Investment Brokers and Bogus Argus Runs

by CoyDavidson on May 17, 2012

Why Investors Should Be Talking to Tenant Reps and Leasing Agents about Acquisition Opportunities

In the age of specialization, at least in the bigger commercial real estate markets, the generalist commercial real estate broker is a dying breed. Most brokers specialize by product type, sales/leasing or even agency type (user vs. owner).

Investment brokers prefer to stay on the listing side with fees or commissions increasingly not being offered to buyers brokers on investment deals. The argument is that these specialists know who the likely buyers are in the marketplace for significant acquisition opportunities and these investors are transaction savvy, therefore a buyer’s broker doesn’t bring any value to the table.

Many investors are in agreement with this rationale based on the fact adding another broker to the deal (additional fee) only drives up the cost of the transaction. When an owner lists an investment property with an investment specialist they are expected to:

  • Expose the property to the market of likely potential buyers
  • Extract the highest value
  • Perhaps even assist with the debt sources for the acquisition

Extracting the highest value from a purchaser involves selling the potential investor on the investment value of the property which includes a pro-forma analysis. A pro-forma analysis requires leasing assumptions both in terms of absorption and rent appreciation. So as you would expect a listing agent’s pro-forma analysis tends to be on the optimistic side as they are expected to paint a scenario that extracts the highest value. Savvy investors are aware of this and tend to put together their own pro-forma models.

Investment properties increase in value over time through increasing occupancy rates and rental rate appreciation. Rents appreciate when demand for space exceeds supply. So what commercial real estate specialists are most in-tune with what markets, submarkets, property types or niches are demonstrating the strongest fundamentals?

Who Understands the Leasing Market?

You have probably heard many times that “leasing drives value.” Tenant Reps and Leasing Agents best understand the nuances of the leasing market. They get paid to understand what the user occupies. They know which submarkets are hot, which industries are expanding and what kind of space tenants are leasing. They understand better than investment brokers which submarkets and asset classes are best positioned for future performance, because they are either advising their tenant clients as to where to take space and how much it will cost or advising their owners how to price space to capture tenants and improve cash-flow better than a competitive building.

This concept isn’t a new one as many investors will contact leasing agents to gather information and solicit their opinion on a particular submarket or asset and will dangle the leasing assignment as incentive for that professional to provide all his insight. This works in a competitive real estate market as there are always brokers seeking that next assignment and willing roll the dice to win a new listing.

I think a better approach would be to engage listing agents or tenant reps to source acquisition opportunities and pay a reasonable fee to do so. The investor may not need a broker’s transaction expertise to acquire a property but they do need their market expertise and insight and a fiduciary relationship (i.e. fee paid) would insure better insight if professionals with integrity are chosen.

Yes, I know what you are thinking, it sounds self-serving right? Don’t worry this concept will probably not gain traction any time soon. Investment brokers will still be pumping their listings with questionable Argus-runs, and leasing agents will be giving away all their insight for free so buyers can develop better pro-forma models in hopes they will win a listing. I just wonder if this practice is really the best approach. Advice that is paid for is usually better than advice that is free.

One final note, investment brokers are good at what they do and when I stumble upon investment listing opportunities, I involve one of our investment specialists. They have the ability and relevant experience to deliver on a client’s expectations better than I do.

  • cfoxworth

    As a “generalist” in a smaller market, I have noticed as the market gets better and investment deals and debt gets more competitive, more investors (and their brokers) expect free information.  They take an incognito approach to the deal, but when it comes to due diligence, they need our expertise on the geography and the market.  And interestingly, demand results in their timeframe.  
    We have had some luck in generating consulting fees for services and continue to value relationships but what you are referring to is very real right now, even in a smaller market.
    I got a bill from a lawyer for $20 for a phone call that lasted all of a minute.  I paid it.  Do you think people would accept a bill for time on a phone call with a broker….and pay it?

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