by Mark Slim
The US broker is renowned for his marketing ability, building knowledge and determination to succeed at all costs. The UK agent, on the other hand, demonstrates loyalty to his client, has a good professional knowledge and strong negotiating skills. Who offers the best service to the client?
The roles played by the US broker and the UK agent differ widely. This is due in part to different methods of representation: in the UK an agent is paid by his client, whereas in the US the broker is always paid by the landlord, irrespective of which party he is representing.
The US broker’s acquisition role is in practice primarily introductory and, except in the case of larger clients, it is not uncommon for the only serious negotiations a broker has with the landlord to relate solely to the terms of his “commission agreement”. Once the two parties have been introduced the likelihood is that they will deal direct: indeed, a large proportion of tenants (say 25%) do not use a broker.
Despite the fact that US occupiers generally have a greater knowledge of office specification and efficiency than their UK counterparts, the brokerage system can nevertheless work to their detriment. Not surprisingly, landlords who are uncompetitive with commissions often have their reputation or buildings tainted by the brokerage community and, therefore, tenants may miss out on potentially advantageous opportunities.
Another interesting quirk of the US system is that it is not unusual for a brokerage company to represent both sides in a lease transaction, although this is more likely to occur in softer market conditions. It ensures there is no hesitation by the brokers to introduce properties upon which they are instructed and, if a deal is concluded, the landlord is liable for two fees. The idea of introducing a client to another brokerage company is unthinkable and joint agencies are non-existent.
In his acquisition work a US broker spends more time seeking business than he does acquiring offices. His role in negotiations is limited compared with that of a UK agent, owing, to a certain extent, to far less complicated lease structures. This, combined with a highly competitive market-place and little long-term loyalty from his clients, both enables and necessitates a concerted effort towards the generation of new business.
The aggressive and industrious manner in which brokers seek exclusive representation agreements (“exclusives”) would have a very negative effect on a UK agent’s client list. Cold-calling on foot or “pounding the streets”, for example, is commonplace, with brokers arriving uninvited in reception and requesting an audience with a senior executive, whose name they may not have known until their arrival. This often achieves the desired result but, if it fails, it is not uncommon to hear of instances where the broker calls the executive at his home later.
It should be noted that even in the US the home telephone call is rather frowned upon, but it emphasises that brokers are largely immune to rejection — they have to be if they are to survive, or have the opportunity to reap the enormous (potential) financial rewards.
The terms of agent/broker employment also vary greatly. Most UK agents receive a salary, bonus, car and fringe benefits. A US broker receives nothing more than an office in which to work: there is no salary, although initially novice brokers with larger companies may benefit from a “draw” system. The standard method of remuneration is all commission, normally equating to 50% of the fee income generated by the individual broker.
With fees typically equating to 4.5% of the gross rental for the entire lease term (ie 22.5% of one year’s rent for a five-year lease), the opportunities to get rich are immense. The reality is that approximately 10% of the brokers make approximately 90% of the deals. The remainder do well in good markets, but when market conditions sour many leave the business for salaried jobs elsewhere, or relocate to more prosperous areas.
The disadvantage of the commission system is that, in the case of acquisitions, clients’ best interests are not always considered. Encouragement to sign can be given prematurely because, for example, the broker has a pressing personal financial commitment. In addition, as the tenant he represents is not paying his fee, undue pressure can be brought to bear upon him by landlords. For example, they can make promises to pay the fee the day the deal is signed — provided the broker convinces his client that the offer presently on the table is the best that can be achieved.
The more astute tenants realise that their broker is little more than a gatherer of information who puts together shortlists of properties and arranges inspections. They pay little or no attention to his recommendations during crucial points of negotiation.
In weak markets some larger tenants insist on paying their broker themselves hourly. Arrangements are then made whereby the fee is passed on by the brokerage company to the tenant or the negotiated price is discounted accordingly. Naturally this is not popular with brokers, as they can be sure to collect less money.
