Thoughts on Broker-Led Solutions for the Middle Market

Finding high quality real estate services is easiest when a company is small, solving for one lease or a few leases in a small region; or, when a company is large and looking to hire a global partner that can provide a spectrum of services for managing a complex portfolio.  These are the “bookends” of the market where there is the greatest alignment between the structure of the services and the client need.  It’s in the middle, companies of 250 – 5,000 employees, where things get challenging.  This week, we’ll explore important considerations when searching for a real estate advisor in this middle market.
 
First, we need to explain a little about the structure of real estate service firms.  Small, independent brokerage firms can often provide excellent transaction related services in a given market.  However, these firms are not positioned to do quality work outside their market, nor do they have broad scope capabilities or the resources necessary to address multi-market, portfolio level advisory.  On the other hand, large firms (like Cushman & Wakefield) can play in both markets, having capable transaction professionals on the ground in local markets and teams of consultants and corporate account executives who provide full scope services to large scale clients.  Yet the big client solution teams and services at all of the large service firms (including Cushman & Wakefield) don’t scale down well.  It’s too expensive and cumbersome to activate these services for accounts that generate revenue which is below a certain minimum threshold.  Hence the service gap in the middle. 
 
Let’s say your company has 1,000 employees in 25 offices throughout the US, with an average office size of 7,000 sf.  You have an average lease commitment of 5 years and an average annual spend of $350,000 per office, or $8.75M.  This is a portfolio that deserves a higher degree of service than one-off market brokerage.  Every year, you likely have a number of lease related issues to manage (expiring leases, contraction, expansion, M&A, etc.) and you need a system for managing the leases, for creating visibility into the portfolio and for gaining ready access to vital data that can inform good decisions.  At this size, you likely have someone from Ops, finance, HR or some combination thereof, responsible for real estate.  These folks also have a “day job”.  If you are selectively addressing each market independently with local transaction professionals, you’re missing out on broader scope services that could materially improve both the quality and functioning of the portfolio.  At the same time, you’re too small to get the attention of the big account platforms.  What to do?
 
The middle market is the largest market segment in the world. You would think the big real estate service providers would have long ago emphasized the development of service offerings that targeted this market.  But they haven’t.  Doing so requires finding ways to scale down some of the portfolio management solutions these firms provide at the top level, while simultaneously causing a percentage of the local market brokers to scale up their business by becoming skilled at multi-market portfolio advisory.  In the absence of well developed offerings, middle market clients often fall prey to what they don’t know (i.e., they don’t know what services are actually available, or how to get them), or to a slick pitch that overstates capabilities.  Since the corporate solutions level teams aren’t selling into this market, the usual point of connection is at the broker level.  The service platform is thus run by either a broker or a small team of brokers.  A common mistake is for the client to hire a broker they like in a given market to run the whole portfolio based on the experience they had in one market, irrespective of whether this broker has the network, skills, resources and scope of services necessary to handle the portfolio.
 
The first place to start when evaluating a broker-led portfolio solution is to ensure the firm has adequate coverage, meaning do they have offices in the cities where you have space?  Secondly, it’s important to understand whether the broker has experience managing multi-market client work.  Next, you must assess the scope of services being offered.  Does the firm provide lease administration?  Do they have portfolio analytics?  Do they have market research?  How do they engage with the client to proactively provide insights and guidance?  What level of quantitative and qualitative analytics do they provide?  Can they assist with design and project management?  How are their services compensated?  This is where the stuff you don’t know can cost you (and the reason for this post).  Middle market customers are extremely valuable.  It’s common for lower end service providers to offer “financial incentives” to win these clients in the form of fee rebates.  Fee rebates, in general, aren’t a good trade for the client.  Using our example, let’s say there’s 15% client rebate and the portfolio generates average brokerage fees of $500,000 annually.  You get $75,000 in rebates, which you have to book as taxable income.  Not much value.  What you should be doing instead, is negotiating for the provision of extra services and a platform that helps manage the portfolio and articulate the process to ensure consistency across geography.  Many of the same firms who are eager to rebate fee do so because they lack essential services.  It’s kind of a “look here, not there” approach.
 
This is not a commercial for TenantSee, powered by Cushman & Wakefield, but we’d be remiss if we didn’t point out that TenantSee was built specifically to address this middle market.  We’re always happy to show our proprietary platform, including custom dashboards built on Microsoft Power BI, and to share how we help our multi-market clients design and execute better real estate solutions.  Importantly, as a member of the TenantSee Community, we’re also happy to answer questions or help you think about how to procure the right service solution for your specific need.  We’re always mindful that our approach is not a fit for everyone, but we see value in being a resource to all.