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Examining the True Costs of Working with a Commercial Real Estate Broker

Post updated on  October 4th, 2018

Finding an affordable commercial real estate lease that will suit both your company’s needs and its budget is certainly a difficult process, but one that’s always made easier with a qualified ally at your side – and that’s where commercial real estate brokers come into play.

Operating on a commission basis, the terms of their payout aren’t always clear at the outset. However, especially if you’re seeking smaller office spaces, it can be difficult to find and retain a trustworthy and reliable broker. To better understand how commercial real estate brokers operate (and how they get paid), read on:

How Commercial Real Estate Brokers Get Paid

Brokers usually get paid a percentage of your total lease value. What that percentage is varies from region to region and depending on individual markets, but it’s typically between 3 to 5%. However, brokers typically have to share a percentage of their commission with their brokerage companies. This percentage can also vary, but let’s use a 60/40-commission split as an example with 60% going to the individual broker.

To get to a signed lease, there’s a major amount of time, energy, and effort that goes into the process. There are calls or in-person meetings, searching for available spaces that meet your requirements, calls to set up property tours, the actual property tours, and lease negotiations. All of the steps above are the same for a company looking for 10,000 square feet of space or 500 square feet of space. In addition, most companies looking for smaller spaces are unsure of what their space needs will be in the next year or two so they are only looking for shorter term deals whereas companies needing larger spaces tend to look for longer lease terms. Here’s what the math looks like in both scenarios:

500 square foot space x $30/square foot per year = $15,000 in annual rent

Lease term is 1 year: 1 year lease value $15,000 total rent (for ease of calculations, I’m assuming no rent escalation)

Brokerage company’s commission 5% = $750

Broker’s commission 60% of brokerage company’s commission = 60% x $750 = $450

VS.

10,000 square foot space x $30/square foot per year = $300,000 in annual rent

Lease term is 3 years: 3 x $300,000 = $900,000 in total rent

Brokerage company’s commission 5% = $45,000

Broker’s commission 60% of brokerage company’s commission = 60% x $45,000 = $27,000

Why Securing a Commercial Real Estate Broker May Not Be Easy

Every deal is unique, but the numbers don’t always make sense for brokers with smaller spaces. This doesn’t even take into account the number of times brokers work on a deal where they’ve put in their time and the deal goes dead for reasons outside of their control. Spending the same amount of time for $27,000 versus $450 is rarely an attractive option in any profession, so finding someone qualified and experienced to handle your office search may not be an easy prospect. In the meantime, shared office spaces, co-working services, and executive suites could be a viable alternative while you seek a first time (and more permanent) office space.

Landlords and property owners budget about a 4-6% commission for the listing agent, which is split between the listing agent and the tenant representation broker once the lease is complete. However, while many commission splits are 50/50, there are lease agreements that dictate a split as wide as 90/10 in favor of the leasing agent. This is more common in competitive markets where prospective tenants are many and available space is scarce, therefore making things even more difficult for companies struggling to find office space.

It doesn’t hurt to ask a prospective broker how much they’ll be earning on the transaction. While they won’t have much say (it’s up to the landlords to determine commission splits), it’s good to know what level of service to expect. The higher the commission split, the more motivated they’ll be to get the deal done on your behalf.

How Much Will I Have to Pay to Work with a Commercial Real Estate Broker?

Most brokers will tell you their services are free, as landlords and property owners budget a commission percentage for each lease agreement. And due to this, it’s very rare that a business owner could negotiate a lower lease rate by dealing directly with the landlord – the entirety of the commission would simply go to the listing agent. While a successful business owner may need to expand to larger space every 3-5 years, a commercial real estate broker handles real estate transactions like this every month, lending more know-how and market experience to the transaction to the benefit of their client.

If you can land a broker, their work on your behalf is an invaluable asset, as it allows your company the flexibility to focus on your business and take a look at prospective properties as they become available, sending you listing information, setting appointments, and accompanying you on tours. And because they’ll be involved with the transaction throughout the terms of the lease, they’ll be able to negotiate any changes or even a lease buyout should you run out of space completely.

