One fallout of the great recession was the substantial decrease in commercial real estate occupancy rates. Tenants may be able to now move to office space that was previously too expensive or lower their overhead by moving to a more cost-effective location. The editor of CREW Corner, Teresa Warren, sat down with Lindsey Smith, a San Diego commercial real estate office broker, to talk about how her services can benefit a company looking for new office space.
Teresa Warren: Will I end up paying more if I use a broker because they have to be paid a commission?
Lindsey Smith: No. In most cases the landlord pays the tenant's broker fees. Usually the landlord has hired a listing agent to represent them. In the listing agreement, the landlord has committed to pay an agreed upon fee to his/her agent for any new leases that are executed in the building. If the tenant is not represented, then the listing agent receives a full fee. If the tenant is represented by an outside party then the fee is distributed between the agents.
TW: Will a landlord give me a better deal if I don't have a broker?
LS: A tenant rep broker is usually able to negotiate a more aggressive deal than a tenant. Most tenants' primary focus is running the operations of their business successfully — not looking for office space. Since the average office lease is three to five years, tenants are likely unaware of the market nuances that have occurred since executing their last lease and consequently may not know what concessions to ask for. For example, a tenant might focus exclusively on a reduction in their contract rate and not think to ask for concessions such as free rent, a new base year or tenant improvements. Most businesses negotiate their leases infrequently, whereas the landlord or listing agent negotiates deals regularly, giving them an advantage. A tenant rep broker will help balance this advantage. For these reasons, it is also important to engage a broker to negotiate lease renewals. Real estate is one of the few industries where repeat customers are often penalized. Unless a landlord truly thinks that a tenant will move, they are often less likely to extend concessions to an existing tenant because they know it is often more convenient for the tenant to remain in their existing space. Even when competitive properties offer slightly lower effective rent, there could be little or no cost savings to the tenant after accounting for the move expense, inconvenience and potential downtime.
TW: What if I already know which building I want to lease and don't need anyone to search around for me? Do I still need a broker?
LS: Yes, when you hire a broker you are not simply hiring a tour guide. Touring the market is only one component of the many services that a broker can offer. The real value of hiring a broker is their knowledge of the market place. A good broker will listen to the client’s needs and utilize their knowledge of the marketplace to structure a deal that meets or exceeds their client’s objectives. Brokers assist in negotiating the deal, formulating the letters of intent on their client's behalf, engage with architects and contractors to ensure that the client's tenant improvement needs can be met, conduct lease audits, review and evaluate the tenant's lease prior to signing and much more. Even if a tenant is certain that they have selected a location or that they wish to renew in their current location, their agent still may suggest touring the market in order to create leverage in the negotiations.
TW: Should I only use a broker if I have a big company that requires a lot of space?
LS: No, even small tenants should seek representation. Many small businesses and start-ups are on tight budgets and can benefit tremendously from broker representation. A broker can help save time and cut cost, which can significantly affect the productivity and profitability of the business.
TW: How do I find a broker, and how do I know which broker to use?
LS: A broker's primary job is to serve as a trusted adviser for the clients that they serve. Ask your current service providers (lawyer, banker, accountant) for referrals. Since you have already built a relationship with these trusted advisers, you are likely to feel comfortable with their recommendations.
TW: My tenant rep broker asked me to sign an exclusive representation agreement. How do I benefit by signing this?
LS: Signing an exclusive agreement creates a fiduciary relationship between the tenant and broker and is very similar to hiring an attorney, accountant or other trusted adviser. Your broker becomes a single point of contact for your space requirement and frees up your valuable time. This single point of contact significantly reduces the time and resources a tenant would dedicate to educating multiple brokers on the requirement, seeing duplicative buildings and updating multiple agents as the requirement evolves or changes. Additionally it keeps the interest of broker and client aligned. When you commit to a broker, it allows that broker to fully invest their time and energy to your requirement because it minimizes the broker's risk of potential compensation loss by being circumvented by a property owner. Additionally, an exclusive relationship strengthens a broker's negotiating ability on the tenant's behalf because it establishes that the broker has real authority and that their offer should be taken seriously. It also allows the broker to use exclusivity as a negotiating tool by alerting the owner that the broker will receive a commission at whichever property the tenant chooses. Most importantly, it allows the tenant to have a single objective adviser to assist them in the leasing process.
Smith is a member of the Office Division of Cassidy Turley BRE Commercial in San Diego. Smith serves on the 2011 CREW San Diego board of directors as director of sponsorships. Warren is president of TW2 Marketing, a San Diego-based marketing and public relations firm .