By Howard Ecker
Since our most recent election, fake news is, well, all over the news. It seems that everyone has their own perception about what constitutes “fake news.” Sometimes, I think fake news is anything that we really don’t want to know about or goes against our core beliefs. No matter your definition, the phrase is, at best, misleading and, at worst, flat out incorrect.
So what does this have to do with commercial real estate, you ask? Recently, I read an article entitled “Your guide to finding tech office space in Chicago” written by a commercial real estate broker. And all I could think of was “fake news” and the fact that marketing disguised as news has entered our industry. And it made me sick.
The article, which I do believe has some really good information in it, included a section about cost. Stay with me, because here comes the tricky part. The section, for the most part, says all the right things:
** Your negotiating power is as important as finding the right space.
** Working with an experienced broker helps with much more than the search.
** From risk mitigation, expansion strategy, termination rights, renewal options, flexibility and buildout, a broker is well versed on the all aspects of real estate — and how they impact your business strategy. And best of all, there‘s no fee.
Did you catch it? The slight of hand at the end? The part about “no fee.” This just is not true. In fact, the landlord assumes that tenants will have a representing broker. The landlord and tenant’s broker then split any fees.
This seems like fake news to me. The statement makes it seem like the customers are getting something free, but the fees are actually embedded in the rent the tenant pays. Now if that isn’t “fake” enough, this will really blow your mind: Not only is the fee for the tenant broker included in the rent, but the fee for the landlord broker is as well!
What also is not mentioned is something called dual agency. This happens when the landlord and tenant’s broker work for the same firm, which means that firm is collecting, most likely, a commission-and-a-half — all paid for in rent by the tenant. All represented as a “free” service. Like I told you before: fake news.
Just as important, however, is the previous paragraph from the article, which speaks to working with an experienced broker. So that begs the question: What is an experienced broker?
Is it your friend, your friend’s boss who has been working for 10 years, or a really experienced broker who can offer quality advice and is only looking out for the tenant (and in my opinion, a pure tenant rep)? Because if you hire the most experienced guy or not, the fee is the same.
I have continued to state that when someone is looking for space, they have to understand, first and foremost, whether they are the broker’s client. And if not, who is the broker’s client? In my opinion, when dealing with a public company as your agent, it’s important to remember that the “client” is really the stockholder, not you.
How often have we seen tech tenants lease substantially more space than they need because “they need space to grow?” Did anyone ever hear about other options? What about what IBM recently did in New York, moving into a WeWork space so they would not only not have to worry about design or cost of construction but, more importantly, also have the flexibility should more or less space be an issue. And their commitment was only three years.
Tech tenants are very susceptible to misleading or “fake news” when it comes to the advice they are getting from brokers and how fees are paid. Be clear — the tenant is paying for the broker. Maybe not directly, but certainly through rent. Also, be very clear that one should only lease the space they really need, and planning for “future expansion” may benefit the broker and the broker’s company far more often than if benefits the actual tenant.
Here in Chicago, the dramatically unfortunate situation with Outcome Health may be a classic example of this.
Thoughts? Questions? Shoot me a line anytime and let’s discuss.