In markets where tenants are at a premium and landlords are rushing to get their spaces filled, a tenant broker’s commission split may be higher, meaning landlords may try and find ways to make up for that gap in other areas of the lease. While you likely won’t end up paying higher rent due to other options in the marketplace, there’s a greater chance that you won’t see tenant improvements to your liking – but your tenant rep is there to make sure that doesn’t happen.

Should I Just Find Office Space Myself?

It makes sense that a listing broker working on behalf of the landlord would agree on lower lease terms by working directly with a prospective tenant, as they’d secure the entirety of the commission as a result. While this could work in smaller office spaces or in short team and subleases, listing agents work for the landlords, so bringing in below-market deals may upset their clients. Expect average market level deals using this avenue; after all, no one likes upsetting their boss.

No matter the size of your business or the limitations of your budget, working with a commercial real estate broker can be a genuine ace-in-the-hole for business owners seeking their first location or in need of an expansion. While the process isn’t always straightforward, you should be better equipped to discuss your options with whichever tenant rep broker you consider bringing on board to assist you in your search.

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The Evolution of #CRE

By now, we’ve all heard the joke about brokers and the fax machine.  It’s no secret that commercial real estate has a dinosaur reputation when it comes to technology but times “they are a changing”- sort of.  Some brokers have embraced it while others haven’t.

While Facebook- Does it Extend to CRE? pointed to split camps on Facebook and CRE, there is less debate on Twitter, social media’s 140-character microblog.  Twitter is a conversation where experts come out on top of an array of business topics including  our industry’s very own #CRE.

However, not everyone or every top broker is on Twitter: an evaluation of the top 3 brokers (as determined by Co-Star’s annual awards) across 3 disciplines in New York, Seattle, San Francisco, Los Angeles and Chicago showed that none of these brokers had Twitter accounts.

With that said, there is an excellent community of brokers, brokerage firms and CRE services on Twitter performing some highly effective habits:

1. They are framing themselves as CRE experts by offering their opinion and feedback on various topics, articles and their own blog.

2.  They are using Twitter to promote their Twitter newsletters, blogs and websites.

3. They insert a little personality and conversation to take away some of the “your broker is invested in the sale more than you” façade.

4. They are forging relationships with others.

5. They are creating excellent name recognition with their strong presences online. You often see the same names come up over and over again for recommended tweeters as they align themselves with the connotation of #cre.

Just as important as what one does, there are “don’ts” that effective CRE tweeters practice as well:

1. They are not promoting their spaces or at least, not to excess.  While it seems to be a more popular practice on other mediums such as Pinterest, few major tweeters are listing spaces on Twitter

2. They are not spamming followers with useless and annoying information and hopefully, not viruses.

3. They are not going off topic: top CRE tweeters are known for their CRE expertise.  They are not known for their sports knowledge, photos of their family or anything else.

Are you part of the #CRE community yet? If not, no better time than the present to get started and find us @officespace!

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How Important is the Office Neighborhood?

At OfficeSpace.com, Amazon is a part of our lives in more ways than one.  Our headquarters are located in the downtown Queen Anne/Belltown neighborhoods, within one mile of South Lake Union/Denny Regrade, home to Amazon’s new proposed campus, Facebook’s new Seattle office, Vulcan and a number of up-and-coming internet companies.

Recently, Seattle mayor Mike McGinn has proposed increasing the office tower limit to 240 feet, up from the current 124 feet in South Lake Union.

Why are all these companies moving to South Lake Union?  The answer is simple: the neighborhood puts them in the “center of the Seattle universe.”

McGinn even went as far as to credit the neighborhood growth with the success the city has had in recovering from a slow economy

OfficeSpace.com CEO Susie Algard was recently featured in a Friends.org article speaking to the emphasis of transit-options and amenities.

“[The companies] want to be as competitive as possible on the recruiting front,” Algard said in the article.  “They know that people want to work where they can easily walk to lunch and other amenities.”

