The Squeeze Is On, Again!

Twenty years ago, the corporate real estate industry was on the brink of change. Back then, a corporation’s real estate staff needed only to hire a broker, arrive at a “fair” deal, and everyone involved went home happy. Each corporate real estate manager knew a dozen or two commercial real estate brokers that could basically cover their assigned region and both sides were fairly comfortable with the predictability of their business arrangement.

At that time, real estate brokerage was its own value add–each transaction was evaluated separately and each broker’s performance was based on customer satisfaction.

As outsourcing grew, the focus for corporate real estate departments changed from customer satisfaction to creating competition in the brokerage industry. They did this by aggregating brokerage services through outsourcing arrangements with real estate service providers. The larger real estate service provider companies became adept at creating outsourcing structures that allowed them to negotiate fee sharing agreements with their own brokerage teams. The brokers were paying the price (or justifiably anteing up, depending on your perspective). Either way, for the average corporate-focused commercial real estate broker, the squeeze was on.

Over time, corporate real estate departments got used to the idea that brokerage would give up some of the commissions; they then began to focus on the money earned by the outsourcing team and looked for a way to share in some of it. Outsourcing groups were forced to get creative in designing fee models and began structuring outsourcing engagements differently. They began to include profit sharing, rebates, discounts and other fee structures into their contracts. For most service providers, it became apparent that outsourcing would only make sense if there was high transaction volume in the client account. And even if the volume was there, outsourcing groups started to put more “B” teams on the client accounts to improve their margins. Service quality took a notch down as a result. Corporations won the cost battle but started to lose the quality war. And for the real estate service provider outsourcing teams, the squeeze was on, again.

Fast forward to today where real estate service provider teams struggle to establish account profitability, struggle to sell against a procurement mentality, and continue to look to brokerage to compensate the teams for their work. I sometimes struggle to understand how the model continues to work. On the surface, it looks like a symbiotic relationship–the internal corporate services team generates real estate strategies that result in transaction business for the broker (in essence, feeds the machine). The broker is the beneficiary of these transactions without investing any shoe leather in the pursuit. Having received this “gift” (depending again, on your perspective), the broker willingly offers up a portion of the fee to the outsourcing team. The client and service provider agree to an end-of-year true up to split profits in excess of the team’s fully loaded expenses. Everyone’s happy, right?

Well, when you take a look under the hood, this dilution seems to be working against the corporate real estate client. The broker (whether he or she is on the A team or the B team), isn’t incentivized to work hard, only to get the deal done. The service provider team’s focus is not on delivering value, just on making sure there is enough volume to cover the fully loaded expenses. And for the corporate real estate manager, with increasing demands from management on his department to create value, increase quality and lower costs, the squeeze is really on.

Vik Bangia is senior vice president for the corporate solutions group of United Properties in Minneapolis. The views expressed in this article are the author’s own.