For commercial brokers, the musical chairs begins

<i> More office buildings to switch leasing firms in the greatest upheaval seen since early '90s</i>

As commercial buildings change hands and landlords seek to squeeze more profit out of their properties, full-service brokerage firms are sharpening their knives for what insiders believe will be a feeding frenzy for new office leasing opportunities.

A building’s leasing agent — a firm such as CB Richard Ellis or Cushman & Wakefield — represents the landlord in leasing negotiations, and such contracts often are packaged with overall building management.

Unlike the residential new development condo market, where buildings change marketing agencies frequently, most agents at commercial buildings remain in place at a building for years with very little turnover, records show.

Insiders said there was little change in recent years to leasing agents because owners had no reason to be dissatisfied when the economy was booming.

“In 2007 and 2008, a monkey could have been a leasing agent and raised the rents every day,” said James Kuhn, president at Newmark Knight Frank.

Yet while the historically sleepy industry has seen a low level of turnover in recent years, it’s now set to undergo its greatest upheaval in more than a decade, brokers said.

Over the next 16 months, “I think you will see more buildings change their leasing and managing agents than since the early ’90s,” Kuhn noted.

Real estate observers expect two factors to drive buildings to switch brokerages. For starters, distressed buildings will be sold or returned to lenders, giving new owners an opportunity to change agents. And, to a lesser degree, desperate owners who bought in recent years at elevated levels will seek more aggressive agencies to lease up their properties.

An analysis of nearly 1,000 properties tracked through leases by The Real Deal shows less than 1 percent of the buildings changed leasing agents over the past three years. Among those that switched, the majority changed after a building sale when the new owner either took the leasing in-house or switched agencies.

CBRE recently picked up the agency for 1540 Broadway, after its real estate fund, CB Richard Ellis Investors, bought the tower from Macklowe Properties, which had defaulted on the property. However, CBRE lost the 1330 Avenue of the Americas account after that building’s ownership changed hands. Jones Lang LaSalle is the new leasing agent there.

Kuhn said Newmark has picked up about a half dozen agencies in 2009, and hopes to pick up another 10 million square feet in the coming two years.

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His firm acquired the leasing contract for 1400 Broadway and 450 Park Avenue over the past year, according to The Real Deal‘s lease records.

The leasing agent contract is not only important to a brokerage firm as a source of income but as a way to put the firm on an inside track to broker future sales of the building. On the income side, at the New York offices of Grubb & Ellis, building leasing and management accounts for 15 percent of revenues, but the company is aiming to double that in 2010, said vice president Gayle Mattei-Meredith, who works in business development.

In the 1980s, commercial service firms did a majority of the landlord leasing for the owner, but over time, major landlords such as Tishman Speyer Properties, Rudin Management and the Kaufman Organization began to manage their own buildings, said Lloyd Shor, a partner with law firm Blank Rome.

Today, a majority of office space is self-managed, experts said.

Richard Bernstein, vice chairman with Colliers ABR, said, however, he expects large landlords to move away from in-house representation and hire outside agents as the leasing market remains lackluster.

“The amount of space represented by third parties increases in softer markets and decreases in strong markets,” Bernstein said.

CBRE leads the pack in Manhattan when it comes to office space leased and managed by brokerage firms. They have 62.2 million square feet in 109 buildings, according to research firm CoStar. Newmark Knight Frank ranks second with 40.7 million square feet in 192 buildings, and Cushman & Wakefield is third with 40.2 million square feet in 93 buildings.

CoStar data found that those firms were followed by FirstService Williams, Jones Lang LaSalle, Colliers ABR and Grubb & Ellis.

Service firms are adopting different strategies to win more business, with some firms running campaigns and others giving top brokers control of their own efforts.

Grubb & Ellis is launching a targeted attack directed at 20 owners who control scores of buildings. It drew up its list by reviewing hundreds of building sales over the past three years with the presumption that those assets had fallen in value, said Mattei-Meredith.

Kuhn said lenders who take back properties from owners in default want one of the larger firms with more brokers on the ground to lease up the building.

“I think the institutions that are taking back the real estate want a major firm to lease and manage. That is an important factor in winning agencies,” he said.