By MOTOKO RICH
Staff Reporter of THE WALL STREET JOURNAL
Aug 23, 2000
Ever since the real-estate industry discovered the opportunity -- and
threat -- of the Internet, industry players have been wondering: whither the
commercial real-estate broker?
As the people who bring together and help negotiate with buyers, sellers,
landlords and tenants, brokers would seem most vulnerable to the rise of the
Web, which has consistently diminished the power of intermediaries.
The brokers' message: We've got things covered. Three property-services
firms, all of which derive between 40% and 70% of their revenue from
brokerage activities, have banded together to invest in online initiatives,
including Web-based services that help real-estate principals transact
deals, either with or without a broker. Insignia Financial Group, based in
New York, has so far invested $17 million in Internet companies and $25
million developing internal initiatives. Cushman & Wakefield, also of New
York, recently signed an agreement with Zethus Inc., a Washington-based
start-up being incubated by Goldman Sachs Group Inc., to run some leasing
transactions through the start-up's system, which proposes to act like a
Nasdaq Stock Market for real estate.
"We are very enthusiastic" about the Internet, says Ray Wirta, chief
executive officer of Los Angeles-based CB Richard Ellis Services Inc., one
of the three companies -- along with Trammell Crow Co. of Dallas and Jones
Lang LaSalle Inc., Chicago -- that are investing collectively in online
systems. Mr. Wirta says the real-estate industry has learned from the
experiences of others that have gone before them in the battle with the Web.
CB Richard Ellis is "not going to be as slow" as Merrill Lynch & Co., he
says, referring to the nation's largest securities firm, which entered the
online stock-trading business in June last year after originally saying it
In the case of the publicly traded real-estate companies, Wall Street is
carefully watching their online efforts. Property-services firms "are
touting their Internet businesses," says Lee Schalop, director of equity
research at Credit Suisse First Boston in New York. "But the $64,000
question is: Can their Internet businesses generate the same revenues as
their traditional businesses?" Mr. Schalop predicts that transactions
conducted on the Internet will be less profitable than traditional
transactions. (Stock prices of the five New York Stock Exchange-listed
real-estate services firms are up 17% for the year but down 55% since the
beginning of 1998.)
Moreover, competition from Web-based brokerage firms is likely to hurt
traditional brokerage commissions. Tenants and prospective buyers will be
able to do more on their own on the Internet -- search for space, conduct
demographic profiles of local markets and exchange lease and sales
documents. As a consequence, customers are likely to demand lower pricing
for the services of brokers.
According to a new report by Banc of America Securities, real-estate
brokerage commissions, which total around $18.8 billion annually, are likely
to fall about 11% to $16.6 billion in the next three years. "There is not as
much value added at the broker level," says Will Marks, the analyst who
wrote the report. "There are too many things that the Web does."
Indeed, some start-ups aren't only replacing traditional brokerage services,
but offering new ones. Realcentric, a Los Gatos, Calif.-based Internet firm,
will not only help corporate tenants find space, but also office furniture,
accountants and telephone service. It will also refer companies to brokers.
"Brokers will become increasingly specialized," says James M. Stuart, chief
executive of Realcentric, "And customer expectations will rise."
Brokers argue they are protected because they already offer more
sophisticated consulting services. "The Net does not think," says Thomas
Falus, who is leading new ventures and e-commerce at Cushman & Wakefield New
York Inc., a unit of Cushman & Wakefield.
Ray O'Keefe, president of Grubb & Ellis New York Inc., a unit of Grubb &
Ellis Co., Northbrook, Ill., says those who think the Internet will cut out
the role of the broker misunderstand the role. "If we thought we were
middlemen, we would be really concerned," says Mr. O'Keefe. "What customers
really value is our ability to advise them and negotiate a transaction."
To the extent that tenants or buyers can now do some of their own work on
the Internet, brokers say it will give them more time to focus on the
creative parts of their jobs -- juggling tricky office requirements in
crowded markets, haggling for better deals and analyzing the financial
consequences of a real-estate purchase. And in some cases, brokers are
willing to give up deals altogether. CB's Mr. Wirta says the
property-services firm loses money on small lease transactions -- under
5,000 square feet -- and therefore would be happy for an Internet broker to
take over the work.
What brokers most hope to get from the Internet is raw data. Real estate is
a fragmented market with no centralized database. Companies such as CoStar
Group Inc. and RealtyIQ.com offer extensive troves of for-sale and for-lease
listings compiled by large staffs of researchers. Other online firms, such
as LoopNet Inc., Propertyfirst.com Inc., Comro.com and Cityfeet.com Inc.,
solicit listings from brokers and landlords who submit the information to
them online. Last week, Propertyfirst.com, Alhambra, Calif., announced its
intention to develop the first multiple-listing service for commercial real
With such services, tenants can survey office sites online before setting
foot in a building. That should save the broker the hassle of escorting
tenants through numerous properties. Most of the Web-based firms say they
don't aim to cut out the broker, and in several cases prohibit tenants from
accessing information directly.
Where the Internet companies may be taking on the traditional brokers more
directly is in online discount brokerage activities. New York-based
TenantWise.com is offering tenants brokerage services, but at a 60%
discount. Tenants use the company's Web site to calculate how much space
they need, search for available space and to schedule appointments to visit
prospective offices. The firm then helps tenants negotiate leases.
Thomas P. Lynch, manager of office leasing for real estate at the Port
Authority of New York and New Jersey, says he recently used TenantWise
to negotiate with a tenant for a 1,150-square-foot lease in the World Trade
Center, which the Port Authority owns. Although he says he appreciated the
service -- particularly its lower commission rates -- he says "we couldn't
rely on online brokerage services alone. I'm not quite sure whether these
firms have the brokers that are experienced in larger deals."
Some Internet services are carefully courting brokerage companies. Zethus,
for example, originally planned to offer discount brokerage services through
in-house advisors. But the company reversed course and decided it needed to
embrace traditional brokers. James A. Hime, chief executive, describes the
services as a "box of tools" for brokers. As for commissions, he says, "it's
not for us to say. We'll let the marketplace sort that out."
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