The Changing Brokerage Paradigm

These are edgy times for commercial real estate brokerages. Office leasing volume is flat-lining, top brokers are switching firms and mergers are creating a new breed of mega-brokerages. Yet, even as these national entities take shape and executives describe how they will function as high-level consulting services to corporate tenants, the industry still revolves around one thing: brokers who hit the pavement and come back with the leases.

The tension is palpable: The firms, including the nascent combo of CB Richard Ellis and Insignia/ESG, feel they need to move beyond the cowboy tradition of hot-shot dealmakers and “professionalize” the business. They want to create teams of professionals who provide a range of real estate services — and create a multitude of revenue streams. But the harsh reality of 2003 is that firms badly need their lone-eagle sales stars to find whatever commissions they can at a time when the economy continues to shed jobs, and real estate sources project little improvement before mid-2004.

That leaves corporate real estate executives hesitant to make space decisions.

Reis Inc., a New York-based research firm, reports that the national office market has recorded nine consecutive quarters of rising vacancies and declining rents through the first quarter of 2003. The national office vacancy rate hit 16.2% at the end of the first quarter, Reis says. In short, this is a full-blown tenant's market, and vacancy rates could still rise.

Leasing Frontrunners

Where does that leave top brokers? Brokers that have a solid Rolodex of top clients are red hot. While the top firms say that their corporate reputations and all the services that they provide tie clients to the brokerage, not the broker, that is not how they behave. To lure brokers that have great client relationships, the top brokerages continue to throw money. Exorbitant signing bonuses for top producers are not unheard of.

At the same time, the big firms are writing non-compete clauses into employment agreements, which forbid brokers from taking clients who were added while they were at the firm when they leave. If clients were completely loyal to the firm, such measures might not be necessary.

So, clearly, it is still sales superstars who make the commercial real estate business turn. Who are these men and women? They are concentrated in the three biggest office markets — New York, Chicago and Los Angeles — where the top corporations cluster and where rents are highest. “New York City broker commissions can be huge. The rents are higher here, and so are the commissions,” says Jay Gerfine, a Manhattan-based attorney who specializes in brokerage matters.

According to Bethesda, Md.-based real estate research firm CoStar Group, CB Richard Ellis and Insignia/ESG dominated these major leasing markets in 2002. The two firms, which employ a total of 5,300 brokers and manage nearly 1 billion sq. ft. of property worldwide, are set to complete their merger in June. CoStar reports that CB Richard Ellis bested its competitors in office leasing activity in metro Chicago and Los Angeles, while Insignia/ESG held the lead in metro New York City.

CoStar based its rankings on total square footage leased within each city's metro area. That amount did not include sales, renewals or subleases.

Although CoStar would not disclose total leasing volume for each firm in the markets, NREI obtained the leasing figures from each of the top-ranked companies. Insignia reports that it brokered 18.9 million sq. ft. of deals in 2002 for metro New York City, while CB Richard Ellis posted 6.6 million sq. ft. of leasing deals in the Chicago area. That sum may include some renewals, according to a CB Richard Ellis spokesperson, so the actual number may be less. For the metro Los Angeles market, CB Richard Ellis brokered 6.4 million sq. ft. of deals in 2002.

CB Richard Ellis' top leasing brokers in Chicago and Los Angeles boast a combined 30 years in the business, while Insignia/ESG's star leasing broker in New York City has closed deals with an impressive roster of tenants and landlords. A combined 30 million sq. ft. of office space has been leased by the three brokers profiled in this feature.

Brokerage Shuffle

Over the past year, the brokerage arena has been witness to a well-publicized round of musical chairs. It started when Insignia/ESG's top broker, Mary Ann Tighe, jumped ship to CB Richard Ellis last summer and has evolved into an industry-wide series of staffing coups. Few rival the Tighe defection in stature, but that hasn't stopped brokerage promoters from touting any new hire as a coup.

One Manhattan-based public relations executive who works for a real estate brokerage says this is common practice. “They take some broker who you've never even heard of before and make him out to be a ‘powerhouse’ broker. It's a chance to promote the new hire basically, even if it's exaggerated,” says the executive, who asked not to be named.

These defections are symptomatic of a wider trend — consolidation. Following the announcement early this year that CB Richard Ellis and Insignia would merge, it was anticipated that Insignia brokers would leave the firm in droves. That hasn't happened to the extent that experts predicted (or rivals hoped), though sporadic departures have taken place.

Still, firms such as Cushman & Wakefield and Newmark have benefited from the defections that have occurred, and it appears that both stand to absorb any residual talent that grows disillusioned with the merger. In fact, Cushman & Wakefield over the past 16 months has hired six former Insignia brokers and three former CB Richard Ellis brokers. Just last month, Cushman hired three brokers from Insignia's downtown Manhattan office. The shuffle cuts both ways, however: Insignia also has hired two of Cushman & Wakefield's Manhattan brokers over the past year.

No ‘I’ In Team

Another subtle change is shaping the business. The era of the freewheeling, cowboy broker may be coming to a close as brokerages adopt a more corporate teamwork posture. Brokers are still driven by commissions, of course, but one industry expert says that firms want more of that commission going to the bottom line.

And there is markedly less tolerance for flamboyant, fast-talking brokers. “When I started in this business, the broker ran with the deal,” says Manhattan-based real estate consultant Peter Pattison. “Now, this business is much more corporate, more institutional, and more staid. It's definitely a business in transition.”

Reining in top brokers is delicate work, however. Brokerages worry about losing their talent to another firm, so they are forced to tread lightly. “You don't screw around with the revenue producers,” says Lawrence Fiedler, professor of real estate at New York University's Real Estate Institute. “If you do, expect to see more musical chairs between firms swapping brokers.”

