Commercial Real Estate Brokerage 101
So you want to make a lot of money and own your own buildings one day, but you'd rather not go through the grueling hours of investment banking. Well, there's good news for you - commercial real estate brokerage might just be the perfect career path.
In this article, we'll explore how commercial real estate brokerage can help you achieve your financial goals without the sacrifices of the investment banking world. We'll also hear from a young broker who will provide insights and tips on how to succeed in this exciting industry.
The Origins of a Commercial Real Estate Mogul
Q: So what drove you into the commercial real estate world in the first place? Fantasies of multiple skyscrapers with your name on the front?
A: Hah! I think that’s a ways away… but to answer your question, working with real estate was always more interesting to me than say, stocks and bonds. The tangibility of the assets was something that really drove me to the field. It also helped me understand the industry and the processes behind it.
When I was younger, I had some friends who were already in the industry. They were a few years older than me, so I had a chance to see if they were enjoying their career path and making good money. It turned out that they were doing both.
There are some industries out there that employ some really miserable people, but all my friends in real estate seemed like they genuinely enjoyed what they did.
Q: So how did you break into Commercial Real Estate Brokerage?
A: I started off in brokerage straight out of undergrad. I was doing office leases for a while when I got the buy-side itch. I had been doing brokerage for a few years, and was staring down two paths.
I could continue to do brokerage and see where that took me, or I could go back to business school to make the transition to the buy-side.
I ended up going back to business school, and finding a job with a real estate development firm. After spending a little bit of time there, I realized that what I really wanted to do was own property for myself. And I saw brokerage as the best way to generate enough cash flow to do this.
After a few months of networking, I landed a job at a multi-family brokerage as a sort of apprentice to the established brokers.
Q: Great. And just to clarify, what exactly do you do as a CRE broker?
A: It’s just like what investment bankers do, but for properties rather than companies.
So they connect buyers and sellers of investment-grade properties, and earn commissions for getting deals done.
Each property is unique and brings a different value to potential investors, so it’s trickier than it sounds to find the right buyer in each sale.
You have the best shot at “making it” in this industry if you have connections and resources and are great at networking and connecting people.
You must also be good at real estate market analysis and figuring out the best regions, property types, and buyers and sellers to focus on.
Degrees and Pedigrees For Commercial Real Estate Brokerage
Q: In some industries, like investment banking, having the right pedigree (school, connections, etc.) helps tremendously in breaking in. Did you find that this was the case in commercial real estate?
A: Yes and no. The specific school that you attended doesn’t really matter, especially in brokerage. No one cares what school you went to if they are confident that you can get the deal done.
It’s also generally easy to get your foot in the door in brokerage, at least compared to fields like IB and PE.
The hard part is flourishing once you are in.
Connections, on the other hand, are everything because CRE Brokerage is all about who you know. You can’t get big property deals done unless you have a wide circle of potential buyers, sellers, and financiers.
To that end, going to a top school will generally expose you to more people who could one day be clients/investors/partners.
As a broker, you are constantly chasing new deals. It’s sort of like networking to break into investment banking, but you are gunning for a deal instead of a job offer.
Q: Is there a certain “path” that most real estate big wigs take to get to the top? It seems like a lot of the head honchos are “old money.” How does the “new money” float to the top?
A: There isn’t really one path that real estate gods take to get to the top, but there are common themes. I would say that most people who find great success in real estate have an end goal of owning income properties themselves.
There are actually real estate investors from all walks of life - the key is to find something that you can be initially successful in, so that you are able to generate enough cash flow to own properties yourself.
If you are interested in CRE from the get-go, brokerage makes a lot of sense since it is very lucrative and lets you become involved with the assets themselves. Many successful brokers own investment real estate on the side, and some even transition to full-time investors if they do well enough.
For someone who is interested in CRE as an undergrad, analyst and support positions are definitely the best way to break into the industry. These positions give you a great opportunity to learn about a wide range of real estate transactions.
“Making It” In Commercial Real Estate Brokerage… and Getting Paid for It
Q: You face an uphill battle starting out as a broker. Many burn out before closing their first deal. Why is this?
A: To answer your first question, it’s mainly that it is very easy to get discouraged. There is a ton of uncertainty around when that first paycheck will come in when you are a new broker.
Going back to the analogy of networking into finance, it’s very similar here: you exert a ton of effort and time up-front, with no certain outcome. And as that initial outcome takes months and months to materialize, some people just give up.
This uncertainty, along with the possibility of going broke, pushes many would-be brokers out the door before they even get a fighting chance.
Another big reason for the burnout is the hiring practices of some firms. There are definitely firms out there that do shotgun recruiting, hoping to get as many candidates as possible, and seeing which ones sink or swim. It’s like a scene straight out of Glengarry Glen Ross or Boiler Room, except it’s arguably more ethical.
Companies can afford to do this because there isn’t much overhead in hiring a new broker. While some brokers don’t mind that and just need a desk and a phone to get started, I wanted a little more hand-holding. In that respect, smaller firms are generally the way to go.