The office neighborhood has become particularly important with tech companies in the Pacific Northwest.  These companies are competitive with recruiting and know what their young recruits want.

In addition to restaurants, Algard mentioned doctor’s offices, parks, fitness centers and parking lots as important amenities.  On top of these amenities, South Lake Union is bustling with new condominiums.

For this reason, our OfficeSpace.com listings always include a walk score.  Tenants want to know what’s nearby and how their employees will get to work.  Our walk scores are expandable and include a breakdown of transit, restaurant, hotel and coffee options by distance.  Tenants can also search for directions by entering information on their commute.

Let’s hear back from other cities: How important is the office neighborhood to you and what are the quickly growing neighborhoods in your city?

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OfficeSpace.com’s Seattle Office Market Q2 Quarterly Report

OfficeSpace.com released its Seattle Office Market Q2 Quarterly Report today to a steady market and significant office expansions.

Vacancy rates have remained steady rising slightly from 14.4% in Q1 to 14.5% in Q2 while rental rates increased slightly from $25.83 to $26.38 respectively.

The biggest change in Seattle is the anticipated major office expansion from Amazon.com in the Denny Regrade neighborhood. This expansion is expected to add 3,000,000 square feet of class A office space. Additionally, Seattle mayor Mike McGinn has proposed increasing the office tower limit to 240 feet, up from the current 124 feet in South Lake Union.

To purchase this report for more information on major expansions and a breakdown of absorption rates by submarket, please contact John Heimbigner at [email protected].

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Facebook- Does it Extend to CRE?

There’s been a lot of talk regarding why CRE brokers should not promote their business on Facebook. The main gist: Facebook isn’t a professional network. None of your friends are on Facebook looking for a 5,000sf office or a 10,000sf industrial warehouse.

Yes, Facebook is fairly social and personal but on the other hand, as the largest social media engine, Facebook is a perfect branding vehicle for a brokerage firm or individual broker. It’s easy to control content for the most part and is a much more visual medium than many other social media tools. The photo album feature is easy-to-use and links come with a nice preview, even when you are sharing a link from another Page. Coy Davidson and Blanchard and Calhoun Commercial are great examples of broker and brokerage pages with depth.

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First, create a Page for your professional life.  Leave your profile personal so your friends who are interested in CRE can follow you on the Page and you can spare the rest.

However, don’t just create a Facebook page because you feel you have to have one. It’s a waste of time to create a page and never use it to communicate with your customers or worse, randomly update it every few months which definitely sends the wrong message. If you have a Facebook page, you’ll want to ensure that it looks as professional and polished as everything else you do.

When posting, it’s important to think about customizing your message for Facebook. Even though sites like Twitter, LinkedIn, Pinterest, Slideshare, and blogs provide a way to link back to your Facebook page., you want to post with care. Many Facebook pages look like a mishmash of photos, slideshows, hashtags and bit.ly’s and other items not properly formatted for Facebook. There are few discussions, replies or status updates formulated specifically for Facebook. In short, it looks sloppy and abandoned.

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Facebook culture leaves very little patience for spammers so you want to think twice before linking your twitter feed to your Facebook feed. If you want to use the same tweet, re-do it for Facebook by taking out the hashtags and leaving the URL text out of the body of the update. Real estate is still very much visual and Facebook leaves much more opportunity for photos. Make use of the photo album feature and facilitate and lead discussions. Facebook’s newest format Timeline lends itself to numerous branding opportunities. Create the perfect Timeline cover, include tidbits about your company history in the timeline and rearrange your featured items along the top right (the “photos” box cannot be replaced).

Does Facebook translate for CRE? Yes, absolutely! It’s a great visual social media tool to reach many users. Time might be a premium and there are better websites for CRE specifically, but if you’re going to do it, do it right.

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How to Launch a Product With a Budget Less Than a Direct Mail Campaign

We recently completed our beta launch in Portland OR in late January of this year and it went well as far as I could tell.  In the first 3 months, we had connected around 350 tenants to landlords, property managers or brokers.  Tenants had found space using our site and leases were being executed.  There’s nothing wrong with that.  The challenge for us, however, had been educating brokers on our new service and how it actually works for parties, the broker and the tenant.

