If you’ve ever wondered why brokers aren’t calling you back when you’re looking for small spaces, let me break it down for you with simple math.
First, here’s some background on how brokers get paid: brokers usually get paid a percentage of your total lease value. What that percentage is varies from region to region 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 I’m going to use a 60/40-commission split for our purposes with 60% going to the individual broker.
To get to a signed lease, there is typically a lot of work. 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 I mention above are the same for a company looking for 10,000 square feet of space as 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. So, 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
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
This is a very simple way to look at the two deals. Every deal is unique but you can see that the numbers just don’t 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. If you could spend the same amount of time for $27,000 versus $450, what would you do with your time? Even if you tried to make a volume play, you would have to close 60 smaller deals to earn the same revenue that you would with one larger deal.
This is one of the reasons that we’ve built a site designed to allow tenants to self -serve. By providing all of the relevant information about a space on our site, we are hoping that we can really cut down on the time investment needed for research and tours by brokers. If you represent a small space that you need to get leased without losing money to get it leased, upload it to our site and ensure that you have lots of photos and that the information is complete. We’ll be sending you qualified leads in no time.