Landmark Links June 14 – Serious Modification Required


Lead Story… In today’s economy, disruption seems to happen at an ever quickening pace.  However, as noted here previously, the real estate industry has been highly resistant to change.  Whether talking about Realtors and their 6% commissions or the construction industry’s lack of technological innovation, real estate has proven to be among the more difficult industries to disrupt.  However, changes appear to be happening, albeit somewhat quietly on the commercial brokerage front.  The Financial Times ran an article a couple of weeks ago about the changing role of intermediaries in the London commercial property markets that could have just as easily been about the US.  From the Financial Times (emphasis mine):

Since at least the mid-1800s, London-based commercial estate agents have sat at the centre of most UK property and land deals.

But many of the largest agents are now having to adapt their business models for fear they could fall victim to a technology-enabled removal of the middleman, a trend that has already reshaped consumer industries such as retail.

On the one hand, there are shared workspace groups such as New York-based WeWork, which last week unveiled plans for its largest location globally, with a deal to lease 280,000 square feet on London’s South Bank. Using apps to market flexible offices, they have cut agents out of smaller leasing deals. On the other hand, multibillion-pound landlords are bringing functions in-house for which they once relied on agents.

The resulting pincer movement has prompted the largest UK and US agents to shift focus to long-term advisory income as they anticipate a reduction in one-off deal fees.

The question that needs to be answered here revolves around the value that agents or intermediaries provide.  Typically, that value has been to act as a gatekeeper or matchmaker of sorts to manage relationships between landlords and tenants or to make introductions between buyers and sellers of property.  However, technology is breaking down walls and re-casting the traditional gatekeeper/matchmaker role as little more than an additional tax to be paid by market participants.  This trend is even more troublesome for  the middleman or matchmaker in an environment where ever-lower investment yields mean that investors and developers are looking to reduce costs wherever possible.  For a long time, the broker’s edge was market information which clients came to rely on them for.  However, comps are now largely available online and market data can be obtained through multiple subscription services, meaning that much of the information that clients typically relied on brokers for can now be had at a substantially lower cost.  The result is that days of the broker as a matchmaker and data provider where large one-time fees are generated for making introductions are coming to an end.  Those that are successful going forward will be the ones able to synthesize the now widely-available data into a coherent investment thesis rather than simply regurgitate it to win listings. This may be unpopular with a good portion of my readership but those that don’t provide some level of transactional and market sophistication (be that entitlement, market, finance, development, etc) are going to have a very difficult time surviving in the coming years. More from the FT (emphasis mine):

Agents need to think about what they do that adds value. Armies of grads creating brochures doesn’t really add value Andrew Miles, Realla
“Two years ago, [the serviced office group] Regus were paying us to deal with them. Now, we are seeing business-to-business deals without intermediation.”

Chris Lewis, head of office agency and consulting at DeVono Cresa, says: “Five to 10 years ago, if a company had a requirement for 150 people for two years, they would speak to their real estate adviser. Now they can go to The Office Group, WeWork, Regus or an intermediary broker.”

Such deals would previously have earned agents a fee of about 10 per cent of one year’s rent, he says. In a parallel shift, services such as Appear Here, a digital market for pop-up shops, are taking over some small retail leasing deals.

When it comes to bigger transactions, the threat comes from large landlords — the likes of Blackstone and British Land — which are now handling functions once carried out by external agents, says Simon Prichard, senior partner at Gerald Eve, a London agency.

“To justify their fees, property managers need to show they’re doing something. They’ve taken away from agents what agents used to do,” he says. For example, he says, in-house leasing teams handle marketing campaigns, attend meetings with lawyers and agree terms with tenants, although agents are able to provide the all-important contacts.

Commercial property sales have not yet moved online, but digital offerings in the residential market are forcing established agents there to change their models, offering a clue to how the commercial market may change.

So, what are brokers doing to avoid the fate of becoming functionally obsolete?  They are moving into market segments that require a higher degree of sophistication or moving towards recurring sources and away from transactions that generate large, one time fees.  The big boys are already making the shift:

Agencies have been quietly shifting into areas such as property management, which entail long-term contracts rather than one-off fees. Over the past two years Savills, the London-listed agency, has acquired Collier & Madge, managers of commercial properties; Chainbow, which manages residential blocks; and Smith & Gore, which specialises in rural estate management.

