A Game of Confidence

Commercial real estate, in all its many facets, has always been a confidence game.  Developers make big financial bets their building will lease as they and their investors spend millions of dollars to build it.  Then, they confidently sell the product, pitching its values to prospective occupiers against the backdrop of fluid markets.  Ideally, they’ve underwritten the market correctly and it moves in their direction, meaning supply of comparable space diminishes, making the product more valuable.  But sometimes the market is moving away from them, forcing them to maintain their confidence despite dwindling prospects for success.
 
There’s confidence selling going on all over the commercial ecosystem.  Brokers compete to represent the developer, sometimes “buying” the business by promising outcomes they know they won’t be able to achieve.  This is a classic confidence scenario.   It’s also known as the “tell the client what they want to hear” approach.  The thinking is once you get hired, after months of failing to achieve the target outcome, the client will settle for a lesser outcome and the advisor who oversold the potential still wins (e.g., they get the fees).  You can blame “the market” for the poor result.
 
This same approach plays out in the tenant advisory market, as well.  It’s the same game.  In both cases, since the client typically has a limited operating window in which to achieve the outcome, once the broker has been selected and time has been squandered trying to achieve the over-stated target outcome, it’s too late to fire the broker and start over.  The client must simply accept the market such as it is.  However, this is not to imply they may not be damaged by having spent time trying to execute an unrealistic strategy.  In fact, it’s likely they will be harmed by this activity in that they will have wasted valuable project schedule and be forced to transact under time pressure, impacting their ability to create leverage.
 
When hiring broker advisors, it’s important to be mindful of the fact these advisors don’t have skin in the game.  The “skin” is yours.  They’re trading performance for value (fees).  This is not to diminish the importance of good advisory.  It can and often does make a substantial difference in the outcome.  But clients must connect performance and fees.  This changes the conversation, forcing the advisor to be accountable to its offering.  This might take the form of KPIs or simply connecting fee to specific targeted outcomes.  Under these circumstances, those advisors otherwise prone to confidently overstating their prowess will suddenly become much more realistic…a better place for everyone to make good decisions.