Tuesday, June 18, 2024 Jun 18, 2024
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BUSINESS The Tale of Our Overbuilt City

Wherein a few bad boys threaten to ruin the once amiable relationship between office brokers and developers.

It was the worst of times, it was the worst of times. So reads the infamous first line of The Tale of Our Overbuilt City in the year of our (land)lord 1986. And as in many great novels, unfriendly economic conditions are central to the plot, grating away at our main characters, stripping them of proud facades erected in better days, leaving their souls naked in the marketplace. These are strange times in Dallas, and our characters-the office developer, the office broker, the office tenant-are being forced to redefine their roles in this society of steel, glass, and granite.

In 1968, there was one office broker in Dallas-Wayne Swearingen, who at that time worked with the Henry S. Miller Company, dealing alone with the mighty developers. Now Swearingen’s name is synonymous with real estate brokerage in Dallas, but he is certainly not alone. Office brokers estimate that their ranks near 500 today, all of them out knocking on the same doors. When times were not so troubled in Dallas, the developer-broker-tenant relationship was amiable and cooperative. The broker was positioned as any middleman, in the middle. He matched a tenant with a developer, and basically let that developer sell his own product. If the product sold, the broker collected a commission, which was paid by the developer.

Fifteen years ago, a broker’s commission was 6 percent of the total lease distributed on a monthly basis as the tenant paid his rent. That commission structure is perhaps the best illustration of what the three-way relationship means to the real estate market: a developer builds an empty, although perhaps attractive, shell; the broker brings to that shell a value, which is the rental stream paid by the tenant; the developer in return pays the broker for the value he has brought to the building. But as the Dallas office market matured, the three-way relationship began to evolve; the commission structure began to change. By the mid-Seventies, developers were finding it harder to sell a building that carried the debt of commissions owed to many brokers. So they proposed a new system. Why not “cash out” the broker up front and get him out of the way, off of the books, and on the road to finding another deal? The brokers thought that was a great idea; it especially helped the larger brokerage firms that had the big overhead that comes with running a large organization. Some brokers even say it was the brokers who thought of the cash-out commission structure, even though it involved a discount of their commission from 6 percent to 4 percent. The symbol of the cash-out era, which began in the early Seventies, is the navy, four-door Mercedes-the choice of many brokers with much cash burning holes in their pockets. And so the cash-out commission became the norm through one down cycle (“73, ’74, 75) and up again, and now, down once more.

This time around the cycle, the commission structure is again a~changin’. Never in the Dallas real estate market have there been so many concessions by so many developers in search of so few tenants. In an overbuilt market, it’s logical for a developer to offer concessions to lure a tenant into his building versus the one down the street. But the gimmes snowball: free rent, turnkey finish-out of the office interior paid for by the developer, cash up front to entice the tenant and speed up his decision, moving costs thrown into the pot. And if the tenant didn’t even need to move, well, then a developer might pay the rent in his present office space so the tenant was free to sign a new lease. We can only speculate as to which creative thinkers came up with each of these concessions-developer or broker. Who knows who started it? But the unhappy truth is, that nobody-including the tenant-is safe with the present situation.

Many developers have been pushed to and past their financial limit. Those who have gone too far giving away the house have found themselves on the courthouse steps on first Tuesday, listening to the auctioneer sell their foreclosed-upon office building. Brokers find their commission checks getting smaller and smaller. You see. they aren’t paid for those years of free rent doled out to tenants by nervous developers. And greedy tenants who searched for the cheapest deal have found that developers who spend their cash up front to buy warm bodies to fill office space have very little money left for tenant services like cleaning the restrooms and mowing the grass. In some cases, tenants have arrived at work to find the doors locked, the building foreclosed upon, and the developer long gone. The stories are abundant; one is told of a building where maintenance was so neglected that the city health department closed down the rest-rooms. It seems they were unfit for human use after months without a cleaning crew, which the developer just couldn’t afford.

Each of our characters is looking for someone to blame, somewhere to go for an answer to this mess. Heads turn unanimously to the lenders. But in a city where developers have become lenders (after starting banks and savings and loans of their very own), and where lenders have become developers, there is still no clear answer, no one place to lay the blame. So. the relationships between our main characters, which were once strong and friendly, have deteriorated. It doesn’t matter anymore what is rumor and what is reality; the fact and fiction have become one.

