August 1, 2008

In a court of law, standard practice is for one law firm to represent the plaintiff and for another to represent the defendant. In such a contentious environment, it makes sense for each side to retain its own advocate. If both parties were represented by the same firm, conflict of interest would be the virtually inevitable result.

The potential for this identical conflict is inherent in commercial real estate. In traditional commercial brokerages, listing brokers ostensibly serve both landlords and tenants.

While this approach is widely accepted, it can be tenuous. Listing brokers have a fiduciary responsibility to expose tenants to and maximize the value of the listings of their clients (without necessarily considering what is in the best interests of the tenant). When tenant needs and broker responsibilities don’t square up, the wisdom of the aphorism, One cannot serve two masters, rings true.

BOTTOM LINE: FIDUCIARY RESPONSIBILITY

The two masters issue has become a thorny one in the financial services and investment sector.

In the wake of the Sarbanes-Oxley Act of 2002, publicly-traded companies now are highly sensitive to even the perception of impropriety.

More CEOs and CFOs are exercising greater due diligence by examining all corporate outsourcing relationships, including those related to real estate. It is becoming increasingly important to them to be represented by a firm that provides a credible system of checks and balances for these typically big-ticket decisions.

CEOs and CFOs also are focusing on the bottom-line implications of such potential conflicts, which may be quite pervasive and costly.

Large real estate firms typically derive a majority of their revenue from representing owners and investors. Moreover, the conflict may not be apparent due to the consolidation of real estate ownership.

Looking to maintain a long-term relationship, some brokers may be influenced by a desire to win the favor of an investor or landlord client rather than to protect the interests of a prospective tenant with whom such a relationship may not be attainable.

In the end, regardless of motivation or win-win-win aspirations for all parties involved, every listing broker has a fiduciary responsibility to the owner or landlord who hired them. At the same time, the space user, without a dedicated representative, is left without an advocate.

NEW BREED: TENANT ADVISORS

After observing the status quo for decades, real estate consumers have taken note and have become more discerning. In the residential sector, that trend has spawned a new class of specialists — buyer’s brokers.

In commercial real estate, it is expressed in the rise of a totally new breed of company — tenant advisors.

These firms differ from traditional commercial real estate firms in two ways. First, they represent only the interests of their corporate clients. Second, they provide long-term advisory services that are not just transaction-oriented.

In so doing, they focus on building ongoing relationships, often operating as an extension of their clients’ real estate departments or functioning as the outsourced department itself.

May tenant advisors offer a full array of integrated services, including project and portfolio management, to satisfy every possible real estate-related contingency.

Recent studies show that tenant advisory firms are capturing market share from traditional brokers, a trend fueled by the increasing complexity of real estate challenges, market consolidation and the growing recognition by space users that it makes good business sense to retain a task-driven expert whose sole focus is to meet their needs.

Yet it has taken decades for tenant representation firms to gain a foothold in the market.

One reason is economics.

Landlord clients tend to generate greater revenue for listing brokers than do tenant clients. So it follows that most brokers prefer to follow the money and work with traditional brokerages.

Certainly, there is nothing wrong about that decision. It leads them to help owners and institutions maximize the value of their assets by exposing those assets to prospective tenants, and, subsequently that action plays a role in ascertaining how high a cost a given market will bear. In so doing, brokers enhance future listing opportunities.

In contrast, tenant advisors are motivated to go beyond the deal, focusing on value-added, start-to-finish services such as strategic planning, space programming, design coordination and project management.

A second reason is that brokers who represent landlords gain valuable visibility via the on-site signs that advertise the availability of space. Tenant representatives typically don’t have the opportunity to gain this brand-name awareness, a decided advantage for listing brokers.

In the final analysis, tenant advisory firms and traditional listing firms are not mutually exclusive. While their approaches are different, they share a desire to see mutually beneficial deals get done.

PUT CONFLICT ISSUE ON THE TABLE

Here’s a final word of advice for companies contemplating the real estate plunge in 2008: Regardless of affiliation, raise the issue of conflict with your service provider from the get-go.

Ask to see its complete menu of corporate services. Get references, and take the time to check them. Request a complimentary real estate needs audit. Shop around.

No one expects tenant advisors to replace traditional listing firms. However, industry insiders do project that the advocacy approach will continue to grow in popularity as more tenants learn about this alternative.