Nevertheless, when it came to launching in another city, I didn’t want to execute the same way.  What bugged me was despite the email campaigns in Portland highlighting our new service to brokers, I knew at best, only 20% of those emails were being opened.  We sent beautiful folders to every broker describing in detail how our service works but I was sure a large percentage of those went unopened and into the recycling or worse into the trash.  So, we began brainstorming other ideas.  Our goal – to reach every broker and explain exactly what it is we do and again, how OfficeSpace.com can help them.

This past week, we announced the launch of our new service, starting in Denver, while we were at an industry trade show.  Instead of sending out direct mail, we delivered customized gourmet cupcakes complete with an edible OfficeSpace.com logo to every brokerage in greater Denver – that was over 600 cupcakes in total.

I reasoned even though it’s an edible item, certainly people would remember who gave it to them.  We built a campaign around our delicious delivery, building anticipation through our social media channels.  We created postcards to go with our cupcakes letting everyone know we were celebrating our birthday in Denver – and the cupcakes were free, just like our service.  We encouraged our recipients to use social media to tell us how they liked our gift and we waited.

I can already definitively say this campaign was much more successful and cost-effective than our first and here’s why: when we began to make our follow- up calls, people wanted to talk to us.  They wanted to tell us that they liked our clever idea and more importantly, they wanted to know what the company was doing.

If we could be this creative just to get their attention, what would that mean for the types of products we could create to help them? We achieved what direct mail could not: a captive audience (with full tummies to boot!).

Susie Algard
CEO & Founder
OfficeSpace.com
follow us on twitter: @officespace_com
follow me on twitter: @susiealgard

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Smart Buildings, Tech Portfolio Management- Oh My! Checking in From RealComm 2012

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We’ve been at RealComm 2012 in Las Vegas for the past two days.  The tradeshow, hosted at the Las Vegas Hotel &Casino, connects real estate with technology, a mission shared equally by OfficeSpace.com.  RealComm partnered with IBCom, focusing on intelligent building.

OfficeSpace.com had a booth where we met with professionals from Deloitte, Qube, Property Capsule, Sky Foundry and NOI Strategies amongst others.

Here were some of our favorite tidbits:

Speaker Robert LiMandri of the New York City Buildings Department spoke at “975,000 NYC Buildings – Embracing Innovation and Setting Global Benchmarks.” LiMandri spoke on the less traditional methods of finding office space.  He highlighted “The Development Hub,” a state-of-the-art facility that uses electronic submission of digital construction plans, virtual plan reviews and inter-agency collaboration.  LiMandri also spoke of the opportunities for searching for buildings by environmental friendliness including LEED certification.

Annual Digi Awards: This year’s Digi Awards included JLL, CBRE, Microsoft and the City of New York, but most intriguing were the individual awards given to Don Goldstein of CBC and Tama Huang of NOI Strategies. Huang was named one of RealComm’s Top 35 People to Watch in 2011 previously and has delivered.  We look forward to watching the careers of these winners.

RealComm Live:  RealComm hosted a video series interviewing heads of companies from Sky Foundry, Property Capsule and OfficeSpace.com’s very own, Susie Algard.  Algard went through a web demo of what we do at OfficeSpace.com and announced our Denver launch today at the event.

Commercial real estate sure seems to have come along way from its technology dinosaurs reputation and OfficeSpace.com plans to be there every step of the way.  Between online listings, construction management technology and cloud-based technology portfolio management, what’s next for CRE technology?

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Commercial Real Estate Startup Reinvents the Way Business Owners Search for Space

new home page

June 13, 2012 – OfficeSpace.com knows a change in commercial real estate technology is coming— in fact, they’ve known and are readying to launch their free broker and landlord-to-tenant service in its second market.