Our subplot begins with John Amend, an office broker with The Staubach Company. Amend has been recently promoted to senior vice president of the facilities division, The Staubach Company’s office brokerage arm. The new post was a well-deserved reward for his hard, persevering work. Amend, the rest of the Staubach facilities people, and the other 500 office brokers in Dallas are out there on the street every day, knocking on the doors of developers, pounding on their conference tables, making deals for the brokers’ clients-the office tenants.

To say the name “John Amend” in Dallas today is to hear an echo. The words roll past a developer’s lips and plop upon the ground like unwanted grape seeds that have just been bitten into, leaving a bad taste in the mouth. Other brokers don’t like to compete with Amend and his colleagues at The Staubach Company. They say Staubach’s crew is changing the way brokers do business, beating up on the developers in Dallas, telling developers what to do, leaving them angry, resentful, and in no mood to do business with any office broker. They say the Staubach brokers have forgotten who picks up the tab when developer, broker, and tenant walk away from the bargaining table. Amend hears about the barbs thrown at him when he turns his back to leave that table- lease agreement in hand. But his own popularity is not a priority, he says. His one and only priority is his client-the tenant. “I tell you, if I was a developer in this market, and I had to deal with The Staubach Company, 1 would probably shudder a little bit,” Amend says. That’s because The Staubach Company has taken the tenant representation philosophy to the limit. In most cases, the tenants who use The Staubach Company as their consultant never meet the developer who will be their landlord for the next three to ten years-until they sign the lease. Of course, that excludes the developer from the sales pitch on his own product.

Some tenants want to avoid dealing directly with the developer. One Staubach client, Kathleen Hampton, administrator at the law firm of True & McLain, says that’s the way her firm wanted it. Their time is worth more than $175 an hour; meeting with developer after developer was a waste of money.

“I have never taken a gun and held it to a developer’s head and said, ’do this deal, or I am going to pull the trigger,’ ” Amend says. “The point is, we have no way of coercing developers to make the kinds of deals they are making in the marketplace. Each owner makes whatever decision is appropriate for his project given the specific conditions of his financial arrangements and the open marketplace. Certainly I want to be tough. I’m going to be a good negotiator. That’s my job.”

Amend has been on the other side of the table, as a leasing agent, developer, and partner for the Trammell Crow Company. Back then, he fought tooth and nail for the developer. He remembers what it was like. Now, he fights for his tenant.

Hampton says The Staubach Company helped her get to the bottom line since it offers the advice of an unemotional middle man. “Besides your payroll, your lease is the second most expensive element of your budget. It can make or break the success of your year. It is important not to have any emotions involved, for it to be a more sterile deal.”

Developers hate to hear talk like that. They hate to hear that the office building bearing the name of their company, the building that now displays every beautiful detail painstakingly created by their hand, their very ego now standing on the street is reduced to-a number. The bottom line. The “effective rental rate” (what the tenant ends up paying per month after all of the concessions are figured in). And when developers speak of this crisis with the brokers, their words flow past the John Amends of Dallas, past The Staubach Company, past any one brokerage firm in this town.

The climax of our story comes when developers near and far decide they have had enough of these belligerent brokers. One by one, developers are coming forward to talk about the relationship. Commissions, which in our last chapter were set at 4 percent and were paid in total at the signing of the lease, have risen in recent times to a standard 4 1/2 percent and 5, 6, and 7 percent in special cases. This happened for two reasons: the cash value of the average commission has decreased because of the free rent, and in some cases, developers are being forced to bid against each other for a tenant controlled by a broker, and the broker’s commission is being bid up to sweeten the deal (just one of many practices that violate the unwritten ethics of the community). Some time ago. developers found that they could spread their risk by paying the broker half of his commission when the lease was signed and half when the tenant moved into the building. Slowly but surely, that became standard practice. But the market got worse. The local economy got worse. Tenants, too, began to weaken and fall. You see. in some cases, the tenant never materialized, and the developer was left holding the bag-an empty bag, since he had already paid the broker his money in full.

