The long-running debate on the potential conflict of interest that exists among real estate firms representing both tenants and landlords stirs strong feelings on both sides.
In a new white paper on the topic, tenant rep broker Gail Corder Fischer doesn’t mince words when she describes the organizational conflicts of interest as a “spreading cancer” in the industry. “It’s a gamble for a company to put its commercial real estate portfolio in the hands of giants that service multiple masters, and whose coffers have more to gain by supporting the best deal for landlords rather than helping tenants minimize costs,” she notes in the report.
Fischer is vice chairman of Fischer & Company, a national tenant representation firm based in Dallas. She created the white paper to shine a spotlight on what she views as a “huge” problem in the industry. Situations where a conflict of interest exists are not just isolated cases here or there. It is far more pervasive than anyone will admit, says Fischer. For example, Fischer & Company recently took over a tenant rep assignment for a client in Colorado after a number of conflicts came to light. The tenant had initially worked with a real estate firm that ended up having an ownership interest in a particular building that it was showing to the client.
“Our competitors are very smart people, and there are very good firms,” says Fischer. But there are situations where the tenant/client does not see all of the available properties in a market, or one property gets promoted over others.
“You have to be indifferent to where your tenant/client goes, and if you have an interest in these buildings, or a co-worker that sits next to you represents one of the buildings, it is a little more difficult to be disinterested.”
Missing the big picture?
On the other side, full-service real estate firms have equally strong views on their ability to deliver services to both landlords and tenants. “There are some firms that advocate that they only represent tenants. Frankly, I think that is absolutely the weakest argument going,” says Steve Purpura, a managing partner and Northeast market leader for Transwestern in Boston.
Purpura contends that full-service firms are actually in a much better position to advise clients looking for space. He makes the argument that full-service firms have greater visibility into the market, whereas tenant rep brokers only see deals that they are working on. They don’t know which other tenants are looking for spaces, and they don’t know what landlords are looking for. In Purpura’s view, tenant rep brokers only see 20 percent of the picture.
In the Boston market alone Transwestern did about 500 deals this year. Of that, approximately 300 were on the landlord side, and 200 on the tenant side. The average tenant rep broker might do 10 deals per year, notes Purpura.
“So even though tenant rep brokers might use the fact that they are not conflicted as a selling point, the reality is that they are not conflicted because they are not nearly as active as brokers that are doing both sides of transactions,” he says.
The conflict of interest debate has flared up for a variety of reasons. Technology is enhancing people’s ability to identify and quantify conflicts of interest and try to mitigate them, says Fischer. Consolidation and M&A activity within the real estate sector have also left fewer national tenant rep firms still standing. Added to that is the significant flow of investment capital into the market that is creating a very competitive environment where investors and developers are emboldened by their appetite for yield and fees, Fischer adds.
Maintaining a “wall”
Certainly, many real estate service firms, ranging from large international ones to small boutique ones, offer landlord and tenant representation, and also represent multiple landlords or investors in the same market. One could argue that being a listing agent for the landlord of one office building, and another building next door, creates a conflict of interest.
However, most firms mitigate potential issues by not having the same individual or brokerage team working for clients or properties where such a conflict exists, says Garry S. Weiss, a senior instructor at the CCIM Institute and principal at GSW Ventures LTD, a real estate services firm. “I think there is a little bit more divide today with specific agent relationship teams that are working for the landlord,” he says. Weiss has worked as both an industrial broker in leasing and investment sales, as well as on the ownership side as a principal at a REIT.
Fischer believes that the so-called “Chinese Wall” that exists at many firms to create separation between different divisions is not a sufficient barrier. “I have walked into restaurants to entertain a client at times and seen one of the asset managers at a larger firm sitting there with one of the top tenant rep brokers,” says Fischer. “Just because they are not sitting right next to one another, there is a lot of sharing of rent rolls and a lot of things that go on.”
Legally, brokers are required to disclose conflicts of interest, and those disclosures are generally regulated by individual state law. Brokers also rely on their own ethics to manage potential conflicts of interest that might arise. “It is one of those things where all you have is your reputation as a broker, and you can’t continue to do business in these markets if you are not completely above board,” says Purpura.