After its successful beta launch reaching 24,000 tenants, connecting 350 tenants to brokers and landlords and covering 186 million square feet of space in Portland, Ore. OfficeSpace.com officially launches its new service, starting with Denver, Colo. on June 13.

“As an entrepreneur, finding the right space was always more difficult that I anticipated,” CEO and Founder Susie Algard said.  “The system of waiting for someone to call you back just to give you the space details or rate information is highly inefficient.  All of the tools were focused on people who were familiar with commercial real estate, not for people who only need to find space once every few years.”

In Denver, OfficeSpace.com currently covers over 172 million square feet of space and over 3,000 buildings available for tenants to search.

The days of expensive broker-to-broker subscription services are behind.

“By providing open access to details on an office space, we are helping all business owners during their research phase,” Algard said. “In particular, we are serving an audience whose needs are currently not sufficiently met – small business owners.  It’s difficult for brokers to make small requirements profitable, but we have created tools to help them directly with that.  We connect qualified tenants to brokers for free.”

OfficeSpace.com’s website offers free viewings and listings and social media tools for sharing. The company most recently launched a free Broker Tools suite for brokers to create flyers, surveys and communicate with tenants.  It also features photo-friendly interface and information on the confusing aspects of a lease for tenants.

About OfficeSpace.com

OfficeSpace.com is a start up with the goal of creating an efficient marketplace connecting tenants with landlords and brokers.  The company, purchased by Internet entrepreneurs Susie and Alex Algard, launched it’s new beta service launched in Portland in January 2012 and to date, has serviced over 350 tenants looking for space.  OfficeSpace.com also operates one of the leading commercial real estate marketing and analytics services in Seattle, Spokane, Denver, Minneapolis, Cincinnati and Columbus and can be found at www.officespace.com.

Contact:
Ninette Cheng
Marketing Coordinator, OfficeSpace.com
office: 206.686.4545
[email protected]

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Benefits of Using a Tenant Representation Broker

Tenant Representation Broker

This post was updated on August 8, 2018.

Isn’t it cheaper to use the listing broker?  The one whose name is on the sign?

Even for savvy business people, this is a myth that we hear over and over.  In order to answer this question, you really need to understand how commercial real estate brokers make money.  The landlord pays commission for both the listing broker as well as the tenant rep broker.  However, the big caveat here is that you, the tenant, ultimately are paying for the commissions through the lease that you sign as landlords have already taken into account the cost of commissions when they determine their rates.

The listing broker is responsible for representing the landlord’s best interests.  Their job is to find a tenant to lease space at the best terms to the landlord.  Even if the broker agrees to represent you as a client, your needs come second to the landlord’s needs – and this is something that is in writing between the listing broker and the landlord.   This is a practice called dual agency.  Think of it from another angle.  If the landlord thought that the listing broker was giving you an advantage by working for you, do you think that the landlord would allow it?  The answer would be a resounding no.

A tenant rep broker’s only job in the transaction is to represent you and your best interests.  If you decide to walk away because they aren’t finding you spaces that work for you, they haven’t made a dime on you.  In addition, when they negotiate for you, they are only concerned about what will work for you, whereas the listing broker may be worried about irritating the boss and may not negotiate so hard for you.

Now, going back to the point earlier, that you, the tenant ultimately pay commissions through your rent.  The landlord has already taken into consideration that the commissions will be paid, regardless of who represents you in the transaction.

The landlord isn’t going to agree to lower the rent or give you more rent concessions because he’s going to have a lower cost of sales because the listing broker is representing you.  Listing brokers love representing the tenants for their own listings because generally, there’s very little negotiation and the deal gets done with less friction but potentially costing you, the tenant, more.  Whatever commission was budgeted for the tenant’s representative, some portion, or all of it, will be paid to the listing broker.  The bottom line is this: if the listing broker represents the tenant, they make more money on the deal.

It just makes good business sense to have someone represent you who has your best interests in mind, not someone who would like to represent you because they earn more commission but is actually legally bound to hold someone else’s best interest first.  Knowing this, why wouldn’t you want to have your own representation?