In recent years, the number of brokerage firms specializing in representing tenants has dwindled. Jones Lang LaSalle's June 2008 purchase of the Staubach Co., the largest exclusive tenant rep firm in the country, left only a handful of companies in this sector.

 

While many industry pundits have predicted the demise of the tenant rep model for some time, actually it is quite the opposite.

 

1) Why is the tenant rep model still viable?
It's been viable for 30 years so there's no reason it's not viable any more.  The largest tenant rep firm [Staubach] sold out for reasons of getting a payout more than a business plan. It wasn't that the business wasn't working, they were very successful. It has been successful and it will continue to be successful, and I think in this environment it's even more successful in that it's very much a tenant's market that we are in.  The ability to provide value to a tenant in this environment is great in terms of flexibility and termination rights, and the kinds of things you can negotiate when it's a tenant's market. If anything, Tenant Representation is more valuable now than it's been in the past. On average 40% of prospects like the tenant rep model, 60% don't care and 0% think it's bad. So 40% get the conflict of interest that comes from doing business with a full-service firm.

 

2) What  is the conflict of interest?
If you look at the revenues of  "dual agency" real estate firms, about 80% of their revenues come from the landlord side and about 20% from the tenant side. So the conflict is twofold. One, they may be on both sides of a transaction, but the bigger conflict is they are always trying to get the landlord's business, so if they are in the process of negotiating a deal with a landlord, the landlord may be saying 'If you get me this tenant, I'll get you this listing.' Even if you're not on both sides of the transaction, you're always looking to get business with the landlord because that's where 80% of your business comes from. It's a built-in conflict. We don't have that conflict, and we can push hard to get tenants the best deal we can.

 

3) What are tenants looking for today?
It's flexibility. There are a lot of corporations out there right now that are uncertain about their futures and they are looking for flexibility. Unfortunately many of them are doing it the wrong way. That is, they are doing it with very short-term leases and landlords are willing now to accommodate that. When the markets are high, all landlords want to do is long-term leases. All they were interested in doing in the big markets a year ago were 10-year leases. In the bad times, landlords are all of a sudden ready to be flexible because the rents are down and they're hoping in two years they will be back up.
What I advise my clients is, right now we've got about a one-year window.  Commercial real estate is a lagging economic indicator about six to nine months behind the economy because companies have tough times, then they lay off people, then they restructure space, then they get rid of it. So we haven't even seen the effects of all these layoffs. Companies are just starting to do their restacking and put space on the market.  I think the window of opportunity will run through the third quarter of 2010 where companies should be looking to do long-term deals on their core space, with contraction and cancellation options. We're advising our clients to take advantage of the market now.  You do not want to be in a position where rents are rising in the next two years when the economy recovers, and then you will be negotiating a long-term deal at the wrong time.