The experienced brokers at my office are slowly showing me the ropes while I assist them with their deals. As a younger broker, the most important thing is to have a leader you can look up to while trying to build your business.
Q: So how much should an established real estate broker expect to get paid, and what does the commission structure look like?
A: Everything is on a sliding scale. When the deal is first completed, the broker gets a commission based on the transaction price. This generally starts at ~5% for smaller deals, and the percentage gets lower as the deals get bigger.
Every deal is different though, and there can sometimes be nuances that change the fee structure. Once the broker gets paid, he owes the brokerage firm a cut.
This is on a sliding scale as well, but this time around volume works in the broker’s favor. The percentages differ at each firm, but you can expect to have at least 50% of your commission taken by the firm when you are starting out.
As you start to bring in more deals, you have more leverage and can start taking more and more of your own commission home.
If you are looking for hard numbers, an experienced broker in investment sales (one who has been doing this for a handful of years) should be making $250K at the minimum.
Rock star brokers can make millions of dollars per year, depending on their deal volume and average deal size.
You won’t see brokers who make hundreds of millions or billions of dollars a year, though, unless they actually move over to the investment side and start to buy and sell property for themselves.
Q: Do you have any specifics on what the commission figures might look like?
A: Honestly, I’m not sure of all the numbers because they differ depending on the broker and the deal.
Generally, the commission starts at around 6%, but that quickly drops to 4% after the $1 million USD level, and then that scales down to around 0.5% for very large deals (say, over $70 million USD).
When you’re first starting out, you’ll be doing more high commission percentage, but low dollar-value (under $1 million USD) deals, and then that will shift in the other direction over time.
Deal Making In Commercial Real Estate
Q: It seems like the average pay is lower than what you see for mid-level professionals in investment banking careers, but the “ceiling” is similar, at least at most firms.
How do you analyze real estate deals to make sure the numbers work?
A: Investors generally look at three things when analyzing a property:
- First, they look at what the building is currently doing - how much income it has been generating and what the property-level expenses are, which gives you the Net Operating Income (NOI).
- Then they look at the property to make sure it can maintain its current income. It’s one thing to have generated strong income in the past, but sometimes factors like mismanagement, demographic shifts, or changes to the local area can drive a property right into the ground.
- Finally, investors project what the building could do in the future to increase income and/or cut expenses.
Depending on what kind of deal it is, investors will focus on either the current income or the projected income. For example, on a stabilized deal that isn’t expected to see much upside, current rents are the key valuation driver.
On a bank-owned REO (real estate-owned) deal, projected income is the driver because often the buildings are vacant and dilapidated.
Q: It seems like Cap Rates are the primary metric in property valuation. Why is this?
A: Mostly it’s because Cap Rates are a very simple way of calculating the return on a building. Essentially, they tell you what percentage of the funds you paid for the building comes back to you annually.
It’s just an easy metric to use; for example, if you have a 6% cap property, but it’s at a 6% debt interest rate, you can easily see that it isn’t returning any money.
Cap rates do have flaws, however. The biggest one is that everyone assumes cap rates in a specific submarket to apply to every property within that submarket.
And that simply isn’t the case. Every single property has its own nuances that will make it more or less appealing to potential investors. If you get too hung up on the cap rate, you could either be over or undervaluing your building.
You really need to analyze each building and the market thoroughly to get a sense of how much it is truly worth.
Q: How does due diligence change in the real estate setting compared to what you see for companies?
A: Basically, with due diligence, you are just making sure that the deal doesn’t have more holes than a slice of Swiss cheese. Sellers want to sell their property at the highest price, and brokers have an interest in closing the deal, period.
Buyers have to protect themselves, or they could get the shaft.
Due diligence is generally broken down into two components. You analyze the property in the micro sense, and then again in the macro sense.
In the micro sense, you look at the building itself. You check the market to make sure that projected rent prices at the building actually make sense, and that people are paying those prices at similar buildings in the area.
You might dig deeper and also make sure the tenants are in good financial shape themselves. This is especially true if you are buying a single tenant building or if you just have larger tenants in general.
For example, if you buy a commercial building with a Starbucks and a Quiznos currently leasing the space, you would want to check the financials of those businesses to make sure they are stable.
Next, you look at macro trends. You look at what other investors are paying for comparable buildings to make sure you aren’t overpaying.
It’s also important to look at macroeconomic trends in the region you are investing in to make sure the submarket can sustain positive economic growth over time.
For example, it would be considerably less risky to buy a building in New York or San Francisco than it would be to purchase the same building in Detroit, even if the price is much lower there.
Becoming a competitive CRE broker is no easy task. It is arguably more difficult to find success than investment banking, because of the ease of entry. However, those brokers who do succeed can find great wealth, with an outstanding work/life balance, in an interesting and rewarding field.
If you're intrigued by the world of commercial real estate brokerage, you might also enjoy reading our article on "How to Get into Commercial Real Estate: Side Doors, Front Doors, Steppingstones, and Career Paths."
