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Real-Estate Brokerages Debate The Merits of Online Services

By MOTOKO RICH
Staff Reporter of THE WALL STREET JOURNAL

Aug 23, 2000

Ever since the real-estate industry discovered the opportunity -- and threat -- of the Internet, industry players have been wondering: whither the commercial real-estate broker?

As the people who bring together and help negotiate with buyers, sellers, landlords and tenants, brokers would seem most vulnerable to the rise of the Web, which has consistently diminished the power of intermediaries.

The brokers' message: We've got things covered. Three property-services firms, all of which derive between 40% and 70% of their revenue from brokerage activities, have banded together to invest in online initiatives, including Web-based services that help real-estate principals transact deals, either with or without a broker. Insignia Financial Group, based in New York, has so far invested $17 million in Internet companies and $25 million developing internal initiatives. Cushman & Wakefield, also of New York, recently signed an agreement with Zethus Inc., a Washington-based start-up being incubated by Goldman Sachs Group Inc., to run some leasing transactions through the start-up's system, which proposes to act like a Nasdaq Stock Market for real estate.


"We are very enthusiastic" about the Internet, says Ray Wirta, chief executive officer of Los Angeles-based CB Richard Ellis Services Inc., one of the three companies -- along with Trammell Crow Co. of Dallas and Jones Lang LaSalle Inc., Chicago -- that are investing collectively in online systems. Mr. Wirta says the real-estate industry has learned from the experiences of others that have gone before them in the battle with the Web. CB Richard Ellis is "not going to be as slow" as Merrill Lynch & Co., he says, referring to the nation's largest securities firm, which entered the online stock-trading business in June last year after originally saying it wouldn't.

In the case of the publicly traded real-estate companies, Wall Street is carefully watching their online efforts. Property-services firms "are touting their Internet businesses," says Lee Schalop, director of equity research at Credit Suisse First Boston in New York. "But the $64,000 question is: Can their Internet businesses generate the same revenues as their traditional businesses?" Mr. Schalop predicts that transactions conducted on the Internet will be less profitable than traditional transactions. (Stock prices of the five New York Stock Exchange-listed real-estate services firms are up 17% for the year but down 55% since the beginning of 1998.)

Moreover, competition from Web-based brokerage firms is likely to hurt traditional brokerage commissions. Tenants and prospective buyers will be able to do more on their own on the Internet -- search for space, conduct demographic profiles of local markets and exchange lease and sales documents. As a consequence, customers are likely to demand lower pricing for the services of brokers.

According to a new report by Banc of America Securities, real-estate brokerage commissions, which total around $18.8 billion annually, are likely to fall about 11% to $16.6 billion in the next three years. "There is not as much value added at the broker level," says Will Marks, the analyst who wrote the report. "There are too many things that the Web does."

Indeed, some start-ups aren't only replacing traditional brokerage services, but offering new ones. Realcentric, a Los Gatos, Calif.-based Internet firm, will not only help corporate tenants find space, but also office furniture, accountants and telephone service. It will also refer companies to brokers. "Brokers will become increasingly specialized," says James M. Stuart, chief executive of Realcentric, "And customer expectations will rise."

Brokers argue they are protected because they already offer more sophisticated consulting services. "The Net does not think," says Thomas Falus, who is leading new ventures and e-commerce at Cushman & Wakefield New York Inc., a unit of Cushman & Wakefield.

Ray O'Keefe, president of Grubb & Ellis New York Inc., a unit of Grubb & Ellis Co., Northbrook, Ill., says those who think the Internet will cut out the role of the broker misunderstand the role. "If we thought we were middlemen, we would be really concerned," says Mr. O'Keefe. "What customers really value is our ability to advise them and negotiate a transaction."

To the extent that tenants or buyers can now do some of their own work on the Internet, brokers say it will give them more time to focus on the creative parts of their jobs -- juggling tricky office requirements in crowded markets, haggling for better deals and analyzing the financial consequences of a real-estate purchase. And in some cases, brokers are willing to give up deals altogether. CB's Mr. Wirta says the property-services firm loses money on small lease transactions -- under 5,000 square feet -- and therefore would be happy for an Internet broker to take over the work.

What brokers most hope to get from the Internet is raw data. Real estate is a fragmented market with no centralized database. Companies such as CoStar Group Inc. and RealtyIQ.com offer extensive troves of for-sale and for-lease listings compiled by large staffs of researchers. Other online firms, such as LoopNet Inc., Propertyfirst.com Inc., Comro.com and Cityfeet.com Inc., solicit listings from brokers and landlords who submit the information to them online. Last week, Propertyfirst.com, Alhambra, Calif., announced its intention to develop the first multiple-listing service for commercial real estate.

With such services, tenants can survey office sites online before setting foot in a building. That should save the broker the hassle of escorting tenants through numerous properties. Most of the Web-based firms say they don't aim to cut out the broker, and in several cases prohibit tenants from accessing information directly.

Where the Internet companies may be taking on the traditional brokers more directly is in online discount brokerage activities. New York-based TenantWise.com is offering tenants brokerage services, but at a 60% discount. Tenants use the company's Web site to calculate how much space they need, search for available space and to schedule appointments to visit prospective offices. The firm then helps tenants negotiate leases.

Thomas P. Lynch, manager of office leasing for real estate at the Port Authority of New York and New Jersey, says he recently used TenantWise to negotiate with a tenant for a 1,150-square-foot lease in the World Trade Center, which the Port Authority owns. Although he says he appreciated the service -- particularly its lower commission rates -- he says "we couldn't rely on online brokerage services alone. I'm not quite sure whether these firms have the brokers that are experienced in larger deals."

Some Internet services are carefully courting brokerage companies. Zethus, for example, originally planned to offer discount brokerage services through in-house advisors. But the company reversed course and decided it needed to embrace traditional brokers. James A. Hime, chief executive, describes the services as a "box of tools" for brokers. As for commissions, he says, "it's not for us to say. We'll let the marketplace sort that out."

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