Broker Sean Cooley of CB Commercial spent a year marketing a Pleasant Hill, Calif., office building before it sold in August. Over that time, Cooley prepared numerous market analyses, a comprehensive report on the property and a 10-year cash flow projection. He also accommodated a change in financing rules that delayed the sale by months.
The same deal, said the nine-year veteran, would have taken half the effort five years ago.
Today, Cooley said, “it takes a lot more work and a lot more analysis.” During the boom years of the 1980s, the industry that matches buyers with sellers and building space with tenants was driven by speedy transactions.
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The cowboy brokers, as they were known, made a lot of money by peddling scores of newly built office, retail and industrial properties. It was a fast-paced, glamorous business.
Today, the brokerage business is emerging from a massive shakeout of the commercial real estate industry that lasted several years and took no prisoners. The cowboys are out of the business. The number of people working in brokerage is down by as much as 70 percent from five years ago.
Transactions are few and far between, and the older, more seasoned brokers who survived the contraction are specializing in providing services that cater to market niches.
“You can’t just throw two people in the room anymore and pocket the commission,” said Edward Del Beccaro, manager of the Walnut Creek and Oakland offices of Grubb & Ellis.
With the ownership of commercial properties shifted from private hands to sophisticated institutional investors, brokers now must be able to prepare detailed reports and be versed in disclosure law, government regulations, seismic hazards, the Americans with Disabilities Act, flood plain and earthquake issues and financing.
That means the national brokerage companies are expanding their research departments and investing thousands of dollars in technology. In order to stay competitive with the three big companies that dominate the East Bay, local regional firms have merged or joined national or international networks. Many smaller firms simply went out of business.
Rivalries are heating up between the brokerage firms and the industry is facing unprecedented competition from its own clients, who increasingly are bypassing the brokers and dealing directly with each other.
McMasters & Westland, a regional firm that dominated the East Bay market in the 1970s, survived the market shakeout by merging with TRI Commercial in 1989.
“I could see the need to grow to stay competitive, ” said Jim McMasters, now director of business development for TRI Commercial in Walnut Creek. “I realized the market was changing.”
The company since has allied with Oncor International, a national network of commercial brokerage firms.
“It allows you to compete with CB Commercial, Grubb & Ellis and Cushman Wakefield,” McMasters said, pointing to the area’s three dominant brokerage firms.
But being large didn’t make surviving the down market any easier. While small firms have merged to keep up, Grubb & Ellis, the nation’s largest publicly traded commercial real estate company, has downsized.
After losing roughly $40 million in both 1991 and 1992, the company was sold to an investment group. Prudential Insurance, Warburg Pincus Investors and a private investor pumped $28 million in cash and debt relief into the company in exchange for 67 percent of its stock.
Under its new ownership, Grubb & Ellis cleaned house, jettisoning unprofitable operations and letting scores of brokers go. After a relatively modest loss of about $1 million in 1993, the company posted its first profitable quarter in six years in 1994’s second quarter, netting income of $1.2 million.
To grab a bigger share of the local market, Del Beccaro aggressively is recruiting brokers both from inside and outside the industry. He is looking for people with varied backgrounds who may have skills in financial investment or property operations.
In its strategy to regain its footing as a regional powerhouse, the Walnut Creek office of Grubb & Ellis has spent hundreds of thousands of dollars on computer systems in the past 18 months, Del Beccaro said. The new computers used by the big brokerages such as Grubb & Ellis allow brokers, among other things, to print out detailed, up-to-the-minute lists of available properties and spaces.
In its effort to stay ahead of the competition, Cushman Wakefield’s research services department has tripled in size over the past eight years, said Richard Simonich, director and manager of the company’s Contra Costa County office in Lafayette.
“It’s more expensive to run an office,” Simonich said. “It costs $65,000 to run a desk.”
Cushman & Wakefield brokers are expected to make at least $100,000 annually after three years in the business.
Working solely on commission, brokers split their fees-generally 50/50-with their offices, helping to pay for their share of support services.
“I can’t afford to keep them around unless they are producing,” Simonich said.
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Drawing business away from the brokers are the institutions and real estate investment trusts that are buying up commercial properties, as well as the corporations that occupy the majority of their buildings.