7 CRE myths busted

“Evil prevails when good men stand by and do nothing”. Here is our attempt, for CRE industry outsiders in South Africa, at “pulling back the veil” on our industry. The more informed you as customer are, the easier it is to identify and work with ethical and honourable CRE professionals. Excellent service from skilled, passionate CRE professionals means better outcomes…
Commercial real estate myths busted

What insiders know – 7 CRE myths for SA busted

“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.)

CRE predictions 2020

Myth: “In South Africa, brokers have exclusivity on space”

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

  • The better a broker, the faster they can can turn around on a complete menu of all available options
  • Area specialists generally have access to more space or deals – shadow space (like sub-lets), occupiers who are wobbling, or “private stock”. “Generalists” are at a disadvantage here.
CRE predictions Gmaven

Myth: “It is a good practice to run multiple brokers on a deal”

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.

CRE predictions 3

Myth: “CRE is easy” 

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.

Vanity is the enemy of the tenant, and the friend of the landlord.

Gmaven predictions 4

Myth: “Your lease enquiry does not deserve the best”

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”.

Commercial real estate website project

Myth: “Big brand trumps the quality of the individual”

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:

  1. Complete and accurate data (see point 1 above)
  2. Access to efficiency tools (to turn work around fast)
  3. Experience (to negotiate on your behalf, with the relevant market intel and to support the process for both you and your landlord)
  4. Relationships (the accumulation of trust and goodwill to get tricky deals across the line)

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

  • When granting exclusivity to a broker on a leasing or sale transaction – don’t be shy to use a 10 to 14-day window period to assess performance. It should take a fraction of this time to demonstrate competence and for you to get a “feel”. After that you will know quite quickly if the appointed agent is worth her salt or not.)
  • Spoiler alert: generally, not always, good residential property brands do not maketh good CRE service providers. CRE is a very different animal to resi.
Commercial property myths

Myth: “You can successfully DIY CRE deals”

Bust: Do it yourself is good for Ikea and (most of the time) hanging pictures. However, in CRE, it can end in tears.

Landlords are experts and deal with complex property negotiations every day. Tenants venture into these once every 3 or 5 years. Get the best team you can.

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.

Commercial property myth no 7

Myth: “Going direct is cheaper, service provider integrity is irrelevant”

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:

  • As with leopards and their spots, incompetent property owners will generally always remain incompetent. Further, your relationship to a landlord via a lease is more binding than a marriage.
  • Unethical brokers, in a quest to get leads, can market space below the mandated price. Firstly, as established above, stock is “common”. Secondly, this unethical / illegal “price discounting” makes dishonest brokers appear to have an advantage. The opposite is true – “the truth will always out”. Well-regarded brokers have earned the trust of landlords, and your ability to discern a quality service provider positions you well in your engagement with a reputable landlord.
  • A fundamental conflict of interest is baked into a leasing deal. In the general case, the broker/consultant/advisor is understood to represent the tenant, but is paid by a landlord. This requires an ethical “balancing act” by the professional involved – and underlines the huge importance of your ability to discern the ethics of your professional. (Certain services providers in CRE in SA, such as CRES professionals, can collect a fee for services from their tenant. While beyond the scope of this article, here, if interested, is some deeper reading on the age-old challenge implicit in agency relationship dynamics)
  • Certain space within a portfolio can carry greater leasing commissions than other spaces. This creates further conflict of interest. Beware.
  • In South Africa, generally, only one commission should be paid.

One last bit of information

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.

In closing

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.

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