Market Data

The Internet Rewrites the Rules for Brokers

Clearly, the Internet has changed how commercial real estate is leased and sold. Web sites in use that are run by commercial real estate professionals range from those that provide simple information to sites that assist buyers and sellers or tenants and landlords in virtually all transaction types.

Databases track hundreds of thousands of properties, providing commensurate sales comparables, property images, and information on tenants, among other things.

Most brokers have heard or thought about the question at one time or another: Is there still a need for the traditional commercial real estate broker? The answer is yes. But brokers also must be willing to adapt in today's market.

As the Internet begins to permeate all aspects of the real estate business, unique challenges and opportunities continue to confront today's commercial real estate brokers. The Internet can assist both sales and leasing brokers and can provide significant information to be used in market research, marketing, and investment analysis; however, it also presents serious competitive consequences.

The good news is that the Internet will provide better and faster information without eliminating the need for brokers, but the other side is that brokers' roles — and fees — may change.

Brokers vs. the Internet The Web has added a new dimension to commercial real estate marketing and sales.

Various Web sites can complement a broker's marketing, market research, and investment-analysis requirements. Previously, brokers had to find and use their own information sources and/or research departments for market data such as occupancy rates, rental rates, comparable sales prices, expense analyses, and building information including images or floor plans. In addition, it used to be much harder to find information on subjects such as marketing alternatives (advertisements, mailers, billboards), tenants with space needs, or vendor services such as professional companies (accountants, attorneys, engineers), tradesmen, furniture suppliers, and telecommunications companies. Now much of this information is available online.

For example, Costar Comps maintains a real-time database of commercial sales transactions, a source for researching property comparables. It also provides regional market trend reports for office and industrial properties . LoopNet provides a broad spectrum of products and services, including sales listings, market data, and financing alternatives for commercial real estate. PropertyFirst.com also provides online sales and leasing opportunities for buyers and sellers, landlords and tenants, and brokers.

But, the flip side is that this information is available to everyone, including sellers, buyers, tenants, and owners that may look to the Internet in lieu of real estate brokers.

As such, brokers must focus on ways to make themselves indispensable for needs that cannot be fulfilled on the Web. At the core of brokers' strengths are trust and personal relationships. Brokers offer personal contact that most clients find remarkably reassuring. Further, experience and skill in negotiations, coupled with more refined market knowledge, also are areas where brokers can continue to add value in sale or lease transactions.

The Internet also directly competes with brokers in commodity transactions such as tax-deferred exchanges and triple-net-lease purchases. These types of special transactions can be — and are being — completed on the Web. Again, however, brokers can add that personalized touch that the Internet can't.

The plethora of online information also can be advantageous to commercial real estate professionals. For instance, independent brokers or those at small companies now can compete more successfully with large firms. Independent brokers can use online research and maintain a lower cost of business since much of the information on the Internet is free. Moreover, the Internet eliminates geographical constraints of market information. Independent brokers easily can do deals in many markets nationally, and ultimately, internationally.

Large commercial brokerage companies also can use the Internet to their advantage, but they may experience more negative effects than small businesses. While large companies previously could lure the best brokers with substantial information from their research departments, this advantage may be diminished as more information becomes available online, and research staffs may be reduced. Competition from online brokers and independent brokers will grow, potentially reducing large firms' market shares. Also, to reduce overhead, large companies may lay off administrative staff or even merge with other companies.

Because more information will become available at a lower cost to users, the Internet also may affect brokerage fees. Buyers and sellers, as well as tenants and owners, may see savings due to the diminished work required of brokers. Further, online brokers already are cutting fees due to the reduced cost of business and the speed that they provide. The result may be that commission rates will be driven downward.

Preparing for the Future While the current role of the Internet is not significantly affecting large real estate brokerage firms or individual brokers, its influence is accelerating.

What can brokers do to prepare for the increased impact of the Internet? First, they should change the way they do business. Not only will relationships, experience, and negotiating skills be more valued, but also deeper insight into the best market data will prove advantageous. Brokers will need to build on strengths such as prospecting, investment analysis, and negotiation skills.

Second, brokers should include the Internet in their strategies, when appropriate, for themselves and clients. They should use market research, marketing, and other information from online sources. They also should recognize which transactions can be completed online and offer this as an option to clients.

Finally, brokers should seek new products and services to offer clients to offset the possible changes that the Internet may bring.

The Internet is sure to continue to change the way that the commercial real estate market operates, and commercial real estate practitioners should be ready both to embrace it and to showcase their own valuable skills and offerings that go beyond what it can do.

Jack Barthell

Jack Barthell is partner in charge of real estate capital markets at PricewaterhouseCoopers in New York. Contact him at (212) 596-7280 or jack.barthell@us.pwcglobal.com.

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