What is a square foot?
Often times it takes reading some interesting articles for me to focus on a real issue. I recently read an article about the swelling number of commercial real estate brokers coming into the industry. It is my opinion that the heart of this increase is a combination of two things. First, the common “get rich quick” attitude of many millennials, all hoping to be the next Mark Zuckerberg of the real estate industry. The second would be the need from the very large public real estate firms for bodies to service the ever-expanding needs of their national and international clients.
When I started in this business almost 50 years ago, I can remember, one of the first deals I ever worked on was for a consulate here in Chicago. Not only did I have to call all the buildings in the market area to see who might have availability but once that availability was identified and a specific building and space were identified, I actually had to draw up the space plan — a really bad idea, but a great learning experience. While it’s quite clear that I am not an architect nor have I ever tried to be an architect that experience of working on drawing up a plan gave me the basis for an understanding of square footage and what it actually means and how planning works. Today, of course, space planners do all that work and thus, entry-level brokers often have very little understanding of space, a square foot, what it means, how it is measured and how to measure its real value. In fact, recently, a long-time friend and employee of one of the major public firms came to me trying to get an understanding of how space is measured in New York. I said that he should talk to their New York office but he indicated that they were fairly disinterested in speaking with him because the deal was too small and he was working it himself. I explained that square footage in New York is unlike any other city I have ever worked in. An accurate calculation or, more importantly, an understanding of the calculation is almost impossible. That is one of the reasons that New York, as an office market, stands on its own and makes it very difficult for outsiders to become part of its “insiders club.”
Another issue that I think arises from the tremendous influx of inexperienced people is an unreasonably high expectation among tenants about the deals that can be made. Newer people in the industry “hear” about deals and immediately believe that they can simply duplicate those deals because they “heard” that was what the market was dictating. First of all, it is my experience that the reality of what is happening is quite clouded by the perception of what is happening. In other words, brokers often like to exaggerate as to what they are actually doing, how many deals they have completed and how “great” these deals are. While I respect the enthusiasm these young brokers possess, I cannot respect the belief that hearsay and reality are one and the same. I think this becomes very important as the younger tech companies, quickly expanding throughout the US today, often times like to deal with people like themselves. That is not the best route although it might be the most comfortable.
For the last couple of years, I have been predicting a substantial correction in the office market and while I admit that my timing is a little off as I thought it would start in 2016, I do believe that we are looking at the prospect of that slow down if not downturn, beginning in 2017. Here in Chicago, particularly, we have new buildings being delivered, which will result in a substantial amount of vacancy occurring in the buildings that are being vacated by the tenants moving to the new buildings. Additionally, there has been a substantial increase in the availability of sublease space being offered by tech companies who have been too optimistic about their growth projections. The sublease space being offered by tech companies, in my opinion, might be very difficult to market as experience shows me that the sublessor’s credit is a major issue for any sublessee. What less-experienced brokers do not quite understand is that the ability to sublease at less-favorable terms than the lessee’s existing term is an essential part of marketing the space. In the worst case, a sublessee who has no parody with the existing landlord, by virtue of the nature of subleases specifically, can be thrown out of space by the lessor if the lessee, the sublessor, goes into default. The situation has occurred and it is my prediction that it will continue to occur at an even greater pace. Finally, the advent of artificial intelligence will slowly but surely have a major effect on our industry. It will never replace the one-on-one relationship between OWNER and Broker but it will automate a great part of the process specifically in the selection of a building and a location. The result of this move to AI will be an increasing value placed on experience, a quality only achieved through time and hard work. As an old Chinese proverb states…An old horse knows the route.