Development Magazine Spring 2012

Development - Ownership

Owners and Brokers: Can We Talk?

Are property owners from Venus and commercial real estate brokers from Mars? Do they understand enough about each other’s business to move transactions along in a challenging environment? Development magazine set out to learn what owners wished brokers knew about their business and negotiations and vice versa.

For the most part, interviewees had high praise for each other; after all, they said, anyone who’s still in business now must be fairly knowledgeable, nimble and skilled. But as in any long-term relationship, there were just a few things that irked owners and brokers about each other. Here are some highlights of those interviews.

From Owners to Brokers:

  • We value honesty and transparency. Tell us what’s really important to your client, not just your wish list.
  • Understand how our company’s goals, objectives and culture are unique and different from others in the market.
  • Don’t waste your time or ours with a requirement that doesn’t fit us.
  • Know when to step aside and let the principals deal with each other.
  • Don’t try to negotiate every single issue – that doesn’t work today.
  • Manage your client’s expectations: a small user isn’t going to get signage, as an example.
  • We can only be flexible to a point. Deals have to be financeable.
  • Help keep the deal on track.

Michael McNerney, of Lowe Enterprises, said “Most brokers generally understand that their key role is to bring two parties together. Tenant rep brokers try to protect their relationship with the tenant and want to continue to be the filter. But good brokers know when it’s time to step aside.”

He observed that brokers have had to be more creative for the last three years, and that “cookie cutter deals don’t happen.” They also have to understand what the tenant’s business plan is and how it best aligns with the landlord.

Jack Goodwin of Miller-Valentine said, “There is nothing more frustrating than having to deal with someone who’s not up to speed about the market or the process.” What Miller-Valentine looks for in brokers representing Miller-Valentine in leasing or sales mirrors what all owners said: they must understand thoroughly the product they’re representing. “Things are too competitive to do things off-the-cuff. You need to know what it takes to get a deal done, with a plan for marketing the property and what investors are looking for. The last thing we want is to be told we can sell it for X price, but that’s not what buyers are looking for. You don’t want to misstep,” noted Goodwin.

He remarked that one unwelcome trend is that there is more competition between owners and brokers. Brokerages are offering more products to clients, including property, asset and construction management. “In some cases it’s a value-add, but in others, it’s just to enhance the bottom line,” he said. Moreover, some take leads and turn them into prospects for development deals.

Greg Nelson, principal, Nelson Johnson Developments, a family-owned company with close to a million square feet of commercial space, said he wished some brokers were more on top of the market. “They seem to feel like developers are the big rich guy but we’re not. They [brokers] make the market. They create the expectations of what’s needed but they don’t necessarily relay that to the owner.” He added that brokers focus on rents, but other issues are important too. If you meet directly with tenants, you find other things they need that are not necessarily rent-driven, such as utility costs. Still, Nelson commented, “We do learn a lot from brokers about tenants’ needs, especially if we’re doing a new development -- things like number of docks, grade-level doors. It’s very helpful.” He believes in getting brokers involved early on.

Peter Cocoziello of Advance Realty, remarked that if you have the components of integrity, honesty and full intent of disclosure, “You’re in a position to be more forthcoming and have a more cohesive discussion and negotiation.” Also critical: timely communication of important information, with no hidden agenda or inadequate information – because that leads to a stalemate. The hard issues of rates, concessions and all related items should be disclosed up front.

He pointed out that brokers sometimes don’t understand all the benefits of a particular property or ownership and added, “Sometimes requests are so crazy, like signage and parking rights, even from a small user, as well as caps on operating expenses and management fees. Tenant brokers try to present the most aggressive number for their clients.”

As for the nearly universal call by brokers for owners to be as flexible as possible in this market, Cocoziello noted, “This isn’t rocket science. Clauses in leases are not that different. We should be able to put together a lease very quickly.”

Deborah Boyer of the Swig Company’s advice on selecting brokers to represent owners: “You want a broker who’s part of your team, a strategic partner who truly understands the building, so they’re not representing things that can’t be delivered, or are too expensive to be delivered. They should be experts in their submarkets. They need to reflect the company’s business practices and ethics to the greater community.”

From Brokers to Owners:

  • We value honesty and transparency. We don’t like surprises. If there’s an issue that’s going to affect the building, tell us about it.
  • Be flexible and realistic about the market. Be responsive to the tenant’s needs.
  • Understand that tenants today want to know a lot more about your financial status and your ability to do TIs and operate the building well.
  • Understand why deals can take longer; tenants may have multiple layers of approvals to go through, or they may have a changing cast of characters involved in the requirement.
  • Don’t try to negotiate every last issue. That doesn’t work today.
  • Make sure that there’s good communication throughout your company, so everyone is on the same page regarding a potential transaction.
  • Respect the commission agreement.

John McDermott of Sperry Van Ness observed, “The big blind spot for owners is where they are in the cycle. Where’s the bottom? Every market, every product type, is at a different level. Owners have to ask, where do I fit? Are my rents at market? Is there rent rollover risk? Can I retain tenants and at what cost and what concessions?”

Owners must realize that the same pricing for all suites does not work. “Not every suite is going to be worth $24 a foot. It may be $10 or $30. Price each suite accordingly and price ahead of the market.”

