'If We Don't Make Deals, We Don't Make Money': Brokers Confront Reality Of Stagnant Market
Investment deals are thinning out across the country and companies are holding off on making major leasing decisions, forcing commercial real estate brokers to work harder than ever before to find new ways to stay afloat.
“Of course it’s a worry, but most brokers are used to volatility in their income," said Colliers International Executive Vice President Julie Taylor, who works in the firm’s retail services group in San Francisco. “Granted, this is feeling a lot like 2009, and it’s very painful to see your pipeline reduced so dramatically and the number of active deals reduced so dramatically, but it's not the first time I’ve been through a cycle.”
With a dearth of leasing, Taylor is working to lock down more rent arbitrations and consulting work. Much of her time has been doing “triage” for existing clients, she said, and supporting those that are being rocked by the crisis. That doesn’t always result in an immediate commission, so the pressure is on to get creative and find new ways to generate cash flow.
“It’s incumbent on brokers, if they want to survive and stay relevant, to figure out how they can create benefits for their clients,” she said.
Brokers across the country are fighting for a piece of a shrinking pie. Nationally, investment sales plunged in the second quarter, dropping nearly 70% to a total of $35B in closed transactions, per CoStar data.
In marquee markets like New York City, the decrease was even more severe; investment sales were down 80% in Q2 year-over-year last year. The city’s office leasing market, after record-shattering years, dropped to its lowest level in a decade.
Boston Properties CEO Owen Thomas described the market as “in discovery mode” on the company's earnings call Wednesday, saying transaction volumes for office assets are down 66% from the first quarter.
There is already some evidence brokers are being seen as expendable in the deal process. Last week, SL Green Director of Leasing and Real Property Steven Durels told investors on the company’s second-quarter earnings call that most of its renewal deals in the last two to three months have been done without the participation of brokers.
“So there's been a lot of capital savings on those deals,” he said.
But that kind of comment doesn't give Savills Senior Managing Director Wendy Feldman Block, a D.C.-based tenant representative, any cause for concern.
“I’ve had no pushback from any landlords — they are coming together to figure out the best practices. They are not doing it in silos. We are all going through something that no one could have ever imagined,” she said. “Most landlords know that in a down market, the most important people in their world are the brokers."
Of course, the pressure is on, she said. Much of her work is doing "handholding" with clients as they navigate the pandemic. Holding hands isn't as lucrative as locking down big transactions, but now is the time for brokers to build trust and relationships and show their creativity, she said.
“You are going to have to think of different approaches,” she said. “I don’t see anyone saying, ‘This is going to hell in a handbasket’ … But if this continues until next summer, who knows?”
Brokerage hasn’t been unscathed by the job losses across the country. JLL, Eastdil Secured, Marcus & Millichap have all let people go. In New York City, MHP Real Estate Services closed its office leasing arm in May.
Taylor said that over time, commission structures may need to change to reflect the work brokers are doing on more flexible deals, like percentage rent.
“The brokers who have been around for a long time have a pretty good book of business, they have learned to weather the storm,” said Madison Marquette Southeast Region President Bill Weghorst, who is based in Atlanta.
“But I think there is a whole new fresh crop of brokers that have been in the business less than five years that don’t have clients and are being fed by the older brokers," he added. "As there are fewer transactions, they will be less likely to need younger brokers' help on smaller deals.”
Some brokers have been zeroing in on parts of the business that have remained healthy. Colliers International Atlanta Chairman Bob Mathews said the facilities management side of the business is surging.
“I’m very bullish on that side of the business," he said. "The transaction side is going to have to recover."
Compass Vice Chair Adelaide Polsinelli is shifting her approach, too. Much of the investment sales broker's work now is advisory, and she is focused on deals outside of New York City, which she described as a “saving grace.”
“Most of the last three months was spent fixing deals that fell apart because of the pandemic," she said. "But you can’t sit still like a deer in the headlights. This is when you have to be an innovative entrepreneur.”
In the second quarter, there were only 18 deals closed in Manhattan over $10M, the lowest quarterly total going back to 2009, JLL New York Investment Sales Chairman Bob Knakal said. He has used the extended slow period to catch up on research projects he hadn't had time to tackle, he said, but is also working to push as many deals across the finish line as possible.
“There are people who feel the political headwinds are stacked against them, they’d rather sell [in New York City] and purchase property in a more business-friendly environment," he said. "That is happening more frequently than we would like.
“On the buy side, there are people who are motivated and on lookout in New York City because they believe it will prevail, just as it has prevailed every time in the past.”
Steven Westreich, who runs his own Manhattan-based investment sales firm, Westbridge Realty Group, said his approach to the new normal is rooted in the old school: working the phones.
His focus has been “soft prospecting” rather than anything “hardcore,” he said. Since June 15, he said the team has signed a deal every week, though he acknowledges there has been a considerable decrease in investor appetite in the city.
“Coming out of the lockdown, everybody wanted to sit down and brainstorm and come up with a strategy, and I told all my guys in the office ‘don’t overthink this, stop trying to be a fortune teller, go back to hitting the phones … let’s just drum up [business],'” he said. “If we don’t make deals, we don’t make money.”
Contact Miriam Hall at firstname.lastname@example.org.