“Sunlight is the best disinfectant”
Quote by Robert Walter
In sharing “insider info”, this post aims to “shine a light” on misunderstandings that industry outsiders have on commercial real estate (CRE). In this “reveal”, we focus on CRE service providers’ role to CRE customers – i.e. those on the “buy” side of CRE – the tenants and potential buyers.
It’s not fair that people trust CRE professionals, and get let down by incompetence or worse. It’s not right that good, hardworking CRE professionals’ names are tarnished by the few. This injustice will persist while customers of CRE don’t know the truth of how the industry works.
This post aims to empower you on the “buy” side of CRE – with the facts to make better decisions on your service providers. Why? So you can identify and work with ethical and honourable CRE professionals. Excellent service from skilled, passionate CRE professionals means fairer outcomes for you, and boosts your perception of the industry.
(Housekeeping: while we are industry insiders, we are independent of brokerages / CRES and property funds alike. Therefore we can talk to this problem and address any falsehoods directly, without conflict of interest.)
Bust: Unlike resi, 99% of the time, any broker can help lease you any property that is vacant.
Leasing mandates for residential are exclusive. Mandates for CRE are not.
Just because a broker has their board on the property, or is advertising it on Prop24, does not mean you only have to go through them to rent the space.
All leasing brokers (to a large extent), have the same stock.
Insider hints
Bust. This is only a great idea if you like bad service, want to create false demand, and are excited by the risk of paying double commissions.
More brokers on a deal creates noise. This noise is defocusing. Defocused service providers cannot provide you good service. As an example, think about a surgeon trying to operate on you… while other surgeons are running interference on the operating table. Same story.
Secondly, if ten brokers are running with the same enquiry, it creates the illusion of high demand among landlords (who set the prices). This artificially high demand translates into above-market prices for tenants. (it also, needlessly creates “busywork” for already stretched property owners and managers).
Thirdly, because of the stakes involved, CRE deals can be litigious. Property funds, out of goodwill, can end up paying additional commissions, which has to be added to your rental or sales price.
Bust. This is one of the more dangerous CRE myths. Quick test: What do you know about gross vs net rentals. Rent attracting supplementary space vs GLA. Parking ratios. TIAs. BO. Redev clauses. Cap rates. Fit outs. Tenant covenant?
By way of context, it takes around 2 years, after university, for a bright, well-supported and -trained CRE professional to operate with confidence and provide decent service. During this practical learning time they are needing high levels of support from senior team members (to avoid risk of the odd mistake).
You don’t want to “be that guy”. Especially if you are flying it alone, and making mistakes on your own dollar.
Bust: Let’s say you are taking 1,000 sqm of office space at say R200 / sqm at a lowish escalation, with average parking for 5 years.
This works out to a leasing commission calculation of c.R540K (paid by the landlord).
How about an industrial enquiry of 4,000 sqm at say R65 / sqm, on the same terms as above?
This works out to R600K (paid by the landlord).
In conclusion: your lease is not small money, so you can expect the highest quality service. As the legendary L’Oreale slogan positioned it – “because you’re worth it”.
Bust: Not so. In South Africa, talented CRE professionals are distributed from the major brands down to boutique, low key operations. Your success in CRE transactions is dependent on the jockey you back.
The challenge – what do you use to assess the talent of your jockey?
This article explains the criteria. Your best CRE professionals have mastered the four variables of competence:
Next steps? We suggest an old-fashioned beauty parade.
If the guys want your business, let them pitch for it, up front. The best won’t mind. And the comparisons between CRE professionals will be most enlightening to you. The provisos: you need to pick one jockey and be loyal, your work itself has to be significant (no <200 sqm office deals) and you cannot be a tire kicker – don’t waste these professionals’ time.
Insider info
Bust: Do it yourself is good for Ikea and (most of the time) hanging pictures. However, in CRE, it can end in tears.
DIY in CRE can only be advised if you have both a) someone skilled willing to teach you, and b) 6 dedicated months of not doing much else but learning CRE.
Which, let’s be honest, if you are serious about running any business, this is time you don’t have.
Secondly, as the saying goes “data is the oil that CRE runs on“. Assembling and organising the complete list of your available options is both data intensive, and requires specialist tooling to do efficiently. Out of those five properties you miss, one could represent your perfect deal, in an ideal location.
As with plumbing, heart surgery and flying planes – we advise you leave specialist work to the pros.
Bust: Commissions are already budgeted for by the landlord. A leasing deal is admin-intensive, and requires surprisingly high levels of appropriately-incentivised skilled professional time – either inhouse or provided by an independent party. Therefore money will still be paid, and the value is going to be amortised somewhere in a lease.
Insider insight – the importance of selecting an ethical and honourable professional:
While not one of the CRE myths, we see the following misunderstanding quite frequently. It relates to the roles of CRE players. A broker is different to a property manager who is different to a property owner. In some instances, confusingly, a broker can work under the same brand name as a property manager.
Talking to the money side of things… Property management, who represent the landlord and is paid a retainer/recurring fee and often a performance bonus (by the property owner), can either be outsourced, or done inhouse by the property owner. Brokers work on risk to bring tenants, and do not, currently, in SA, earn a retainer or salary from property funds.
We hope our attempt at providing sunlight to you has indeed succeeded in myth-busting.
We trust you are now a more considered consumer of services, with a better ability to make strong service provider selections.
South Africa’s commercial real estate industry is filled with hard-working, passionate and skilled professionals who can deliver successful and pleasant CRE experiences to you. Hopefully you now know enough to find them!
Thank you / acknowledgement
We are grateful for the feedback of all honourable, experienced and passionate CRE professionals, you know who you are, for your invaluable contributions to this article. Your commitment to your clients and passion to improve the transparency, fairness and integrity of this industry needs to be called out, and is greatly appreciated.
This is a key number in South African commercial real estate (CRE). After a lot of hard work, we are able to deliver a firm, defensible value to SA – relevant to businesses (who almost all operate out of CRE), policy makers and the industry itself.
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