is to ask their representative if he/she is willing to acknowledge that in no case during the representation of the firm by the representative will the tenant ever find his broker in a dual-agency position. If the tenant broker will not acknowledge that this situation could occur, the answer is clear…man can fly.