The decision to outsource transaction management functions to vendors, or to assume them in-house, is receiving increasingly thoughtful attention from top management. Historically, companies have perceived transaction management as external to their core business and in many cases they are not even aware of the amount they pay to brokers to clinch a deal.
Take the case of a venture capitalist firm in Palo Alto, California. When asked if they knew the amount paid to the broker for the lease they had just signed, they shook their heads “no,” adding that because the landlord paid it separately it didn’t really affect them. The reality is that the commission amounted to nearly half a million dollars, and in some way, shape or form these dollars were coming out of their rent! In this case the money was gone and there was nothing they could do.
But other companies are starting to wake up and understand that insourcing, or at the very least better managing of the outsourced party, is going to be a far more profitable and cost effective approach.
It used to be that companies found part of the magic of the CRE transaction process in negotiating for hidden spaces, otherwise known as pocket listings – secret real estate gems only known to the broker and his lucky customer.
Today, however, most companies will not even consider a space that is not posted on one of the industry’s numerous tracking databases. Detailed information about site and space availability is now plentiful and available to all; this transparency has come to represent some of the new quality standards within the industry.
Bringing the brokerage fees of large outsourced vendors in-house and assigning the same responsibilities to independent advisors, including finding sites and negotiating for space, is becoming very cost effective.
By hiring these smaller independent specialists, companies are not only able to eliminate brokerage fees, but they are also able to cut commissions to create lower rents for themselves as tenants without adding to the company’s headcount or employee payroll.
How to get more mileage from a transaction fee that has traditionally gone to external brokers? Change the way you compensate them!
Take the example of a company like General Electric. GE has brought onboard a licensed real estate broker (who technically remains an outside vendor) with whom it shares the transaction fee.
You need a license to be able to do this, but the way it works is fairly simple. The said company adjusts the fees it pays to these vendors to get the services it needs. As an example: Instead of compensating a broker with a commission of $5/rsf, they will offer $3/rsf and put $1/rsf toward architectural services, and another $1/rsf toward project or construction management.
This practice is leading to an offshoot trend, which is that larger companies are entering the competitive arena and beginning to broker transactions themselves.
Open office space. Couches and comfort. Mobile or ergonomically-friendly workstations. The Google Look. Everyone knows it and everyone’s doing it, or wants to.
Today, companies are redesigning their space to align with how their employees like to work and to enable closer, more effective collaboration. In such cases, companies with multiple sites need to ensure space consistency in terms of look, feel, flow and functionality.
What is changing is that while CRE transactions are being realized, companies are simultaneously crafting the space involved in these transactions. This is done by summoning and coordinating all the necessary players – architects, contractors, IT, HR.
So again we return to the importance of building appropriate, expert teams that can not only deliver cost value but aesthetic and design value, too.