Pushing Dirt

A consequence of the utterly lousy commercial real estate market is that suffering landlords and sellers are likely going to need to start to pay higher commissions. Those higher commissions will be needed to lure the best seller and landlord representatives, who are risking more taking on assignments in this market: despite their best efforts not every space will lease and not every building will sell. Representatives of buyers and tenants will demand even higher fees, and deserve them: they control a very precious commodity in today’s market…at least in the case of creditworthy tenants.

I’m not going to win many friends among owners for saying it, but it’s time for brokers to start demanding higher commissions. Don’t get green with envy for the brokers. The volume of investment sales transactions is down 70 to 80 percent. Leasing transactions are not moving robustly either, with tenants staying put and renewing for very short terms in many cases.

The opportunity for brokers in this market is representing the most motivated of sellers: those that are facing distress and must sell to raise cash. We’re seeing many more of those sellers in places like Michigan, Ohio and Florida. In the Washington DC area the distress is primarily in vacant buildings or residential land.

Established auctioneers are a busy lot, and brokerages are ramping up groups to market distressed assets for sale or to deal with workout situations.

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The New York Observer wrote about what on the face of it sounds like an amazing generous deal : 10 months of rent free occupancy!

I before wrote about the marketing power of “free rent,” i.e. offering a tenant rent-free occupancy at the beginning o a new lease term.

Ten rent free months on a 120 month lease on a simple basis equates to less than a 10 percent discount. On a present value basis it’s modestly more generous, because a dollar today of course is worth more than a dollar tomorrow (this is the “time value of money”).

To me, and to most tenants in my opinion, 10 months of rent free occupancy makes a much bigger impact than say a reduction in base rent from $99 per square foot to $90 per square foot.

Use rent-free occupancy to keep your existing tenants and lure new ones to your buildings.

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I haven’t seen many residential agents make the transition successfully to commercial real estate. I believe it can be done, but you need to consider the following guidelines:

1. You need to make a clean break of it. Successful commercial agents don’t do any residential work. None. Never say never, but none of the top agents in my market try to do both.

2. Take your picture off your business card, even if you are cute

3. Determine an area in which to specialize. First, sales or leasing? Next, what product type? Retail, office, industrial, etc?

4. Take some professional training. SIOR, CCIM, and ULI all offer great basic training for commercial agents.

5. Train under a senior agent. We used to call this job a runnership (run for coffee, run for dry cleaning, but mostly just run to show property again and again and again). You won’t make much money for that year of running, but if you’re working under a capable agent, you’ll learn everything you need to know.

6. Remember to think big. It takes the same time and energy to execute a 10,000 sf or 100,000 sf lease as a 1,000 sf lease. In the first year work on whatever you can get, but once you ramp up, focus on finding transactions or listing assignments that will bring in a least $100,000 in gross commissions.

7. Dial for dollars. Cold calling works wonders in commercial real estate, and business to business calling I believe is much easier and more pleasant than calling on homeowners at their houses.

8. Remember that unfortunately the commercial real estate business is still dominated by men. It’s a shame, but if you’re a woman, you may find some advantage in negotiating with men because of it if you’re not intimidated. CREW (Commercial Real Estate Women) is a great organization providing networking opportunities for women in the business.

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Whether you’re looking to buy deals or list them, you need to “farm” for them - develop relationships with prospective sellers over time and build the necessary connection to win the business.

The best approach is to start with a product and a geographic area - a city, town, county or submarket: whatever feels manageable.

Then you need to build an owner database. If you can afford it and they are active in your market, Costar can give you a headstart on this database building process as they make an effort to track every office, industrial, flex and retail building in the markets they serve (in the Washington DC area where I am active are weaker on the retail side; I don’t know about other ares). Costar gives you the list of buildings with locations, photos, maps and basic building details, but the tracking of owners is poor.

At this point you hopefully have a list of 25 to 100 buildings or so. Learn everything you can about these buildings. Visit them in person or virtually though Google Earth Street View, Windows Live Maps birdseye view, etc. Using public record data found on smartpages.net and from your state and county records, find who owns each building. I subscribe to Lexis Nexis for access to unlisted phone numbers.

You can track the data in a three ring binder, an excel or MS Access database, or a contact management program like Act!, outlook, or one designed specially for our industry like REA or Realhound.

Then you need to make regular contact. Start with the dreaded cold call by phone. Don’t just ask them to sell; build a relationship. Find out how you can help them to make money, what they want to accomplish. Capture their email address for future use.

Regular phone contact should happen every quarter at a minimum unless the first call was a disaster and you were hung up on.

Accompany your phone contact with regular mailers: I use post card mailings or email to announce new listings and sold transaction. An investor can announce new acquisitions and the like.

It’s not rocket science, it’s the way brokers and investors have found deals for decades. We just have many more great new tools at our disposal.

