Looking forward in a backwards facing industry

If there is any single industry that depends on data trends to provide indications about the future, it’s real estate. Brokers, investors, and tenants all love to look at recent history and use it to provide a prospective on where the industry is headed going forward. Data points such as vacancy rates, rental rates, absorption, comparable deals, and loan rates are all used as evidence to prove where the market is heading.

While these data points are useful, they hardly tell the whole story. A perfect example would be using comparables to indicate where a deal should get done. Just because a particular landlord or tenant agreed to a certain pricing structure three months ago doesn’t mean that they will do that particular deal again.

Another example is using vacancy or availability rates to indicate the health of a particular market. Vacancy rates could be trending up, but if there are a couple of big tenants in the market, those vacancies could get filled quickly. Or vacancy rates could be high, but they are all small spaces and a large tenant would have few choices. Looking at the historic trends and current data points wouldn’t tell you that part of the story.

That’s the value of the broker… Helping to make sense of the noise and provide counsel that will help the business make a sounds decision.

Critical dates

One of the biggest challenges of brokerage is managing all of the shifting dynamics and priorities of the various stakeholders. Everybody is busy and the long project timelines make it easy for clients to back-burner a real estate project in favor of more pressing issues.

I’ve written before about the importance of leaving enough time to negotiate a good deal, but circumstances don’t always permit a leisurely pace. When that happens, it’s important for brokers to establish milestone dates and keep everyone on track.

The second part is keeping everyone accountable to these dates. It’s tempting to publish the schedule and then assume everyone is paying attention. This job is as much about managing your client as it is negotiating deals. Everyone can look like a hero with leverage and time. But getting a complex project across the finish line when you’re up against the clock is a real skill.

I’ve found it easier to create a plan when I know where we want to end up, so I start at the move date and work backwards. Once the move date is set, start looking at construction timelines, permitting, lease review and negotiations. Then assign tasks and responsibilities to the team members. And remember to follow up to keep everyone on target!

Thoughts on mentoring

I had a long conversation with an old fried the other night about the perceived lack of commitment among the new generation of employees. I talked about how they didn’t seem to have the same work ethic that I had felt was necessary when I was starting my career in my mid-20s.

He challenged me, asking, “what are you doing as a mentor to make sure they understand their responsibilities? Are you explicit about your expectations? Are you praising them for their positive behavior in addition to discouraging negative actions?”

It got me thinking about the brokerage industry and the traditionally poor job we do developing talent. Brokerage shops are happy to churn through young employees, provide minimal training, and hope that something sticks before they burn out and quit. It’s something that I experienced as a young broker myself and have been guilty of doing now that I’m more advanced.

I recognized that while I frequently express disappointment when junior guys miss the mark, I don’t do a great job of reinforcing positives. It can create an environment that is frustrating and leads to a lack of communication inside the office and within a team. Rather than complaining that new employees aren’t cutting it, we would be best served by investing in their success. We need to lay out expectations and then help them figure it out.

The Security Deposit part II

I wrote last week about different ways to structure a security deposit when negotiating a lease. While there are a few options when it comes to posting the deposit, there are also options when it comes to the structure.

One of the things that any landlord wants to ensure is that his up-front investment will be protected. He has come out of pocket for construction and transaction fees (including brokerage commissions, legal fees, etc) and if he provided free rent he may not recognize any revenue for months after the tenant occupies. The landlord has amortized those costs into the lease and will recap them eventually, but his fear is that the tenant will go bankrupt or is otherwise unable to pay the rent before he recoups his investment.

There are a number of ways to provide the landlord with some comfort while also not crippling the tenant by locking up a large portion of their operating capital in a security deposit. The first step is to get the landlord comfortable with the tenant’s financial position. that may include providing bank statements, audited financials, or recent tax returns. Anything that can demonstrate fiscal stability should be offered to the landlord before any security deposit amount is discussed. If the financial condition is strong enough, this may mitigate the need for a security deposit altogether.

There are also a number of other options when it comes to posting a security deposit. You can request a “burn-down” which means that the landlord reduces the security deposit when certain benchmarks are hit. Whether that’s simply paying rent for a period of time without any late payments, the tenant achieving certain revenue targets, or closing an additional round of funding, this is the time to try and get the landlord to view the tenant/landlord arrangement as a partnership.

The more comfortable you can make the landlord with the relationship, the better your chances for achieving a lower security deposit. This is why it’s important to have an adviser that not only helps you negotiate a good financial deal in terms of rental rate, but is also willing to be your advocate in selling your tenancy to the landlord.