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Agent loyalty key in all market climates.

In the boom of the late 1970's and early 1980's, it was not uncommon for brokers to send out three leases for the same office space at one time, and make the deal with whoever signed and returned the lease first. The idea of paying a tenant for their architeCt, planner or moving costs was unheard of. Today's market is quite the reverse. Based on the old system of supply and demand, there is a lot of office space searching for fewer and fewer tenants. Thus, tenants are in a position to negotiate everything from rentable price to build-out, and a great majority of brokers have emerged in the market as tenant representatives to handle these intricate negotiations. While tenant reps play an important role in getting the best deal for the tenant, the best interests of the owner - who pays the broker's commission -may be compromised in favor of simply making the deal.

Since the late 80's, market conditions have enabled tenant representatives-licensed brokers who work on behalf of the tenant - to be successful because they not only show space and negotiate the lease for the tenant, but they can keep him at arms length from the owner while they push for better and more favorable lease terms. Tenants are such a hot commodity in a down market that owners are thankful for any reasonable prospects brought their way and will continue to negotiate in order to keep them from going to the competition.

In this type of system, the owner is not receiving the benefits of economic conditions. Where the broker's commission should have decreased with the status of the market, it did not. Rather, as the supply of tenants declined, and because the typical commission is generous, brokers who act on behalf of the tenant began bidding for tenants by giving back part of their fee. In this respect, the broker and the tenant come out ahead while the owner is at a loss: the broker still receives a commission, the tenant receives favorable lease terms at lower costs as well as part of the brokerage fee, and the owner is left paying the same commission and getting less return on his investment.

This represents a potential conflict of interest. Tenant rep brokers are paid by the owner, but they work for the tenant. Their goal is not to add value to the asset, but simply to make the deal in the interest of the tenant and earn the commission. Again, these brokers play an important role on behalf of the tenant, however they should also be contracted by the tenant.

Owners, on the other hand, should demand absolute loyalty from their agents. Contracting an agent broker on their behalf, one who is committed to bringing the best deal to them, is essential. The owner and the owner's agent share a common goal: To make the lease longer and produce a stronger lease which enhances the value of the building, enabling the owner to secure better financing.

In a difficult market, owners should employ brokerage firms that are structured to represent them from a marketing, leasing and management standpoint. In some cases, such as with Bender & Company, this may even mean that agents are salaried -- not dependent on the commission from a deal to earn a living. This type of structure creates a true partnership between the agent and the owner. The pursuit of a single deal becomes .less important than the owner's objeCtive and the leasing team's efforts to meet that objective. This enables the agents to be client-oriented rather than transaction-oriented because every negotiation does not directly affect the agents' income.

Additionally, drastic changes in economic conditions have influenced the real estate industry, creating an even greater need for broker loyalty. In this difficult recession, more institutions have become owners, increasing their concern for quality asset management. And as institutional standards have been raised to meet this new level of priority placed on real estate investments, so have the standards of competing owners. The increasing investment from foreign capital, pension funds, public syndications and other sources has also affected the nature of the industry. Owners today require agents who can provide the highest level of proficient, loyal and professional counsel to assist in adapting amidst these ever-changing market conditions.

The position of brokers always changes with the status of the market. Eventually, when there are more perspective tenants than space, the tenant rep brokers will evolve back to owner reps, and brokers currently attempting to represent both tenants and owners will be forced to choose which function to perform. Certainly doing both functions is not in the best interest of the tenant or owner. In any case, no matter what the conditions of the market, the owner clearly benefits most by having his own loyal representative serving on his behalf.
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Article Details
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Title Annotation:Mid-Year Review & Forecast, Section II; commercial building owners find it necessary to demand complete loyalty from leasing agent in depressed real estate market
Author:Sandstrom, Janet M.
Publication:Real Estate Weekly
Article Type:Column
Date:Jun 23, 1993
Previous Article:EC still provides viable opportunities.
Next Article:In lease disputes, negotiating may beat litigation.

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