Fiedler believes that as consolidation drives competitors to create giant brokerages, one casualty will be the broker's checkbook. “When brokerages start to become dominant, it's inevitable that the broker's commissions on major deals will get cut,” he says. “These huge firms need the money and that's how they'll get it.”

If there's a cautionary tale that proves Fiedler's point, it may be Grubb & Ellis. Two years ago, Grubb & Ellis attempted to corner the market for real estate advisory services at the expense of the standard broker-driven business model. To do so, the firm hired a former Ernst & Young consultant to lead the charge. Several other former consultants were installed in senior-level positions within the firm.

The theory may have been sound, but the execution was marred by scores of top broker departures. Timing wasn't on the firm's side either, as the leasing market began to sour in 2001. This experiment culminated earlier this year when Grubb's CEO Barry Barovick was forced out of the firm.

“The brokers are the market makers. They shape the market because they control the users who are tenants,” says Pattison. “Some owners might not agree with that, but it's true.”

The Networker

Gary Fazzio joined the Chicago office of CB Richard Ellis in 1983. In the past two years, he's brokered more than 2 million sq. ft. of office space. He knows the market well, though he is humbled by its size and scope. “I tell people, ‘If you know of a Chicago real estate expert who knows this entire market, show them to me,’” says Fazzio.

Fazzio was hired by Washington Mutual two years ago to secure a Chicago site that could handle its swelling staff. Fazzio credits a long-term relationship as the basis for the plum assignment. In the 1980s, he had worked with Sears Mortgage, which became Washington Mutual.

Washington Mutual needed a parking ratio in excess of 5 spaces per 1,000 sq. ft., which Fazzio says is hard to come by, due to the area's lack of available land. But after an exhaustive search, he found the Highland Landmark IV building in the suburb of Downer's Grove. “There were a number of people chasing this business, and Washington Mutual wanted to get in the space fast,” he says. The bank now occupies the entire 172,000 sq. ft. building, and recently expanded into an adjacent 65,000 sq. ft. building.

The entire process, from winning the assignment to Washington Mutual signing the lease, took nine months. “And that's very fast, considering how some firms can labor over a 100,000 sq. ft.-plus lease for a long time,” he says.

While Fazzio admits that his initial encounter with Sears Mortgage in the 1980s helped, he emphasizes that other qualities enabled him to win the business. “You also need good technical skills and the ability to communicate,” he says. “But when it comes down to it, this is a business of relationships.”
Parke Chapman

The Rainmaker

Insignia/ESG's star leasing broker in New York City is known by many as “Mr. Big.” Though he is 6 feet 2 inches tall, Robert Alexander's nickname stems from his tenacity as a dealmaker.

New York's weak leasing market apparently hasn't slowed him down, either. Alexander has closed some of the city's biggest leasing deals. In 2001, he worked for Lehman Brothers on a 410,000 sq. ft. lease at 399 Park Avenue and a 710,000 sq. ft. lease for the firm at 1 World Financial Center. That's over 1 million sq. ft. of space for one client.

He also advised JP Morgan Chase on consolidating several Manhattan office locations that eventually became a 1.3 million sq. ft. corporate campus at 277 Park Avenue.

Alexander credits his strong relationships with Manhattan's financial services firms as one secret to his success. “I'm encouraging major tenants to look at their plans now and make decisions,” he explains. “I'm telling them to look at lease renewals as a great way to drop occupancy costs.”

Alexander believes in maintaining many long-term relationships with landlords and tenants. One major deal that Alexander brokered in 2002 was the Bank of New York's lease at Atlantic Terminal in Brooklyn. “The discussion went back and forth over where they should move. Finally, the city hammered out an incentives plan for the bank to lease 370,000 sq. ft. here,” he says. Because the deal entailed working with New York's Economic Development Corp. and private developer Forest City Ratner, Alexander says the outcome was especially rewarding.

Despite market uncertainty, he sees increased leasing activity in parts of New York City. But many landlords are pricing space based on past market conditions, which Alexander says is a mistake. “You have to price the space forward,” he says, “especially when demand is down.”
Parke Chapman

The Problem Solver

Jeff Pion of CB Richard Ellis knows what tenants and landlords want out of a deal. He ought to — Pion has worked for both sides of the desk during his 18-year tenure at CB Richard Ellis' West Los Angeles office, brokering more than 17 million sq. ft. of space in that time.

The West Los Angeles market consists of businesses working in the entertainment, technology or professional services arena, and most of these tenants lease around 5,000 sq. ft. of space. Pion defines the tenant base as “entrepreneurial” and diverse.

In October 2001, Crown Realty & Development hired Pion to market the six-building, 567,000 sq. ft. office campus Wateridge in West Los Angeles. Crown bought the building in August 2000 in order to build a 5-story, 200,000 sq. ft. spec building. It was finished in early 2003, but still lacked a tenant. “We decided to reposition the building for Crown as a way to secure tenants fast,” says Pion, a self described problem solver.

When BAE Systems, a major West Coast-based aerospace systems manufacturer, began searching for a new headquarters building, CB Richard Ellis and Crown saw an ideal prospect for Wateridge. BAE had specific security and mechanical needs for its space, says Pion. “We spent a lot of time trying to understand their space needs, and the deal took several months to close,” he says.

In February, BAE signed a 10-year lease for 150,000 sq. ft. of space at the Wateridge building. As Pion notes, Crown was grateful to secure a credit tenant in the space despite the sluggish leasing environment. “You're only as good as your next deal, and you are always looking to cultivate new relationships with clients,” says Pion. He believes that the Los Angeles market is broker-driven, but insists that it does not demand an aggressive, win-at-all-costs approach. “Reputation really is key here, not just aggression,” he says. “That's not true in every market.”
Parke Chapman

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