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In the current economic client, it’s a fine opportunity for all parties to a lease transaction to explore an early renewal of a lease:

The landlord can address near-term lease rollover and help stabilize his or her building, creating value immediately. Look over your rent rolls and approach tenants now to firm up your tenancy. Things won’t be rebounding dramatically over the next 12 months so you don’t stand to gain by waiting.

The tenant can often secure very attractive concessions in the form of tenant improvement dollars, a lower rent, or even rent abatement. The tenant’s knee jerk reaction is to keep lease term down to keep their options open for the future. This may be the right move, but if you don’t expect to grow or shrink, take advantage of this very tenant friendly market.

The broker can earn a fee for advising either party in this climate where the volume of sales is down dramatically. If you’re not already, approach any tenant with less than two years of lease term remaining about the prospect of politely approaching their landlord to negotiate an early renewal. This is a pipeline of income that you may be missing out on.

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The pool of commercial lender owned real estate (or real estate owned - reo) Much foreclosed commercial property today was encumbered by a CMBS loan (i.e. securitized, conduit loan). When CMBS loans go into default, a third party called a special servicer takes over. There is a small handful of special servicers nationwide assigned the duties of working out troubled loans or if necessary taking them through the foreclosure process. You need to get to know the special servicers, ideally before they need you. the mortgage bankers association should have a list with contact information (mbaa.org). call each one, ask for the person dealing with “troubled loans” and real estate owned (reo) in your state. then “farm” them (to borrow from the residential parlance), calling or emailing them periodically and offering to help with market information if they need your help.

I use any number of means to market my commercial properties: costar, loopnet, google base, craigslist, washington post ads, direct mail, email blasts, cold calling, etc. etc. When it comes to selling buildings, there’s still nothing that beats brokers.

When I market empty buildings, I need to reach out to cooperating brokers. Larger users of space got successful by leaning on trusted advisers. They are represented by brokers 95% of the time.

When I market larger investment property, I start with my own relatively conclusive list of owners and investors across the mid-Atlantic. Once I’ve gotten the word out to that list, I expand my efforts to include the cooperating brokerage community.

Most of the buyers the internet brings me are still “small potatoes:” they might buy a $300,000 condo from me, but rarely are they in the market for that $10 million free standing warehouse. I’m not worried about being disintermediated yet (a word we real estate brokers made up I think). The process of buying real estate is still complicated…a lot more complicated than buying a stock.

The popular wisdom is that social networking sites are going to be great business generators for brokers in the future. I’d like to hear if anyone is actually finding any business this way.

Linkedin is a popular one with the older crowd.

I acknowledge I’m a cynic, but it strikes me that these sites are like high school all over again. How many friends are in your clique?

Tell me about your experiences positive or otherwise on these sites.

I know, a dry topic, but if you don’t work for an institutional owner or a national brokerage firm, you may be lacking in access to good analysts for Argus modeling and other financial analysis.

Here are some folks who have expressed interest in doing this kind of work, or do it for a living:

rebackoffice. http://www.rebackoffice.com/analyticsResearch/investmentAnalysis.html. $250 plus $10/tenant and $25/assumption. rebackoffice has a wide range of real estate outsourcing solutions. Overseas solution.

Cherie M. Hardgrove, MAI, CCIM. chgrove@columbus.rr.com. $90/hour.

Global Realty Outsourcing, Inc. T: (212) 209-0772. Wide range of pricing depending on format of data provided. Can do lease abstracting and other due diligence projects. Overseas solution.

Carey Guiberson. Carey [carey@ont.com]. Will refer assignments to his graduate students. $50/hour.

This is a complete generalization. Fees can be higher or lower. Just thoughts about the appropriate range:

Up to $3 million - 6%

$3-$5 million - 4% to 5%

$5 - $10 million - 3% to 4%

$10 - $20 million - 1.5% to 3%

$20 million to $40 million - .5% to 1.5%

over $40 million - .75% or lower

Fees tend to top out (with sophisticated sellers) in the $500,000 to $1 million range. That said I have heard of much larger commissions being earned.

You know the bubble has burst when people start suing the salesmen. Real estate agents, prepare to join stock brokers on the firing line of the blame game.

The lesson? Brokers do not give “opinions of value.” Only appraisers do. Do not let these words appear in the same sentence. Share the facts and let your clients draw their own conclusions.

I have every exclusive listing professional photographed.

Jim Oesch, one of the best commercial real estate photographers in the country, charges me well less than $1000 to shoot a building. Jim is flown all over the country to shoot buildings.

He makes buildings look so good, I’ve actually got complaints from prospective buyers: “the building doesn’t look nearly as good in person!”

I argue your marketing materials not only sell your listing, but win you your next one. Whether we’re talking about a residential commission (in the five figure range) or a larger commercial sale, it’s money well spent.

When I list and sell commercial property, I ask my clients to order updated:

1. Phase I Environmental report from a national, reputable firm

2. Title Work

3. ALTA Survey

4. Roof report (in case of one story property in particular)

In order to share with the contract purchaser. The goal is to keep the contingency/due diligence/study period (whatever you want to call it) as short as possible.