McDermott further remarked, “Most tenants today have lived through the last three years, where their buildings could have been owned by two, three or four people. Today our building is owned free and clear by a hedge fund. It’s 40 percent vacant. So tenants are concerned about ‘who’s my landlord, what are his capital reserves?’”
 
Mitchell Katz of Newmark Knight Frank noted that the landlords who are most successful are flexible and have understanding and patience in dealing with tenants. He added, “The tenants we represent don’t necessarily have the most direct marching orders. Things change along the process. Today’s economy has stretched out the process. Every day you think you’re going to get there. That’s where patience of the landlord comes in.”

Katz recalled completing a 130,000-square-foot industrial deal where 18 months earlier, the owner he represented was a second-place choice and the tenant was going to negotiate a deal with its first choice. But that owner was inflexible and the deal fell through. “The tenant came to us and asked, can you make our deal? Our landlord was receptive, responsive and flexible and did what I said they could do in terms of time frame, logistics and budget.”

Then, of course, there’s the issue of compensation. “The commission agreement is part of every deal. When owners don’t want to address that until the deal is done, or they give the brokerage firm a hard time, what are they going to do to the tenant in negotiations? The agreement should be treated with respect,” said Katz.

David Bercu of Colliers observed, “Everyone’s under stress today. Both sellers and landlords believe they’re being beaten down. It’s important as an agent to educate them that the business environment is challenging for users too. Owners need enhanced sensitivity to the tenant or user situation. They have all the same challenges. It’s not a one-way street.”

Seena Stein of Newmark Knight Frank pointed out that having built a level of trust over time with landlords and understanding each one’s quirks and preferences is a big help, particularly in an environment where doing deals is a “rush and wait kind of thing.” Like other brokers, Stein prefers working with owners who respond quickly to prospective tenants’ needs -- not necessarily easy when, for example, “getting the cost of a complete build-out for labs or a data center is a lot of work.”

Even when a transaction is on track, it can derail at the last minute if communication within the owner’s organization is flawed. She recalled one 25,000-square-foot office transaction that floundered because, just when the tenant was about to sign the lease, it became clear that the owner didn’t like the tenant’s type of use. “We should have learned that early on,” she said. The tenant moved to another owner’s building, next door.

John Harty of Voit pointed out that owners need to understand what needs to be done immediately when a tenant moves out, in terms of capital expenditures, to improve the building’s image, make sure the space shows well and is functional. That includes painting, sprucing up the lobby, façade and rest rooms. “If a tenant has a choice of 10 or 20 buildings, the tenant broker has to decide which ones to select for showing; they can’t see them all.” That broker will bring clients to the buildings that show the best.

Harty deals primarily with leasing institutionally-owned Class A and B office buildings in southern California. “It’s incumbent on the broker to educate owners as to the realities of the market, so they can be quick to respond to tenant demands,” he noted. If an owner has unrealistic expectations about rental rates, the resulting lack of momentum can have a negative impact. “You stop seeing deal flow. A tenant looking for 5,000 to 10,000 square feet has up to 30 choices, which is too many to tour. You won’t even get to see the deal.”

Negotiations hinge, of course, on nuances of supply and demand. Harty explained, “We’re at an interesting place in the market. Twelve to 18 months ago, rents were declining and then flat for nine to 12 months. Some tenants were unrealistic about where deals should get done. Six months ago, they were very aggressive, but landlords decided that it would be better to keep the space vacant than to do what the tenants wanted. Now that is changing; the market has firmed and is poised to rebound, and everyone is more realistic. The market has found itself in the last nine months. With a 14.9 percent vacancy, this office market is not far off from being balanced.”

When Collaboration Works

The Swig Company had a problem. Its historic Mills building on Montgomery Street in San Francisco was facing an imminent 60,000-square-foot vacancy when an existing tenant did not extend its lease, during an “anemic point in the market,” according to Deborah Boyer. Concerned about the capital investment likely to be required to reposition the space, the company interviewed several broker teams and found CBRE’s proposal the “most creative and innovative.”

CBRE recommended converting space that the tenant had already vacated to the shell and building it out as creative space, on the theory that it would be possible to get a south-of-market tech tenant to venture to the finance district, finding an interesting old building appealing. “We went out with a marketing flyer without the address and we didn’t identify the building. The flyer quickly generated 40 phone calls. That created a huge buzz, which was fabulous,” remarked Boyd.

Tech and non-tech tenants were interested and brokers also brought in owners from other buildings to see what Swig had done. The process brought Swig its first tenant in the tech suite space: an online restaurant reservation company, SeatMe, but the biggest space of 39,000 square feet on the seventh floor remained. SeatMe agreed that Swig could continue to show its space. There was significant interest in the seventh floor, which resulted in an online gaming app company leasing the space beginning in January 2012.

Swig had wanted to limit its capital investment, but realized that a larger investment would result in a significant rent increase because of the market it could tap into. Boyer noted that the rent for the new tenants is significantly higher than it had been for the former tenant, and about $10 higher than it would have been for a “commodity user.”

This collaboration brought together the broker, design team, chief engineer and contractor. “We definitely relied on the brokers to inform us of their experience with tech clients. The tech culture involves newer companies and younger principals who look at the space and want to move in tomorrow because they can’t work in their garage anymore.”

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