CBRE, meanwhile, said in its annual results that it “continued to shift toward more recurring revenue in 2016”, increasing such fees to 42 per cent from 37 per cent of its total.

Nabarro, a law firm, says agents are “seeking to move up the food chain by providing complex financial advice, which has traditionally been the territory of investment banks”. CBRE and JLL, for example, have corporate finance teams.

This is something that is a regular discussion point around the Landmark office.  In our view, the primary value add that we (or any other financial intermediary) bring to the table is the ability to understand and structure complex real estate development projects.  Our value proposition is straight forward: identifying capital sources is something that can be replaced by technology to some extent but sophisticated advisory, analysis, detailed capital market knowledge and advice really can’t be.  Marrying real-time information about what specific capital providers are looking for with underwriting sophistication provides somewhat of a barrier to entry against commoditization via technology.

Despite the above, its not all doom and gloom for traditional commercial real estate brokerage. The end of the FT article hit on a point that is perhaps the best argument for the continuation of the old business model, IMO: CYA (translation: cover your ass):

Mr Lewis, however, says agents’ role in brokering deals will survive — if only because companies’ property directors will always want to share responsibility and take expert advice.

“For corporates and for landlords, if anyone ever says ‘we want to look at this deal and see how you got to this point’, it’s good to be able to point at a third party who has given you advice and support rather than take it all on yourself.”

In an increasingly litigious time, no one wants to have to answer to investors or a board without having another party to deflect blame to if things go sour.  Perhaps the future of the traditional brokerage model is that of the professional scapegoat.


Strung Out: Goldman Sachs thinks that the opioid crisis has gotten so bad that it is affecting the economy by lowering the participation rate.

On the Other Hand: It’s more than a bit of a stretch to assume that young men are actually giving up work to play video games all of the time.

Trouble Abroad: Prices are cooling in China, which should worry anyone watching the recovery in the U.S.

Dragging Out: Why the robot takeover of the economy is proceeding more slowly than expected.


The Secret’s Out: Two new exchange traded funds have been launched specifically to bet on the decline of the American mall.  Just my opinion but the bearish sentiment here is getting a bit crowded.

Good News for Office: Working from home was supposed to be the “next big thing” in employment but the permanent telecommuter is going extinct. thanks to more team based work environments and employees taking advantage of employers who offered the perk.

Company Town: Facebook is building it’s own mixed-use village of 1,500 homes in Menlo Park to house it’s workers and combat the California housing crisis.


This is What Happens When You Don’t Build: California is home to 12% of the population of the United States yet accounts for a whopping 40% of available home equity.  Trust me, it’s not all due to the great climate.

From the Way-Back Machine: 10 year ago this week, S&P announced the first major downgrade of subprime mortgage-backed bonds.


What VC Bubble? A dog walking/pet sitting company has raised $105MM in venture capital over the past year. That’s $105MM to walk dogs and pick up shit.  Given that this is a revolutionary business plan with incredibly high barriers to entry, I’m sure that the returns will be amazing.  Now, if you don’t mind I’m going to go have a beer and ponder my life choices.

Get Rich Slow: This short article on the fractal nature of compound interest is much, much more interesting than you would think.

Damn: Amazon Prime is on pace to become more popular than cable TV.  Just another reason that Bezos is on pace to become the richest person on earth.

Ouch: Morgan Stanley came out this week and downgraded Snapchat, a company that they helped to bring public a short time ago after the stock has tanked post IPO.  This almost never happens.  Moral of the story: sell to Facebook if you have a technology that Zuckerberg can easily copy.  See Also: Snapchat spurned Mark Zuckerberg’s buyout offer back in 2013 so he destroyed them by transforming Instagram.

Chart of the Day



Gimme Cookie: Police found 314 grams of cocaine in a Cookie Monster doll because, Florida (h/t Henry Baskerville)

Missing Something? Health inspectors found a breast implant inside a bar utensil holder at a Texas strip club.

Knockout: A golf ball diver punched a gator to escape an attack because, Florida.

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