Sensing office landlords’ desperation, some brokers score higher commissions

Like a sports agent representing a top draft pick, brokers for office tenants in Chicago know their clients are in high demand.

As a result, some are starting to score higher commissions from landlords who have lots of office space to fill and few prospective tenants to recruit. 

In Chicago, the typical rate for office tenant brokers, which is always negotiable, has hovered for years around $1.50 per square foot for each year of a lease. But since the pandemic made remote work more prevalent and sent office vacancy rates soaring past 25 percent, landlords have had to come up with creative ways to attract tenants or risk losing their properties to lenders. 

Although $1.50 is still the most prevalent rate, it’s not uncommon for landlords to agree to pay brokers $1.75 or even $2.00 per square foot, insiders told The Real Deal.

“Landlords that have a good position with their lender are being a little more aggressive in proposal making,” said Transwestern’s Eric Myers, who represents office landlords. He declined to share specific numbers but said he has seen the trend pop up among other incentives.

“It’s not limited to commissions. It’s more rent abatement and more tenant improvement dollars than what they may have put in their performa in the past,” Myers said.

The emergence of higher commission offerings in Chicago’s office market also highlights how the typical deal structure in the city stands out from many other major markets, including New York. There, and in many other U.S. cities, broker’s commissions are based on a percentage of the rent charged over the course of the lease. In short, higher rents mean higher commissions. 

By contrast, the footprint of a lease in Chicago determines its commission, regardless of the rent charged. That means Class A, B and C leases of the same size generate the same commission.

But even without the percentage system, Chicago brokers representing tenants who are participating in the post-pandemic flight to quality, could start to break away from the pack. 

Before the pandemic, typical commission rates stayed fairly consistent, but when they did start to tick up, they eventually set a new baseline across the city. It’s unclear if the $1.75 per-square-foot rate will take hold in Chicago or remain an occasional offering from deep-pocketed or desperate landlords. 

“Plenty of tenant rep brokers are pushing for higher commissions,” said Mark Bâby, a broker with Stream Realty who represents office landlords. “Higher has not become ‘market’ yet, but certain buildings are willing to pay more on specific deals.”

It’s possible that a divide between commissions for trophy and lower quality buildings could stick around, said Cresa’s Allen Rogoway, who represents tenants.

“The uncertainty is in the [buildings] that are materially less valuable and if they’re going to be able to afford to offer more, or if there will be a time where there’s going to be a different commission structure for different priced assets,” Rogoway said. 

If that ends up being the case, the rate structure would more closely resemble the percentage system, where leases in higher value properties typically yield higher commissions than leases in lower value properties with the same footprint, he added.

“I think there has to be an adjustment in some way because of the gap between price points,” Rogoway said of Chicago’s system. 

A push to adopt the percentage system over the dollar-per-square foot system, however, doesn’t seem to have traction yet, Bâby added.

Percentage commissions “would only be beneficial for tenant reps on trophy buildings,” he said. 

While many companies have not abandoned in-office work altogether, they have scaled back the footprint of their existing leases and begun searching for sublease tenants, which has also given brokers a better chance at outsize commissions than in the past.

Savills’ Chicago region president Robert Sevim said he hasn’t seen the trend of higher commissions play out much among traditional office leases, but that it’s more likely to occur on the sublease market. 

Sublease offerings in Chicago have entered the market at a record clip over the past couple of years, soaring to more than 8 million square feet amid the pullback in the office market.

Like landlords scrambling to fill vacant office space, Chicago companies that are desperate to save costs on rent by subleasing their spaces may be motivated to offer higher than average commissions to brokers.

Of the subleases that have been filled, however, it’s unclear if higher commissions played a role.

Last month, Kin Insurance subleased 20,000 square feet on the ninth floor of the iconic Merchandise Mart from online consumer lender Avant.

Read more

Commercial

Chicago

Chicago office landlords are sick of funding tenant upgrades

Commercial

South Florida

Meet the commercial brokers making bank in Miami

Commercial

Chicago

Another record-breaking quarter for office vacancy

Even in popular Fulton Market, some firms are scaling back their space. Advertising giant WPP was the latest to do so. In April, the agency listed nearly 80,000 square feet, or 31 percent of its 253,000-square-foot occupancy in Sterling Bay’s 19-story building at 333 North Green Street.

Separately, WPP put 45,000 square feet in the building up for sublease in January. The two listings account for almost half of its footprint at the site. And there’s another big chunk of sublease space available in one of Chicago’s newest trophy buildings, with Salesforce seeking to unload a 125,000-square-foot portion of its 500,000-square-foot office at its namesake tower at 333 West Wolf Point Plaza.

As brokers identify potential tenants to fill the city’s glut of office space, they could have a prime opportunity to score larger-than-usual paychecks.