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Internet Changing Real Estate Deals

By JOHN HOLUSHA

May 30, 2000

In an age when almost anything can be bought online, one of the main exceptions has been commercial real estate. With its complicated procedures and time-consuming negotiating process, the industry has only slowly adapted to the lightning-quick demands of e-commerce.
"E-commerce is so fast," said Julie Benezet, the director of global real estate for Amazon.com. "It is so unlike real estate, which lumbers along like a mastodon."

That is changing, but the shape it will take is still far from clear.

"There is no one in our industry who is not struggling with e-business," said Frank A. Robinson, a vice president of corporate real estate at McKesson HBOC, a health-care-supply management company that oversees 20 million square feet of space. "It is going to change the way we do real estate processes, and the ones who don't get it right are going to be roadkill."

Some real estate executives are already using business-to-business services in their daily operations.

"We are using e-commerce to do things more quickly and with fewer people," said Scott Leibold, a real estate manager at AT&T Corp. "For example, we can use the system to reserve a conference room and order the food that will be served during the conference at the same time."

But many executives say the big savings may come from changing the way transactions are conducted, especially sales and leases.

That will mean changes in how brokers operate and are paid. Until recently, a big part of brokers' stock in trade was their knowledge of the market. Brokers are in the market every day, while their clients get involved only when their needs change. Brokers know what properties have been sold or leased; they know how much money has changed hands; and they know the terms and conditions of the deals. In tight markets, they know which spaces are likely to come on the market. In markets glutted with space, they know which landlords are willing to make financial concessions to lease space.

But that information is becoming more accessible to anyone willing to pay a price. Two national service companies, CoStar and RealtyIQ, collect information on property and transactions and make it available to online subscribers for a fee.

As a result, the value of market knowledge is suddenly much lower. "Any business that is based on knowing things that others do not will be out of business," said Joseph Rubin, a partner in the real estate practice of Ernst & Young, the accountants.

Brokers are also expensive. The standard fee for an office transaction in New York is one-third of the first year's base rent, paid by the landlord. In a deal for 10,000 square feet at $50 a square foot a year, the broker's fee would be more than $160,000, with commissions often split among several brokers.

Top brokerage executives acknowledge that there may be some erosion of their business, particularly in markets for small office spaces.

"I don't think anyone is going to sign a lease for 100,000 square feet of office space without a real estate professional advising them," said Stephen B. Siegel, the president of Insignia/ESG, a national brokerage and real estate services company. "But there may be a part of the market, maybe up to 10,000 or 15,000 square feet, that could become a commodity and trade on the Internet."

Barry Gosin, chief executive of Newmark & Co. Real Estate, in New York, agreed. "You might see some small leases done electronically in a tight market," he said. "It might be useful for small tenants who cannot get the attention of a broker."

But in larger transactions, he said, brokers advise clients, analyzing the terms of leases as well as their financial and tax implications.

Nevertheless, at least one company is trying to circumvent brokers by using the Internet, offering a big cut in commissions as a lure. The company, TenantWise.com, in New York, offers to negotiate leases online at www.tenantwise.com, charging only 20 percent of the standard brokerage commission. M. Myers Mermel, the president and co-founder, compares the venture to online stock trading. He calls it "the Schwab or ETrade of real estate."

On the site, which has been active only a few weeks, landlords can post property at no charge. Prospective tenants can send e-mail messages to TenantWise to schedule visits to the buildings.

TenantWise employees, working with information submitted online, will help prospective tenants make offers to landlords. The company also promises to help clients learn the terms of comparable deals.

Mermel says he has submitted offers to landlords for 20 clients, mostly for spaces smaller than 10,000 square feet. None of the deals have been concluded, he said. The site is currently limited to New York, but hopes to go national next year, he said.

As to whether TenantWise the wave of the future, it is probably too soon to tell, according to those working in the industry. But executives at brokerage companies said they know their businesses cannot help but change.

"Will deals generate fewer dollars in the future?" asked Thomas Falus, the president of New York metropolitan area operations at Cushman & Wakefield, "Yes, that has been a long-term trend in our industry. But as we become more efficient, we will be able to charge less."

Copyright 2000 The New York Times Company
 

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