James M. Underhill, a partner with the Trammell Crow Company, says developers are “tired of being the doormat, tired of being beaten on by brokers who are strictly price- and concession-oriented.” Underhill says the Crow Company still stands on middle ground-half way between payment in full upon signing of the lease (the old way) and the emerging hard line of withholding all payment until the tenant shows up. The Crow Company pays brokers half of their commission at signing, and half when the tenant materializes. The Vantage Company is just one of a group of developers trying to play hardball. Vantage has made two important policy changes recently that are sending a message to brokers: we will not be pushed around. First, Vantage decided to cut a commission check to a broker only after a tenant moved into the office space. Second, Vantage will no longer quote proposals to brokers until it meets face to face with the tenant. Vantage senior vice president of marketing Dave Besserer explains. “’We have had some deals where in between the time the lease was signed and the time the tenant moved in. either the tenant had gotten into financial problems and didn’t move in at all, or they were unable to occupy what they had committed to originally. In those cases where we had paid the broker half of the commission, there was no real recourse to get the money back.” In regard to meeting with the tenant. Besserer said Vantage expects to hear some grumbling from brokers who never let a client see the building or talk directly with the developer.

Besserer admits to having quite a bit of trouble with some brokerage firms over the policy changes. Brokers have traditionally maintained that their job is done when the lease is signed. Says John Rind, a president and general manager of the brokerage firm Casey Rind Foster Lindsey Inc., “Brokers don’t like that [form of payment] and it’s a bone of contention right now. All it is, is a businessman trying to cut down on his risks and put that risk on the broker.”

And what of the brokerage firms like The Staubach Company, which make it a policy to meet with the developer for rather than with their client? Will they stop doing business with some developers in town? Roger Staubach, the firm’s founder, says his company will not avoid those developers’ buildings, although he hopes “every developer in town won’t get into cahoots” and make meeting the tenant a policy in Dallas. In any case. Staubach says, his client, the tenant, is always right.

And now we near the end of our story. After the talk of money and how, when, and to whom it will be paid, our characters wax philosophic. And despite the sterile talk of bankruptcy and bottom lines. our denouement is filled with emotion.

Dan Hanesworth, first vice president of land development in Dallas for Chicago-based Homart Development Company, wrote in the spring Texas Business Office Guide a plea for cooperation among brokers and developers: “What we’re seeing now is a group of Dallas brokers who are influencing office lease transactions to such a degree that they are alienating many developers and landlords in the process.”

Wayne Swearingen, Dallas*s first office broker, has sharp words for such brokers: “There are some people in the market who are opportunists-these kinds of times always produce them. They are shortsighted and are taking advantage of an overbuilt situation. What they don’t realize is what comes around goes around. The developers will remember.”

That’s what the developers are saying. And John Rind is hearing it, too. “I think we need to work together and establish some policies that we can all live with, and I think that is what most of us would like to do. The worst thing that can happen between a developer and a broker is if they get into a commission dispute and lose sight of the real reason they are together in the first place-to make that deal. Unfortunately, it becomes an every man for himself situation, and if that dispute is not taken care of, you may as well go down the road and make the deal with somebody else. That’s a bad thing to have happen, because a broker has an obligation to make sure a tenant sees every available offer.”

But Rind warns that Dallas developers cannot ignore the brokerage community: ’There are just too many of us out there kicking up deals.”

And what of the rumors and reputations? Reputation is important to Staubach and he doesn’t like the criticism directed at his firm, although he says he’s used to taking criticism. He’s been taking it since his football days with the Dallas Cowboys. What’s important, Staubach says, is who’s doing the criticizing. “Some of the criticism is jealousy and some of it is deserved,” Staubach says. “If some of our people are not acting in a humble way, not being respectful of the developer and his dignity, I don’t like that.”

Now that feelings are sufficiently ruffled (smashed, thrown on the ground, and stomped on, some would say) among brokers and developers, the community has reached a stand-off, Each is telling the other: don’t tell me how to do my business. Both brokers and developers seem to agree that integrity and professionalism will prevail through this down cycle and that those who strive for a spirit of cooperation will emerge the victors; those who don’t will fail. They will be weeded out by their own bad tactics. The developers will remember who was naughty and who was nice. And in the next cycle, there will be fewer players in the game. Even in real life, there is poetic justice.