In the disposal of offices, US brokers do not enjoy the monopoly that is the luxury of UK agents. A majority of developers do not use brokers to dispose of their developments; instead, they form their own “in-house” marketing teams, who compete in the market-place with the brokers instructed on other properties.
This is possible as Americans, unlike the British, do not always deal through a third party regularly. It is also easy to comprehend a developer’s desire to use his own team. Its task is to let his properties only and he has complete control over any acquisition work that he may allow them to pursue.
A developer’s marketing team is given great incentive to perform, again through commission. They are as aggressive and industrious in seeking out tenants for their employer as the broker is in his hunt for new clients. The broker is, therefore, under no illusions that once he secures a disposal instruction, he will not hold it for long unless he maintains a rigorous and competent effort. UK agents can also be fired from an instruction, of course, but in practice the demands that the client places upon them to achieve results are not so vigorous — although this attitude is changing.
In order to impress his well-educated tenant market, a broker has to have a substantial knowledge of buildings and how they work. In addition, developers provide a comprehensive service to their tenants which includes space planning and fit-out, both of which must be well understood by the broker as they are important parts of the selling process.
Great emphasis is placed on marketing tools and the ability to present the product well. American tenants are receptive towards the idea of being “sold to” and, indeed, believe it to be a simple and necessary way in which to learn about the pros and cons of the buildings they are considering. The assumption that it is all “hard-sell” is incorrect, and presentations that are not factual can be given short shrift. “Hard-sell” is usually detrimental when used on UK tenants, but they are becoming far more receptive to presentations.
Although each system is moulded to suit national traits, there are obviously areas where both parties could learn from the other and conclusions can be drawn. The acquisition system in the US has many flaws. It is absurd that acquiring brokers’ fees are paid by the landlord. To add to this absurdity, tenants believe that a broker’s services are free, whereas in effect this is not the case.
Fees are naturally added into the rental pro forma. Where a tenant is paying $25 per sq ft in rent perhaps as much as $1.50 of this is to reimburse the landlord for the fee he paid to the tenant’s broker. With this in mind, US tenants are receiving inadequate service.
It does not compare favourably with the service provided by UK agents, who perform very thoroughly for their acquiring clients when solely retained. Agents are in no doubt as to where their loyalty lies and are not under personal financial pressure, in the short-term, to conclude transactions. This has to be right for clients, and it is interesting to note that British firms in New York, such as JLW, have introduced the British system of tenant representation.
The UK agent takes a greater involvement in disposal instructions during the development process than the US broker. Many hours can be spent in architectural and interior design meetings. During the negotiating process, an agent also spends a considerable time in legal meetings as a result of the more complex lease structure.
An agent has much to offer in the advice he gives during the aforementioned stages and it would be inadvisable for him not to play a role. The time spent, however, detracts from the agent’s ability to perform his primary role — that of letting space. Instead of attending every one of these meetings, which are dominated more by the solicitors and architects, agents could be more productive. Cold calls could be made; research material examined and acted upon; new marketing ideas conceived, approved and implemented; and more detailed preparation for each individual presentation organised. These are the areas in which the broker concentrates his efforts.
Brokerage companies have different advantages. Their fee structure is significantly better than UK agents and their overheads much lower, as they have only secretarial and administrative salaries to pay. In addition, many graduates seek jobs in commercial real estate and for these reasons there is no manpower problem as there presently is with many firms in London.
Not only is the US broker able to devote more time to seeking tenants, but he is more likely to impress them with his product knowledge when he meets them. It is an appalling fact, but many UK agents could not hold a discussion on the technical specifications of the buildings upon which they are instructed.
Tenants in the UK should be grateful for the service they receive from their agents in acquisition work: their counterparts in the US would benefit from a similar service. In disposal work, UK agents would be wise to reconsider their role. To a degree, emulation of the US broker would be advisable, particularly in the areas of time commitment and priorities, product knowledge and presentation. The chances are that those who do not adapt will live to regret it.
