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The commercial real estate brokerage industry is one of intense competition, where real estate brokers go to great lengths to find and retain the best clients. One area where some of the savviest brokers find success is in working with commercial real estate private equity firms. CRE PE firms, as they are known, tend to be reliable, well capitalized and repeat clients. For brokers who have the tools and skill sets necessary to work with these firms, the rewards can be great. In this article, we’ll look at some of the ways brokers can add value for CRE PE firms and the skills that PE firms find to be most valuable among brokers.
One of the most essential roles a broker fills when representing a CRE PE firm is as an advocate for their client’s best interest in three types of transactions: acquisitions, dispositions and leasing. CRE PE firms tend to look for specific skill sets in the brokers they work with, including the ability to apply financial and market analysis to each transaction. CRE PE firms succeed by delivering the best returns and value to their investors, which means that brokers can create immense value for themselves by approaching these deals with the PE investor in mind.
Brokers who can orchestrate deals that generate long-term value for the PE firm and its investors are very valuable throughout the life cycle of the investment.
On the “buy side”, the commercial real estate market has been competitive over the last few years. The CRE PE firms that have found success under difficult market conditions have focused on working with brokers who reliably source great deals. PE firms prioritize relationships with brokers who are proficient in sourcing a mix of on-market and off-market opportunities that meet specific investment criteria. A PE firm typically provides the broker with information about its target property type and then relies on the broker to use their local market knowledge to identify properties that fit the search criteria.
PE firms also value brokers who have the ability to negotiate the terms of a contract and manage the logistics of the due diligence and closing processes. The best brokers excel in these areas, which saves the PE firm time and money and affords the firm another way to benefit from the broker’s market knowledge.
When a CRE PE firm determines that it is time to sell an asset, one of the first things it’ll do is speak with a trusted broker to understand the current market dynamics and get their thoughts on how to position the sale as it relates to timing and marketing.
Once a listing agreement is in place, the PE firm will look to the broker to create an offering memo and to market the property to their network of investors and contacts. CRE PE firms value brokers who have deep networks of investors with the financial means to complete the purchase of a commercial property.
When a buyer has been identified, the PE firm will rely on the broker to negotiate the terms of the sales contract and collaborate with the buyer’s broker to manage the logistics of the closing. There are many potential pitfalls during this process, and a broker with deep experience closing complex commercial transactions will prove their value by navigating the process in a way that takes the burden off the PE firm and protects the firm’s interests.
In every market where a CRE PE firm invests, it will look to work with brokers who have the ability to represent it as the landlord in a leasing transaction, in addition to handling purchases and sales. Finding strong tenants can be time consuming and costly, especially when expanding into a new market. Brokers who have relationships and national and regional brand corporations can be very valuable partners as PE firms look to lease space to tenants with the strongest credit profiles, particularly anchor tenants. Great brokers understand that these anchor tenants can make leasing space to secondary tenants much easier and more profitable, as well, so filling these spaces with strong, high-credit brands is highly desirable for firms. Brokers who can help firms do this consistently can expect long-lasting partnerships with the firms they work with.
The best commercial real estate brokers have the ability to shoulder a signification portion of the financial analysis that goes into the due diligence process for every property that a CRE PE firm looks at.
One of the most important analytical tasks a broker can support is the creation of the offering memo and, in particular, the operating pro forma. Thorough brokers can bring value to PE firms by providing detailed and insightful financial analysis that encompasses all the factors that enter into the decisionmaking process. Specifically, PE firms look for brokers to provide detailed and accurate projections of the income and expenses for a given property.
While PE firms typically conduct their own due diligence, being able to rely on the broker’s pro forma gives the PE firm confidence in the investment. The ability to provide insights on property financials and opportunities to create value for investors is a rare and prized skill that PE firms look for in brokers.
Given that brokers have local market knowledge, they can also bring value to CRE PE firms by highlighting the key aspects and demographics of the market in which the property is located. This information is usually included in the offering memo, and it is very important to PE firms because it is another input into the due diligence and decisionmaking process.
CRE PE firms value brokers with local market knowledge who can perform a significant amount of demographic and regional analysis to determine key pieces of information, such as market population, growth rate, major industries, distance from major roadways, significant employers, age and income statistics. These facts and figures are especially helpful because PE firms often comb through investment options in multiple markets with the goal of finding the highest-returning investment that meets the firm’s risk criteria.
Because it’s so important to find the best brokers in each market, PE firms tend to screen brokers before establishing a formal business relationship. Specifically, PE firms screen for years of experience, including how long the broker has held their real estate license. A broker’s expertise in a specific property type can also be an important consideration. For example, a broker that specializes in commercial office properties may not be a good fit to help a PE firm interested in retail property. In addition to their area of focus and credentials, it’s important for brokers have a strong track record of successful deals. Brokers should be able to provide details of their past work and business references if asked to verify their efficiency and reliability.
One of the ways that PE firms generate strong returns for investors while managing downside risk is by building and maintaining strong relationships with commercial real estate brokers who have the ability to provide value at every point throughout the investment life cycle. For brokers, this entails being able to show competence in every stage of the property deal. While brokers may find success specializing in a particular type of CRE property, PE firms still look for brokers with a broader knowledge of what’s going on in the market in a way to help them make the best decisions that will ultimately impact their investors.