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The commercial real estate brokerage model has evolved and some firms are vertically integrating from just being space hunters and lease negotiators to also offering space planning, design, project management and construction management services. The question is, is it better to take advantage of these services as a tenant or is it better to keep them separate?
Should you hire a real estate brokerage who offers design and project management?
It is all under one roof, therefore:
Watercooler talk has been documented as a source of innovation. To the extent that your leasing and construction project will require innovation or will benefit from impromptu chats that start with "Hey by the way or "What do you think about..." having all the team members under one roof cannot be topped.
Even if your space is a rather vanilla project and does not require a great deal of innovation or creativity, there are still the nuts and bolts of the deal.
There are minor tweaks that will be required to your offer to lease that come from a modification to your space plan. There has to be clear communication from the designer to the broker and if they share the same office this can only be enhanced.
For instance the most common complaint that designers have with brokers is that they do not leave them enough time to get permits and construct the space. Brokers normally ballpark two months for construction and do not give it any more thought. Once the deal is firm and the designer and project manager have to execute on delivering the space, the broker is already counting the commission and it is now not his problem.
The second biggest complaint designers have is the insufficient funds negotiated for the tenant improvement allowance. If the designer is engaged early and shares an office with the broker, there can be constant collaboration on budgets that are a moving target.
Everyone prefers to make one phone call or send one email when a problem comes up. The concept of using the real estate broker as the single point of contact and that broker being able to walk down the hall to talk to the designer or project manager is comforting. It gives the tenant the perception that the whole team can huddle face to face whenever issues arise and put out fires quickly.
This is a big reason why the brokerage is offering this service, right? It is not just about delivering a better service, but one they can deliver at a lower cost. Since they are collecting both the real estate brokerage fee, and the interior design / project management fee, they can afford to offer a discount on the entire package since you are buying in bulk.
It certainly stands to reason.
If the broker and designer do not know each other well it make for a questionable working relationship. Both may be defensive and blame each other when things go wrong. By hiring a firm that has all of the services under one roof, you are hiring a team that is used to working together and they will be aware of each others strengths and weaknesses.
If you choose to work with a brokerage and want to use their ancillary services, you are now a bulk customer and the brokerage has the ability to offer you a volume discount. In some cases if you are a large enough tenant the brokerage will agree to bundle in the design and project management services within the brokerage fee.
In most cases the broker was the one who cold called you, presented services, stayed in touch and convinced you to hire him. Usually it is only after that relationship has been fostered that you are introduced to the rest of the team.
You hired the broker because you like the broker. Many tenants who use a brokerage's in-house design and project management team do so because their broker recommends them.
Here is how in-house design and project management evolves: the brokerage thinks it is a good idea and seeks a designer. They go to the best designer in the market. That person is so good they do not need to rock their own boat...life is great and they have tons of inbound business being fed to them from real estate brokers. So they approach the 2nd best designer in the market. More of the same.
It is not until they get down the list to a below average designer that is not being referred any business from the real estate brokerage community that they garner any interest.
The great designers are being given business from a variety of too many different real estate firms and if they become an in-house designer at one company, they will jeopardize those sources of business.
Brokers simply do not want to refer design projects to a designer who now works for the competition...the risk of losing the client to the competing brokerage is just too high relative to just referring their second favorite designer.
Once you obtain the name of the in-house designer search for them on the web and social media. Do they appear to have two identities? If they are both in-house and have their own design shop then something fishy may be going on. They are not fully committed to being part of the in-house team.
Some firms have gone so far as to just have a loose relationship in which the designer carries a set of business cards around from the brokerage but does not occupy physical space with the brokerage. In these cases the designer wants to keep this arrangement hush hush so they can still have the ability to obtain referral business from other brokers...the best of both worlds.
If the designer's business card only has a cell phone number and not the real estate firm's phone number then that is a dead give away.
This comes down to the honesty involved in the real estate brokerage's pitch. If they said that you will save money because they will throw in design and project management for a discounted price (or for free), that is fine. But what if they just asked for an increased commission from the landlord?
Here is the commission clause from a prominent tenant rep brokerage in a major city, representing a 10,000 square foot tenant:
This letter serves to confirm that the Landlord will pay to <redacted> Realties Corporation Limited, Brokerage a commission (the "Commission") of one dollar and twenty-five cents ($1.25) per square foot of Rentable Area of the Premises per annum for years 1 to 10 (that being a total of $12.50 per square foot of Rentable Area on a 10-year transaction), plus applicable taxes.
Standard brokerage commissions for this market were only $1.00 per square foot per annum.
The tenant thought they received $25,000 worth of design and project management services embedded within the brokerage fee. The brokerage used this offer of value to win the business. The commission agreement is always negotiated between the landlord and brokerage...the client never found out.
The real value in services that are bid on is when you are lucky enough to ask good firms to bid when they happen to be a little less busy than usual. You end up getting a good firm for a market value that is less than what they normally charge.
You likely hired a broker that competed the most for your business. Why not make a design firm earn your business as well? Not only will the price be bid down, but designers likely will highlight some of their ideas as their way of winning your business.
Everyone overrates the complexity of their relocation or renewal and their design and construction.
Good designers are used to working with brokers at various firms and they know how to get the job done without having to share the same office space.
Brokers usually provide very little input into the design of a space (tenants just think they are somewhat involved). As long as the broker has given the designer enough time to build the space, that is usually the only hurdle to get over.
You probably like your broker. That is why you hired him. We tend to trust people we like.
But your agent has a hidden agenda in recommending his in-house designer. He is likely participating in the design fees, which is an attractive way to make a few more dollars than having to make more cold calls. Even if the company does not share or pool revenue streams there is social credit at her company that she would receive. It is likely that if the designer was a free agent they would not be your broker's top recommendation.
Whether you are a fan of in-house ancillary services at a commercial real estate brokerage or not, all of the above has a common theme...you must trust your commercial real estate broker, as she is he one who will be leading way.