Everyone knows someone in commercial real estate. It may be their kid’s little league coach, college roommate, neighbor, relative or someone they sit next to on the commute train. And often, that’s who people work with for their first few office leases. Commercial real estate is a “relationship” business so tenants tend to work with brokers they know. Makes sense.
Until it doesn’t. More than 90% of the commercial real estate brokers represent both landlords AND tenants. This creates a built-in conflict of interest that few tenants understand and even fewer brokers discuss. No one would hire a lawyer who works for the other side. Yet, the equivalent happens every day when tenants work with commercial real estate brokers and firms that also represent landlords. So, ask the broker that coaches your kid’s little league team if they or anyone else in their office represents landlords. If so, you have a built-in conflict of interest.
This conflict manifests itself in many ways. For example, if you find you are getting a worse deal on your lease renewal than new tenants in your building, this is a red flag. Landlords (and the brokers that represent them) know that ~70% of tenants will renew their leases. If you don’t put your landlord on notice that you are considering other options, you’ve lost the negotiating leverage that a new tenant would have. Thoroughly researching your options will give you a Plan B in case you aren’t able to work out an agreement with your current landlord. There is no negotiation leverage if you aren’t willing to relocate. So, treating your renewal exactly as you would relocation will give you the negotiating leverage that a new tenant would have. When your broker suggests asking your landlord for a renewal proposal without first creating leverage for you by getting market proposals, you either have an underperforming broker or a broker with a conflict of interest.
It is in the best interest of brokers that represent landlords to keep perceived asking rates as high as possible and vacancy rates as low as possible. Agents that represent landlords talk about the hot market and scarcity of space. But don’t be afraid of the big bad scarcity wolf. Firms that specialize in tenant representation are only focused on finding value and multiple alternatives for their clients. If your broker is leading with the scarcity card and isn’t finding you multiple alternatives, then you either have an underperforming broker or a broker with a conflict of interest.
You may determine that its time to make a change but sometimes its harder and more awkward to cut a poor player that has been on the team for a few seasons than to play the new kid over him. This applies to little league and applies to commercial real estate. Except, do you really want to run your business like a little league team?
For our complete roadmap: How Do I Find Office Space?