Coming Soon: The Discount Broker for Commercial SpacePublished: July 18, 2001 in Knowledge@Wharton
Discount and real estate broker are two concepts that rarely go together, but a new study predicts that this won’t always be the case. Joseph Gyourko and Asuka Nakahara, the director and associate director of the Zell/Lurie Real Estate Center at the Wharton School, suggest in a recently released report that the future effects of information technology in the commercial real estate industry may include the rise of discount brokerage firms.
"While commercial real estate space is not nearly as homogeneous a commodity as (say) shares of Microsoft stock, we believe the Internet and association information technologies will speed the development of a successful discount model in the commercial brokerage sector," write Gyourko and Nakahara.
In addition to the rise of discount brokerages, Gyourko and Nakahara see a number of other changes ahead for the commercial real estate industry:
- More brokers will be paid on an hourly, fee-for-service basis with a completion bonus rather than by straight commission.
- Research and property-listing will be increasingly outsourced.
- The most successful organizations will be those that function as teams rather than as a collection of individual operators.
- Specialized boutiques and narrowly focused teams within larger firms will prosper.
Gyourko and Nakahara’s study, "What does new information technology make possible and under what conditions will changes occur?" was the third and final part of a Zell/Lurie Real Estate Center research project sponsored by the SIOR Educational Foundation of the Society of Industrial and Office Realtors on the impact of new information technologies on the commercial brokerage industry.
If a discount model develops, Gyourko and Nakahara say, it will likely begin with the simplest and most straightforward deals, those in which the broker’s knowledge and experience add least. The researchers see glimmerings of this development already in such experiments as tenantwise.com in New York City.
Beyond a degree of fee compression that tends to happen whenever a process becomes more transparent, Gyourko and Nakahara predict that new compensation models will evolve in commercial brokerage. Brokers will likely be paid on an hourly basis, as is common for other kinds of professional service providers such as lawyers, accountants or consultants, with some kind of bonus for successful completion.
This need not be bad news for brokers, the researchers say. "Having the security of a retainer-like feature as part of broker compensation with the upside of a bonus from success upon closing would be attractive to many brokers," they claim.
While fixed fees and commission cuts might not sound like good news on the face of it, leaders of the trade group that sponsored the study do not see these developments as a cause for alarm. The out-going president of SIOR said he does not believe that the overall profitability of the industry will be threatened by the rise of discount brokers and alternative fee structures. "We’re going to be doing more deals, and bigger deals, in less time," says Richard C. Stanland Jr., vice president for office and industrial leasing for Edens & Avant, a commercial real estate firm based in Columbia, S.C.
Key to Gyourko and Nakahara’s thesis is the idea that online property databases that can be accessed by everyone in the industry will thrive, and that sharing property data will lead to a cut in the number of internal researchers needed by a company.
At the moment, the leaders in the commercial property database game are CoStar Group, a young $414 million public company based in Bethesda, Md., and Octane Ventures, an even younger online competitor that is backed by commercial real estate heavyweights CB Richard Ellis, Insignia/ESG, Jones Lang LaSalle and Trammell Crow.
Stanland agrees that research and listing services will be important sources of cost savings, and believes using software to streamline paperwork would be another important factor. His own firm manages shopping centers from Maine to Florida. "We still have rows and rows of file cabinets containing the leases of these shopping centers," he says. In the future, much of that will be moved onto the computer. "We’re going to become a much more efficient operation over the long term."
Long-term may be the operative word. Some brokers say that one of the big problems in commercial real estate is that unlike some industries, there is no integrated program for every aspect of the business. Stephen F. Blau, SIOR’s current president, and the vice president for biz development at GMH Capital Partners, Newtown Square, Pa., calls it "sneakerware" – because he has to keep running from one program to another.
The researchers caution that technology itself is only a part of what’s required to take advantage of the digital opportunity. New employees will be needed to manage the new technology, and brokers will need a new set of organizational skills and a new level of technological understanding to manage that staff. This will present another challenge to commercial brokers, who have traditionally been "entrepreneurial cowboy types, loners in some respects," Gyourko notes.
While most of the value brokers create is in sourcing and winning new business, as much as two-thirds of a broker’s time is spent executing business already won, according to the researchers. They say that tomorrow’s most successful brokers will be those who can concentrate on the high-value aspects of the transaction while managing support staff that can handle the more routine work.
The greater availability of information will also lead to the growth of boutique brokerages and teams within firms that specialize in a particular industry or product niche.
J. Michael Dow, president and CEO of CRESA Partners, a real estate firm headquartered in New York that focuses on advising commercial tenants, says that this trend toward greater differentiation is happening already. He sees it driven in part not just by technology, but by a growing recognition of the value of a different kind of knowledge: Knowledge of the prospective tenant. "[As a broker,] you have to understand the organization that is going to occupy the space pretty well," Dow says. This is knowledge that takes time to acquire and is very difficult to replicate, he adds.
Gyourko and Nakahara caution that in an industry where even such key basic concepts as usable square footage are not entirely agreed upon, lack of standardization is likely to slow down adoption of the technology.
In the end, brokers say that while IT is already making their life easier, it isn’t going to put them out of work. "Real estate can never be commodifed, particularly in relation to the occupant," Dow says. There’s a limit to how much knowledge can be put on a server, adds Stanland. "Relationships will continue to be important. Local broker knowledge will continue to be important."
"The thing that you have to remember is that real estate gets very personal at the point of implementation…," Blau notes. "The guy who’s going to occupy the corner office wants to stand in the office."