SIOR Study: Internet Will Spur 'Sweeping Changes' in Brokerage

Week of June 18, 2001
Snapshot from the Field

SIOR Study:
Internet Will Spur 'Sweeping Changes' in Brokerage
By JACK LYNE • Site Selection Executive Editor of Interactive Publishing

DALLAS -- -- Despite the collapse of online ventures like Zethus, RealEstate.com, et al, the Internet's importance in real estate isn't receding. Technology, in fact, is spurring "sweeping changes" in the brokerage sector, according to the third phase of an extensive research project funded by Society of Industrial and Office Realtors Education Foundation (SIOR at www.sior.com).
The SIOR study, for example, predicts that technology will create a 21st century brokerage business that includes wholesale outsourcing of research and listings and substantially altered pricing structures and personnel needs. The research also foresees the likely emergence of "a discount brokerage model."
But SIOR's research, billed as "the first of its kind to be conducted by leaders of a highly respected academic real estate program," debunks the notion that the Web will disintermediate brokers.

Rather than a commission structure for a project like this building, the study suggests,
"A more transparent model is to price by the hour worked, just as other service professionals do."

Said SIOR Educational Foundation President Stephen Podolsky, "The study confirms that technology is not the enemy of the broker. It shows how brokers who are familiar with technology and also have good management and team-building skills will become more valuable over time.
"Likewise, it reports that the most successful brokers will be those who are the most comfortable with the new technology and who can make their clients comfortable with it as well," added Podolsky, principal of Riverwoods, Ill.-based Podolsky Northstar Realty Partners (www.podolsky.com).

The study - "The Impact of New Information Technologies on the Commercial Brokerage Industry" - was headed by Joseph Gyourko and Asuka Nakahara, director and associate director, respectively, of the Zell/Lurie Real Estate Center at the University of Pennsylvania's Wharton School (www.wharton.upenn.edu).
The third-phase research was designed to "analyze the extent to which brokerage will be affected by technology," according to SIOR executives. Released last week at the Dallas RealComm 2001 convention, the phase-three findings predict "three sweeping changes in the industry."

Joseph Gyourko (above), director of the Wharton School's Zell/Lurie Real Estate Center, headed the SIOR research, billed as "the first of its kind to be conducted by leaders of a highly respected academic real estate program."

Change No. 1: The Rise of Specialized Firms

Information technology will continue to spur the development of firms that perform only parts of the brokerage process, particularly research and listings, the study predicts. Concurrently, cost and time savings will rapidly accelerate an already emerging outsourcing trend, Gyourko and Nakahara contend.
"The cost of collecting, storing, and publishing the vast amount of information required on any given market simply has fallen with the advent of new technology," the study says. "The potential cost savings from such an operation obviously arise from eliminating the duplicative effort (and associated labor costs) of having many different brokerage firms collecting virtually the same information in-house. [We] firmly believe that the conditions for the development of specialist research firms have never been better."
The study ventures a rough quantification of outsourcing's cost savings: A single, large brokerage company operating in a metropolitan area could reap gross savings "in excess of US$150,000 annually," it predicts.
At the same time, though, Gyourko and Nakahara contend that brokerage firms will continue to need their own "smaller in-house research teams that augment and manipulate the data provided by the specialist firm."
With technology lowering infrastructure costs for research and marketing, smaller, boutique brokerage operations will be able to better compete with larger firms, Gyourko and Nakahara add.
The fundamental issue, the study contends, won't be to outsource or not to outsource. It will be who provides and controls the data.

Change No. 2: New Rules for Pricing, Staffing

"The basic way in which brokerage services are priced will change," triggered by the Internet's ability to make real estate marketing more transparent to clients, the study contends.
Specifically, Gyourko and Nakahara see a move away from a system that pays brokers a percentage value of a signed contract. "A more transparent model is to price by the hour worked, just as other service professionals (e.g., lawyers, accountants, and consultants) do," they contend. Project-based fixed prices will also become more common, they predict.
In turn, changed pricing could promote different personnel needs and different structures for personnel allocation, the researchers say. "Because the sourcing, pitching and winning of new business are relatively high value-added activities, it makes sense for brokerage firms to concentrate the high-cost broker on those activities as much as possible," say Gyourko and Nakahara.

Change No. 3: Rise of the Discount Broker

Gyourko and Nakahara see the predicted rise of a discount brokerage model as "a major change in the underlying business model of a brokerage firm [that] requires the meshing of new technology and firm labor-force arrangements," says the study.
"It is not yet clear precisely how such a firm will be organized," the authors allow, "but the factors necessary for success are becoming more apparent, and we believe the obstacles to success are not insurmountable."
The study sees the stock brokerage sector as a possible harbinger of the virtual model.
"While commercial real estate space is not nearly as homogeneous a commodity as, say, shares of Microsoft stock, we believe the Internet and associated information technologies will speed the development of a successful discount model in the commercial brokerage sector," write Gyourko and Nakahara. They add, however, "This model almost certainly will utilize the Web extensively, but it will not be a 'virtual' brokerage operation."
In addition, the authors expect the successful discount model to be focused on smaller, more generic spaces and properties in relatively low-margin transactions. The discount model won't be appropriate for all firms, Gyourko and Nakahara contend. At the same time, they add, "A successful discount model should be closely scrutinized by all in the industry because it always has the potential to be adapted to serve higher-margin clients."

SIOR's research predicts that the first successful discount brokerage model will focus on smaller, more generic spaces and properties in relatively low-margin transactions. The authors add, however, "A successful discount model should be closely scrutinized by all in the industry because it always has the potential to be adapted to serve higher-margin clients."

Biggest Impact on Tenant Reps, Project Leasing

The tenant rep and project leasing sectors will most likely feel these changes' greatest impact in the near to medium term, Gyourko and Nakahara say. Those sectors "should expect lower relative commission growth," they contend.
The need for the expert human touch, though, will remain, Gyourko and Nakahara maintain: "The fact that commercial real estate is heterogeneous really is what makes the broker relevant," they write. "The value-added a good broker brings to a deal includes, among other things, the ability to understand the market beyond the published statistics, the ability to deeply understand a client's position relative to the competition, and the ability to know when to be (and not be) aggressive during a negotiation.
"This value-added," the two add, "is greatest when the deal is large and complex, and technology cannot easily replicate these features because they are human in nature."
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