Although it may be said commercial property brokers have a world in common, there are also noteworthy differences between the way business is conducted in the US – particularly New York City – and everywhere else.
Beyond our country’s space measurement metrics (which are unique to our market and remain a mystery to our colleagues from other countries – for example, “rentable square feet”) our practices encompass a host of idiosyncratic variables, such as exclusive agencies with landlords and tenant brokers. Most significantly, we have a vastly different form of remuneration: real estate brokers in the US work exclusively on commission basis.
Moreover, commercial real estate brokers are compensated by landlords (in most cases) and not by the tenants. The compensation often also extends for the duration of the lease terms.
I am a principal of the New York office of a national firm focused entirely on commercial property leasing and sales, which includes retail space, office space, industrial sites, buildings and land. My speciality is retail real estate in New York City, which has different criteria from the other practices. Our work focuses primarily on arranging leases on behalf of property owners, retailers, designers and restaurateurs. Our collective goal is to arrange transactions with the most-qualified and best-suited users for the space. In addition, we broker for sale retail spaces, known as commercial condominiums.
We are compensated through commissions, which are calculated using annual rents, lease length and a commission schedule that varies from market to market in the US.
In Manhattan and parts of Brooklyn – two boroughs where my office represents substantial market shares of the retail sector – the varying rent rates can represent quite a spread. For example, in Williamsburg, Brooklyn, a newly developed, trend-setting neighbourhood with an economically diverse residential component, retail rents typically range between $120 (£75) and $250 per sq ft for ground-level space on a desirable shopping corridor. For a 2,000 sq ft space at $150 per sq ft, for a 10-year lease (typical in this market), the commission would be approximately $120,000.
In Manhattan, where the sky is often the only limit – to use the vernacular – it is not unusual for rents on highly desirable streets such Fifth Avenue or in the heart of Times Square to range from $250 to $3,000 per sq ft. Therefore, the commission for a 1,000 sq ft space on Fifth Avenue and 55th Street (again, on a 10-year lease term) is approximately $1.2m.
This commission is then divided between the broker who represents the tenant and the landlord’s broker. In some cases, however, the tenant’s broker receives an “override”, or a full commission for him/herself. Although this occurs most often in office leasing, it is not uncommon for the broker who represents a strongly rated retail tenant, such as an LVMH or Gucci, to receive the override.
Of course, rent rates and practices in this country vary with the markets. From primary markets – such as New York and Los Angeles – to secondary urban and suburban markets in the Midwest and the South, pricing and lease terms often reflect local standards. Even the size of a space is subject to regional interpretations, such as “usable” versus “rentable” space. But what my US colleagues and New York team do have in common is the fact that our compensation almost always comes from the ownership of the property.
Peter Braus is managing principal, Lee & Associates NYC LLC
