Does the broker have a future in commercial real estate?
In the opaque world of commercial real estate, brokers play a critical role in supporting landlords and tenants through the sale and leasing of buildings. Without easy public access to data, tenants and landlords rely on these people to assist with transactions. But the commercial real estate industry is going through a bit of a shake-up. The race to capture and monetize data is heating up, and we are seeing some fascinating business models emerge as a result. Will this mean we no longer need brokers five years from now? Do brokers prefer a lack of transparency to make their jobs more valuable? It’s not that simple.
Having talked to everyone from landlords, tenants and brokers to the tech-focused founders hoping to disrupt an age-old market, I’ve come to the conclusion that — at least in the medium term — brokers are here to stay. Let me tell you more.
The commercial real estate broker
The commercial real estate broker industry is huge. Dunn & Bradstreet valued the industry at $112 billion in the US. The big names really dominate the market, but there is also a long tail of smaller brokerages. The big players include CBRE, Colliers, JLL and Cushman & Wakefield. Brokers in the industry are compensated based on commission. They earn revenue in $/sqft/year of lease (depending on the market). The owner will pay the commission to both agents of the transaction. Successful brokers make bank. When it comes to leasing, the landlord is represented by the listing agent and then tenant is represented by the tenant rep.
Data dynamics
Access to accurate data is challenging. Today, the data about what properties are available is largely controlled by CoStar. CoStar has the largest database of property information and a big team to back it up. That being said, from discussions with brokers, they still must verify and validate that the data listed is accurate and this is usually done over the phone (!). CoStar’s market cap is over $33B and is trading at an enterprise value /revenue multiple of ~19.0x.
And therein lies the opportunity. With a dominant player holding the cards, and current users of its service underwhelmed by its value, the time for disruption is now.
As technology is more widely adopted in real estate, more and more data will become more easily available. Today, we are seeing emerging players such as VTS who launched its marketplace to provide listings for tenant reps verified by the landlords. Brokers are also building their own data sets. CREXI is another data provider of commercial real estate listings for brokers.
How technology can penetrate this market
For this to work though, phone calls and email cannot continue to be the most valuable broker tools. Below is a summary of the different technology that brokers on the tenant side use in the leasing process. The broker space is notoriously slow to adopt new technology. There may be some concerns about the role of technology replacing brokers, but more likely it’s driven by common questions: is it worth the cost? Is the benefit significant enough to warrant the investment in time and money? Is this just another point solution I need to log into? The diagram below begs the question — will we see a platform emerge that will span the full leasing lifecycle?
There are three go to market strategies that we’ve seen play out:
1. Go after the landlord first as a customer and then have them push the technology to their brokers.
2. Go after the tenant first as a customer and then have them push the technology to the brokers.
3. Sell directly to brokers.
All three have the ultimate goal of building something meaningful across the lease transaction, but a wedge or starting point is critical. Each strategy revolves around creating a unique data set. For the broker, there is the added dynamic of who internally pays for the technology — is this considered overhead for the brokerage or out of pocket by the individual broker?
Predictions on the future of finding space
Commercial real estate is going through a transition period. COVID has resulted in a digital tailwind forcing people to adopt technology and remote ways of doing business. Further, when it comes to the office, tenants do not know what space they need or want. Are we going to see a massive shift to flexible co-working? Will that result in fewer leases overall? Will people decide to work remotely more? There are many questions still to be answered, but when it comes to finding space, I predict:
- Increased flexibility in the lease itself — rather than people going fully remote, expect to see a shift to more flexible terms in leases. They could be shorter, which would result in more transactions.
- More advisory services — as the larger brokerages continue to diversify their revenue streams, one area I expect to see increase is support to help companies figure out what space they want and what their office strategy is. Technology has a role to play here — whether it is offering visualizations of space or optimizing location based on a more dispersed employee base.
- Tech forward brokers — it is competitive out there and the brokers that will do well will be the ones that adopt technology and focus on improving the client experience.
Future of brokers more generally
When it comes to brokers and agents more broadly — whether you are talking residential or commercial real estate, mortgage brokers, or even insurance brokers — these roles exist because today they are critical to the transaction. Whether it is due to lack of data transparency, an opaque and complex transaction process or merely the emotional toll of these infrequent and significant purchases, these roles are beneficial for everyone involved. As technology reduces the friction of these transactions by making them more transparent and streamlined, the value of the broker will need to adapt as well…but in my opinion, at least in the medium term, they aren’t going anywhere.
With these new solutions comes opportunities for brokers to be more innovative and entrepreneurial. This could ultimately lead to new business models and away from the commission-based relationships. We’re optimistic for what the broker of the future looks like across real estate and the technology that will empower and fuel this shift.
If you or someone you know of is building a business in this space — get in touch. Even if you’re not fundraising right now, I’m always keen to hear about new ideas and share the insights I’ve gleaned through our research.
