Once a niche, tenant-only real estate is now a force
By Mike Freeman
May 7, 2005
When NFL Hall of Famer Roger Staubach started his own real estate firm 28 years ago, he had to be talked into putting his name on the door. The former Dallas Cowboys quarterback thought that, with his fame from football, potential clients might not take him seriously.
JOHN GIBBINS / Union-Tribune Roger Staubach tapped into a niche in the commercial real estate business that has grown more influential: tenant-only representation.
Today, The Staubach Co. is among the country's largest real estate brokerages that exclusively represent tenants, with 45 offices, including a franchise outlet in San Diego. The privately held firm expects revenue of $300 million to $320 million when its fiscal year ends in June, Staubach, chairman and chief executive of the firm, said during a recent visit to San Diego.
While he might not have known it back in 1977, Staubach tapped into a niche in the commercial real estate business that has grown more influential over the years – tenant-only representation.
Tenant-only brokerages have been around for decades, especially in large urban areas, but in smaller commercial real estate markets such as San Diego, they've been overshadowed by big full-service brokerages. These firms represent not only tenants but also landlords and investors. Some also provide property management services.
Some full-service brokerages argue that they still dominate the San Diego market when it comes to representing tenants. But tenant-only firms have risen in the past decade or so as San Diego's commercial real estate market has matured.
"The tenant-rep firms are a force in the market, and the people who represent tenants from the full-service brokerage companies also are a force in the market," said Brian Driscoll, a longtime broker with Colliers International.
The rise of tenant-rep firms locally has fueled a sometimes contentious rivalry.
"Fifteen years ago, big brokerage firms thought the start-up of tenant rep was going to be a fad or just cyclical," said David Marino, a broker with tenant-only firm Irving Hughes in San Diego. "Using tenant rep (now) has pretty much become the trend in corporate America, and we get more market share every year."
Tenant-only firms say full-service brokerages have one real master – their lucrative landlord clients. That results in a conflict of interest when these firms represent tenants.
Full-service firms counter that their tenant specialists do what's best for their clients, no matter who has the listing on a building. Moreover, they argue that they have vastly more information about the market, such as what other tenants are competing for in sought-after space, than tenant-only firms.
Full-service firms acknowledge, however, that corporations are increasingly seeking out representation for their commercial real estate rather than negotiating for space on their own.
Mark Read, senior managing director of CB Richard Ellis in San Diego, said more firms have cut back on their in-house commercial real estate departments and are relying on outside brokers.
Read added, however, that tenant-only brokers are not getting the bulk of that business in San Diego.
Of the 25 largest lease transactions last year, more than 60 percent of tenants worked with full-service brokerage firms, according to CB Richard Ellis' research. They included Northrop Grumman, Hewlett Packard and Sony.
Besides CB, other full-service firms representing tenants in the top 25 leases included Colliers, Burnham Real Estate Services and Grubb & Ellis/BRE Commercial.
"We feel our full-service approach gives us more complete market intelligence," Read said. "Certainly we would never share confidential information. But particularly in a (tightening) market, our relationships and our information are very valuable to the tenant."
Tenant firms have statistics of their own.
While full-service firms handled most of the biggest deals, tenant-only firms had more business overall, said Marino, the Irving Hughes broker. On a square-foot basis, seven of the top 10 tenant deal makers last year worked for tenant-only firms, based on statistics from market research firm CoStar. Besides Irving Hughes and Staubach, other tenant-only firms include the Sande Co. and Equis Corp.
Full-service firms that represent landlords have a fiduciary duty to get the highest rents with the fewest concessions for that landlord, said Jason Hughes of Irving-Hughes. So if the full-service firm's tenant broker negotiates too hard for some space in a building that his firm is also listing, there's an obvious conflict of interest, he said.
"The ownership makeup of all these buildings is going more and more to institutional ownership," Hughes said. "So if you (anger) an owner on one building, you could potentially lose millions of square feet (in listings)."
Hughes added that lease negotiations have become more complex, which has contributed to more companies seeking representation. For example, several local office buildings have been selling for very high prices, which means higher property taxes that are passed on to tenants.
"But if you're a sizable tenant – and what's sizable depends on the market you're in – you can get Proposition 13 protection so you don't get these pass through (charges) if there's an ownership change," Hughes said. "Most people don't know that's something you can negotiate."
During his trip to San Diego, Staubach said the tenant-rep business continues to evolve as clients demand more sophisticated services.
One example was the deal that Staubach's local office helped negotiate for Intuit in San Diego. It orchestrated a bidding process in which two developers competed to construct the new offices for Intuit on their own land. In addition, Staubach tied up a third parcel and invited other developers who didn't have land to bid.
"At the end of the day, it was our ability to have that (third) site that brought leverage to the table," said Bill Fleck, a principal with the local Staubach office. Los Angeles-based Kilroy Realty won Intuit's business for a new regional headquarters. The maker of Turbo Tax tax-preparation software agreed to a 10-year lease on a three-building, 365,000-square-foot campus along state Route 56 that will be completed in 2007. Intuit also has an option to lease a fourth 101,000-square-foot building in the campus.