The Co-Brokerage Debate
One brokerage company has had success sharing its commissions with other brokerage firms. This counter-cultural philosophy in the brokerage community is not without debate, though.
David Frosh

David Frosh

My company, Sperry Van Ness, has been committed to raising the level of debate on the issue of co-brokerage. We believe if brokerage firms commit to working together, our industry, clients and brokers will all benefit. Yet most brokerage companies make an active effort to minimize co-brokered deals to keep the entire commission in-house. Co-brokerage is something that we believe strongly in, and it is something that we believe makes more transactions happen with a greater rate of speed.

In today’s market, 10 to 20 percent of private investors in commercial real estate are first-time buyers and more than 50 percent buy outside the areas in which they live, making this a national marketplace. There are millions of qualified buyers, but very few “serial” buyers. Eighty-five percent of investors buy or sell approximately once every 7 years. There is no efficient system for disseminating information to these investors since no technology provider has developed a commercial real estate equivalent to the residential Multiple Listing Service. This problem is compounded by the fact that a lot of national firms will not even use information technology tools for the first 90 days of a listing. Most try to sell the property to their limited pool of investors before any marketing campaign is implemented. Bottom line: while technology services are an excellent component of an overall marketing plan, it is a false assumption that they have made the market independently efficient.

In an industry of approximately 125,000 brokers, data shows that no firm did more than a few percentage points of the hundreds of thousands of transactions completed in the U.S. last year. Most national firms do not even have a significant presence beyond the nation’s 40 largest markets. To assume that any single broker or firm can directly reach the millions of qualified investors is a line of thinking that will ultimately cost sellers money.

The old-school tactic of requiring buy side brokers to get their fee from the buyer, does not cut expenses to the seller — it just discourages buy side brokers from working to sell the deal. In addition, any time a buyer has to pay an additional fee to his broker for the purchase of a property, that fee will be factored into the purchase price.

Few would have anticipated the huge run up in prices we have seen over the past 5 years or predicted a 5-cap market in some parts of the country. But these conditions are here today and ruled by a market value set by the highest bidder rather than comps, lenders, appraisers, or a broker’s opinion of value. Since investor relationships are usually local and at the broker level, prospective buyers are eliminated when brokers do not market to and share their fees with competing brokers. Maximum value is only achieved when all qualified buyers are given the opportunity to bid on all available properties.

There is no better proof that cooperation works than the results being achieved with co-brokerage. As one of the nation’s largest investment brokerage firms, it would be easy to sell our listings directly to the clients with whom we have relationships. However, we have chosen to go beyond marketing through our investor relationships and also use the information technology portals. We also market to the entire brokerage community and share our fee with competitors. Seventy percent of the time, this leads to a winning bid on a Sperry Van Ness listing coming from an outside agent. Contrast this with an industry where 80 percent of the time, the listing agent or firm does not cooperate with an outside broker. This approach improves fees for brokerage firms but costs the seller money by denying the basic law of supply and demand.

A study by the National Bureau of Economic Research on the residential real estate industry (January 2005) shows something interesting that could apply in the commercial sector. The study points out two positive facts for residential agents: residential agents are often better informed than the clients they represent and they are not incentivized by the incremental gains that come from maximizing values on the properties they sell. The result, unfortunately, is that homes owned by real estate agents sell for 3.7 percent more and stay on the market 9.5 days longer than the homes they sell for their clients. This research along with the co-brokerage issue magnifies an industry flaw — incentives for bad behavior. If we do not change, considering the current political environment, the government will step in and cause the change.

Whether you are a broker or an investor, I would love to hear your thoughts on this topic. I’d like to keep this conversation moving forward industry-wide. Please email me your comments at froshd@svn.com.

David Frosh is president of Irvine, California-based Sperry Van Ness Commercial Real Estate Advisors. He can be reached by e-mail at froshd@svn.com.

Chicago’s MetraMarket Signs Major Leases U.S. Equities has plans to developMetraMarket, a transportation-oriented retail center in downtown Chicago. A rendering of MetraMarket is seen here from the intersection of Canal and Randolph Streets. U.S. Equities Realty has recently signed two significant leases for MetraMarket, its new transit-oriented West Loop retail and restaurant development.  Located adjacent to Metra’s Ogilvie Transportation Center (formerly known as Northwestern Station) — between Washington, Lake, Canal and Clinton — MetraMarket will transform two underutilized city blocks into an exciting and bustling destination for commuters and area office workers and residents. The first major lease for MetraMarket and the anchor for the development is a 15,000-square-foot French market, which will be run by a highly successful and experienced Paris-based operator. The French market space will incorporate 25-35 individual vendors offering a variety of fresh and unique selections at competitive prices.  Featuring gourmet foods, fresh produce, meat, fish, cheese, baked goods and prepared foods, the French market will be a popular destination for everyone, from professional chefs to commuters on the go and everyone in between. The other major lease signed by U.S. Equities is for a 14,000-square-foot CVS store, America’s largest retail pharmacy.  In addition to these two leases, U.S. Equities anticipates signing several restaurants to take space at the center, and some further gourmet tenants, like wine, coffee and smoke shops, as well as additional convenience and service-oriented retail shops such as a health and nutrition center and a bank. MetraMarket, as seen from the corner of Clinton and Randolph Streets. U.S. Equities is also looking for retailers that have multiple-use concepts. One possible tenant will be a coffee bar in the morning, a sandwich shop at lunch, and a wine bar in the evening. Retail space at MetraMarket totals about 100,000 square feet. “MetraMarket possesses tremendous street level exposure and frontage and provides direct access into Ogilvie Transportation Center for its 95,000 daily commuters,” says Camille Julmy, vice chairman of U.S. Equities. In addition to commuters benefiting from MetraMarket, Julmy equally noted that “it will truly help establish a sense of community for the exploding West Loop and Near West neighborhoods. MetraMarket will become a dynamic place to shop, eat and simply enjoy the atmosphere for all those who live in the area, and beyond.” This development will also benefit the city in bridging the Randolph Street restaurant district and the theater district together. U.S. Equities has been working on the project for a few years. Two key missing components for the project have been the anchors and public financing. The wait has been good for the project, though, as banking giant ABN AMRO, parent company of LaSalle Bank, has built a new 1.3 million-square-foot headquarters office tower across the street from MetraMarket. Several other new office and residential buildings have gone up on Clinton and Canal Streets, which run along the project’s site. “There has been about 2.5 million square feet of new office space built around the two or three blocks surrounding MetraMarket over the last few years,” says Julmy. This figure does not include projects a few further blocks away, like 111 S. Wacker Drive, the new UBS headquarters at One N. Wacker, 71 S. Wacker, the new Hyatt Center and others. Overall, there are about 220,000 people who work within a 10-minute walk of the project. There are approximately 50,000 residents living within one mile of MetraMarket. “This is a terrific location, because it is easily accessible, not only by train, but by other public transportation, by foot and by car as MetraMarket is in very close proximity to the expressways,” says Julmy.  “The development includes 110 parking spaces.” U.S. Equities plans to begin construction later this year with the opening scheduled for fall 2007. — Randall Shearin