One question that rises to the top amid the flurry of M&A activity is whether bigger is better, and whether or not smaller local and regional firms can survive and thrive in that new marketplace. “The consolidations are probably positive for the bottom lines for the service providers, but I’m not so sure it will be positive for ownership of commercial assets,” says Clay Wommack, director of the office and industrial services group at Franklin Street, a real estate services firm serving the southeastern U.S. with offices in Tampa, Fort Lauderdale, Jacksonville, Miami and Atlanta. “The consolidations have the potential to create conflicts of interest within service providers considering the myriad of clients they serve,” he adds.
When asked what kind of brokerage organization clients typically work with when buying, selling or leasing commercial real estate, more than half of respondents (58 percent) said a full-service real estate company compared to 41 percent who said they use a boutique or independent firm. In addition, 17 percent also said they use a member firm of a brokerage network and 5 percent also would use a franchise.
For clients, size may not matter as much as a firm’s ability to get the job done. On a scale of 1 to 5 with 5 being the highest, respondents rated certainty of closing deals as the most important quality with a mean score of 4.5. Other factors that rated high at 4.2 included familiarity/relationships; a broker’s track record; access to markets; and quality of deals.
Wommack expects to see more consolidation and acquisitions in the future. Yet he also believes that smaller firms can gain traction as niche specialty players, as well as be able to deliver services at equal or greater value.
Brokers Adapt to Change
Clearly, there have been significant changes in the brokerage industry over the past five years, let alone a 20-year career. The majority of respondents (68 percent) have worked in the industry for more than 16 years, with 53 percent having worked in the industry for more than 20 years. Some of the biggest changes that respondents cited over their tenure include technology, increased specialization, consolidation of firms and increase in the quality and level of service that brokerage firms now provide.
“Technology today has lifted tremendously the ability to stay on top of market data and inform clients in virtual real time of changing trends both good and bad,” says Wommack. “The only negative thing I really see is that the personal touch in real estate transactions has become way too arm’s length where decisions are made strictly on data and not well-thought-out plans.”
One significant change to the brokerage industry is a shift from being focused solely on transactions to an advisory services model, notes Robinson. “The demands of our clients are for providers to step up their game and bring a more sophisticated set of solutions to their problems,” he says. Those changes around client expectations are going to result in more innovation, better talent and, ultimately, a new organizing principle for firms that want to be the “advisor of choice” to organizations who are dealing with business issues that have real estate implications, adds Robinson.
Another driver for change is the recognition of real estate as an institutional investment asset class that is receiving greater allocations of capital. As more capital is allocated, there is more need for firms to work with investors and asset managers to consider how to best deploy that capital, says Robinson.
Future top concerns for the brokerage industry include the economy and interest rate hikes. When asked what stage of the commercial real estate cycle we are in, the majority of respondents (61 percent) said that we are still in the recovery/expansion phase, while 28 percent believe we are at the peak of the market. Respondents also cited concerns about employee turnover, attracting talent, and independent brokers that may get shut out of the market. Some fear that the ongoing consolidation will create entities that are too big and slow to make decisions quickly, while others worry about the “dilution of expertise” that mergers create while creating firms with more and more people.
The consolidations have some senior brokers stopping and thinking about their career futures. “Many will be caught in over-lap with existing clients and clients they were pursuing. There are a lot of brokers out looking at opportunities for sure,” says Wommack.