Big News in Brokerage is Not So Good for Tenants

Kudos to CB Richard Ellis, the world’s largest commercial brokerage firm who was recently awarded the property management contract for Commonwealth REIT’s United States’ entire portfolio consisting of 156 properties in 31 markets.  In their press release, CBRE noted that this was “one of the largest-ever outsourcing assignments for a U.S. based publicly traded REIT.”  It is unclear at this time whether CBRE will also take over new listing assignments for some or all of these buildings and/or investment sale assignments should Commonwealth decide to dispose of some of them.  Regardless, this contract clearly represents a major financial relationship between two large real estate firms.  What does it mean to the average tenant?

Imagine you are a 20,000sf tenant entering the market where Commonwealth has one or more assets that could be of interest to you.  Alternatively, imagine you are a current tenant in a Commonwealth building and seriously considering a move or a renewal of your existing lease.  Assume you are determined to get the best economic deal possible.  Now let’s imagine that CBRE is your broker.

How do you think your negotiations are likely to proceed with Commonwealth?  Given the behemoth management contract Commonwealth has bestowed upon CBRE, what do you think they will expect from your CBRE broker at the negotiating table?  How would Commonwealth react if CBRE facilitated or even threatened your move out of one of their buildings?  Is there no expected allegiance to Commonwealth that comes with such a significant assignment?  Frankly, can your broker risk taking an aggressive position at the negotiating table given his firm’s substantial financial relationship with Commonwealth?  Given the economic realities of corporate America and human nature, is it realistic to expect a broker to advance the interests of a very small client at the expense of a very large one?

There is nothing inherently wrong with the CBRE/Commonwealth arrangement.  It’s a win, win for both parties.  Commonwealth gets to outsource and consolidate its management into a single provider and CBRE gets a substantial new source of revenue.  However, it is disingenuous to pretend that these types of marriages have no impact on the tenants CBRE is also looking to represent in the market.  Lease negotiations between landlords and tenants are a zero sum game with each party having completely opposite economic objectives.  Because businesses simply can’t afford to ruffle the feathers of their biggest clients, brokerage firms necessarily need to consider the larger impact of their actions when plotting out their tenant negotiating strategies. What rational company would do anything to risk a 156 property assignment simply to make a 20,000sf tenant happy?  That’s economic suicide and a risky career decision for any broker looking to do the right thing.

No doubt CBRE will try to figure out how to sell this new Commonwealth relationship as a positive to its tenant clients and prospects.  Undoubtedly, they will tell tenants that (1) they now have a lot more market information than other brokers as the result of managing all of these Commonwealth buildings, (2) their management division is completely separate from their brokerage division so it has no impact on what they do as brokers and perhaps (3) they have an inside track on Commonwealth deals and, therefore, can get better terms for tenants than other brokers (of course this would contradict (2) above).  Do any of these alleged benefits make sense?  Of course not.  Would Commonwealth ever hire CBRE if it thought CBRE would use its position to advance the economic interests of their tenant clients over the interests of Commonwealth?  No sales spin can change the economic realities and expectations created by such a material, contractual relationship with Commonwealth nor the inherent conflict that arises when you try to represent everyone.

What is interesting about this new relationship is that it creates an additional conflict of interest that should be of concern for tenants.  In most property management contracts, the manager’s fee is quoted as a percentage of the rents collected in the building.  This structure aligns the interests of the property owner with its manager (credit mcfadden).  The higher the rents, the more money the landlord makes and, therefore, the more money the manager makes. Thus, if the CBRE broker were to aggressively negotiate strong economic terms for his tenant client, not only would he be upsetting CBRE’s large landlord client, he would also be negatively impacting his own company’s management fees.  That’s a lot of downside for even the most loyal broker to take on.

Unfortunately, the recent CBRE/Commonwealth relationship is no longer the exception to the rule; these types of mega relationships are becoming more and more common as the large, public brokerage firms look to grow revenues by expanding service lines and large landlords look to consolidate and streamline their operations.  While they create great opportunities for the CBREs of the world, they come at the expense of individual tenants whose economic importance to their brokerage firms pales in comparison to that of the much larger landlord relationships.  Given the growing financial dependence of brokerage firms on these big landlords, tenants may find that their advocate has one or even both of his arms tied behind his back when it comes time to hammer out terms at the negotiating table.

For more information contact Glenn Blumenfeld https://tactix.com/team.php#Glenn

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