Commercial real estate brokers are walking away with more than just commissions at the close of deals in the competitive Chicago office market.
They`re likely also to carry off expensive wristwatches, videocassette recorders, luxurious sports cars and airline tickets to exotic destinations.
The incentives just go to show how desperate developers have become. With vacancy rates of more than 10 percent downtown and 20 percent in the suburbs, the practice of giving away costly gifts has become the price of survival.
For example, Pollina-Lewis Real Estate Inc. awarded a week`s vacation for two to Europe to a Bennett & Kahnweiler Associates broker who brought a 7,000- square-foot deal valued at $400,000 to the 1011 Touhy Atrium building in Des Plaines, in which Pollina is the leasing agent.
That token of appreciation pales next to what Hawthorn Realty Group is offering.
Hawthorn says it will award a $38,000 Porsche to the broker who brings a 60,000-square-foot deal to its Tri-State International office project in Lincolnshire or its Riverway office-hotel development in Rosemont.
It`s also throwing in a 21-day trip around the world, on top of the sports car, for a 60,000-square-foot lease at O`Hare International office project, also in Rosemont.
Timothy Rasmussen, vice president of Hawthorn, figures that prize is worth about $50,000. That would be on top of a standard commission of $250,000 from a 10-year, 60,000-square-foot lease.
”It`s a competitive market, and you do what you can to attract the attention of brokers,” Rasmussen said. ”There`s a lot of buildings out there, and to compete you have to differentiate yourself from the others.”
Many buildings are offering cash bonuses to bring a broker`s commission to 1 1/2 to 2 times its normal amount.
The problem with that practice, Rasmussen said, is that a broker typically must split half of his commission with his company. It`s also more expensive to the building owner.
”A Porsche and a round-the-world trip valued at $50,000 equal a bonus commission of only 20 percent on top of the $250,000 regular commission,” he said. ”It`s a reasonable incentive.”
Grubb & Ellis Co. is trying to set itself apart from the crowd by offering a creative package of gifts in its attempt to sublease 32,000 square feet or the entire 26th floor of 1 Illinois Center in downtown Chicago.
The space will be vacated in May by Campbell-Mithun Inc., an advertising agency that will move to 78,000 square feet in Olympia Centre, 737 N. Michigan Ave. A condition of the lease agreement requires the building`s developer, Olympia Centre, to assume Campbell`s old lease at Illinois Center.
Grubb & Ellis, leasing agent at Olympia Centre, now must find a tenant willing to take over Campbell`s old lease, which has two years left to run.
”Because of the economics of the transaction, we really need to salvage something on that lease assumption,” said Robert Splendoria, vice president of Grubb & Ellis and leasing director at Olympia Centre.
”As an incentive to the brokerage community, we`re putting together a
`Best of Everything` marketing program,” Splendoria said. ”It`s an attention grabber to make sure brokers are fully aware (of the deal) and really want to work on it.
”Instead of just offering a VCR or a trip to Hawaii, we`ll offer things like a chartered yacht, fully crewed; Learjet service to fly wherever you want; a commissioned sculpture, of whatever you want; your choice of a Jaguar or Porsche, or $30,000,” the cash value of the gifts, he said.
Generous incentives join the traditional practice of drawings and door prizes, said Tom Gledhill, a Grubb & Ellis office broker responsible for the northwest suburbs.
”At Embassy Plaza in Schaumburg, we had a program in which each broker who brought a prospective tenant to the building got to put his business card in a hat,” Gledhill said. ”If a broker did a deal, for say 3,000 square feet, he could put three more of his cards in the hat, so his chances of winning improved.
”Eventually we had a drawing, and one broker won a trip to Hawaii,” he said.
”In other buildings we know about, if you lease 2,000 square feet, you`ll get a Rolex watch or a `weekend getaway` vacation in Chicago,”
Gledhill said. ”A 10,000-square-foot deal gets you a five-day trip to Europe. And when buildings hold open houses, door prizes can be VCRs or, in the case of one developer, a trip to Ireland.”
These perks join the concessions developers have been giving to tenants.
The discounts, which can amount to 20 to 30 percent off the face value of the rent, come in the form of two to three years` free rent; extra-generous improvement packages to finish a tenant`s space; cash rebates to help pay for moving expenses, and in some cases, equity positions in a project.
”You see the big discounts on the first couple of deals,” Rasmussen said. ”The theory is, we`ll get an anchor tenant in, and once we establish the building`s identity, we will be able to attract smaller tenants and can discontinue those concessions.
”The big space user in the market now, the company that would be the lead tenant in a building, can get a very special deal,” he said. ”I`ve heard of a deal in Schaumburg for a 50,000-square-foot tenant who signed a 15- year lease in return for five years` free rent plus a $20-a-foot-over-standard work letter.”
That is, the developer promised to spend $1 million more than he otherwise would to finish the tenant`s space.
”You`ll probably see concessions like this for the next 12 months; then the market will start to tighten up considerably,” Rasmussen said.
Ron Frain, principal with the Schaumburg brokerage of Frain, Camins & Swartchild, said, ”It used to be we`d figure a bulding would be filled 12 months after the core and shell was done. Then we went to 18 months, and now most people are figuring two years.
The concession package is the overriding factor in determining how quickly a building will fill, Frain said.
As for the practice of offering freebies to brokers, Frain said, ”I`m not a believer in them. First, you have to disclose the fact to the tenant you`re representing that particular building is offering an incentive, and that creates a litle bit of a conflict.
”Not that the broker necessarily controls a deal, but I`d hate to see one swayed because of a Porsche or a trip to Europe,” he said.
Dennis Copeland, general manager of Chicago office properties for Rubloff Inc., also criticized the practice.
”It puts the broker in a very difficult position,” Copeland said.
”He`s trying to maintain credibility with his client. The client already knows he`ll earn a commission from the (building) owner. What if he finds out the broker also earned a car?”
Additionally, Copeland said, ”It`s probably not done as often as you might think. And I don`t think (broker incentives) have much of an impact at all. Any decent broker will make absolutely certain his client will see every possible building that might work for him and not miss anything.
”That isn`t going to prevent developers from trying to get an edge on each other . . . but I don`t recommend it on major developments,” he said.
”The developer ends up increasing the amount of money he spends getting brokers to bring deals to him that he would have seen anyway.”
