Connecting Your Advisor’s Fee to Value Creation

In cities like San Francisco, tenant broker fees have increased significantly since the pandemic.  These fees are typically fronted by the landlord and recouped over the term of the lease through the rent paid by the tenant.  You may be wondering why landlords would offer more fee when rental economics are on the decline.  It’s because landlords think of the fee as an incentive to brokers to bring deals to their building.

As soon as one landlord increases the fee, others marketing comparable buildings follow suit because they want to ensure their building gets equal consideration (and they think brokers select which buildings to show the client based on fee – they (mostly) don’t).  When the markets are tight, as they were in the decade preceding the pandemic, landlords hold fees flat.  They don’t need to pay more to attract demand – the simple fact they have available supply is sufficient.

The current market rate for tenant rep fees in San Francisco is $3/sf/year of lease term, capped at $30/sf.  Prior to the pandemic, the cap was $15/sf.  Today, a 10-year lease of 10,000 sf will yield a tenant rep fee of $300,000.  As fees go, these are relatively large sums.  Since the tenant effectively pays the fee, it’s important they understand what they’re getting for their money in terms of services and value creation.

In fact, the primary driver behind how a tenant selects an advisor should be a thorough evaluation of what you get for the fee you pay.  When hiring the right advisor, broker fees are easily justified, as the right broker will deliver value that substantially exceeds the fee.  Good brokers will be able to transparently detail exactly how they create value.