Is it Time to Go Commercial?

How to decide whether your brokerage would benefit from branching out.

November 1, 2007

Your residential business is in the doldrums, so now might be a good time to start a commercial division. After all, commercial real estate remains strong despite the subprime mortgage problems that have plagued residential sales.

Indeed, the NATIONAL ASSOCIATION OF REALTORS®’ Commercial Leading Indicator for Brokerage Activity — a key indicator of commercial market health — rose 0.5 percent in the second quarter to 120.7, a record. The index stood at 119.7 in the second quarter of 2006.

Strong transaction volume is behind that upward trend in the index. Just in the first quarter of 2007, almost $160 billion in commercial real estate changed hands, fully half the dollar volume of all transactions in 2006, putting 2007 on track to chart one of its best performances in years, NAR data shows.

What’s more, your existing residential customers could provide you with the client base you need to get started, since upper-tier customers often do business in both sectors. So why not give it a try?

Not so fast, say brokers who’ve already taken the leap to starting a commercial division alongside their residential operations.

First, the payback to starting a commercial division won’t be immediate. Commercial deals generally take longer than residential sales, so ramping up a commercial division likely won’t be a quick fix for your bottom line.

“You’ve got to be prepared to fund a commercial business for one to two years to establish a presence in your market,” says Dave Hawkins, executive vice president and managing broker with McEnearney Commercial in Alexandria, Va.

What a commercial division can be is a good way to diversify your operations to create a new income stream for future growth.

That’s what drove Randall GMAC, REALTORS®, in Westerly, R.I., to start a commercial division in August. “We basically saw the need and the opportunity to gain market share and to build business for ourselves,” says Andy Schilke, director of Randall Commercial Real Estate.

Taking the Plunge

Starting a successful commercial division requires recruiting a commercial sales staff and picking a commercial niche that presents opportunities. You’ll also have to provide resources and education to your new commercial sales associates. Commercial encompasses everything from leasing to new construction and the local zoning challenges that arise in such projects, so it’s a much different world than residential sales.

“It’s much more than printing a new set of business cards that say ‘commercial,’ ” says Tim Hatlestad, president of RE/MAX Commercial Investment in Scottsdale, Ariz., and 2008 national president of the CCIM Institute.

Start-up costs for such things as advertising, new signage, and office resources can range from $30,000 in a small market to $100,000 in a mid-sized market to hundreds of thousands in larger arenas, commercial veterans say. Once in operation, commercial overhead costs per salesperson can be two to three times higher than in a residential operation because new commercial operations generally have fewer sales associates than do residential ones, points out Hatlestad.

Staffing is a major task in a new commercial operation. Start at the top by finding an experienced commercial hand who’ll be able to develop, guide, and measure the results produced by your commercial people.

“A successful residential broker isn’t necessarily someone who’s prepared to develop and lead a commercial business,” says Hawkins. “The skills and knowledge are different.”

Someone in your organization might fit the bill if that person has been doing commercial deals for you or has practiced in the field in an earlier career. But that person also needs administrative and team-building skills to lead a new group.

Schilke at Randall GMAC, for example, had been handling commercial at the firm before it launched its separate commercial operation.

Prudential Rand Realty in New City, N.Y., found the leader for its new commercial operation in-house, says Greg Rand, managing partner of the company. Rand turned to a senior staffer with a background in land use. That person also had “creative solutions to major development projects in the region,” and once convinced Robert DeNiro to turn an empty commercial building into a movie studio, he says. Rand launched Prudential Rand Commercial Services in 2006. Rand says his commercial operation already is profitable. He says it will produce between $1 million and $2 million in gross commission income in 2007.

Building Your Roster

Once you have a leader in place, assemble your commercial team. Cindy Chandler, ccim, cre, 2007 chair of the Realtors® Commercial Alliance and head of The Chandler Group in Charlotte, N.C., recommends four approaches to finding talent:

  • Recruit from successful commercial firms.
  • Look for residential practitioners on staff who have the business skills to handle commercial transactions.
  • Bring in experienced commercial associates from other markets.
  • Hire people from other professions such as construction, mortgage banking, and urban planning who are familiar with commercial markets and have a network of commercial contacts.

Rand started by using internal people but soon expanded his commercial team by hiring commercial sales associates from smaller operations in his suburban New York market.

Doug Fowler, manager of Coldwell Banker Brokers of the Valley in Napa, Calif., started a commercial operation in the late 1990s by taking over a two-person commercial office that had been remotely managed by another firm.

Building Your Business

Growing your commercial operation takes a combination of old-fashioned legwork; ongoing staff education, especially for those you’ve brought in from other professions; and image building.

Although commercial MLSs exist, they’re often not as comprehensive as residential MLSs, so commercial salespeople need to hit the streets to learn their territories, says Rand. He assigns territories encompassing 400 businesses to each of his commercial salespeople. They need to visit with landlords and tenants in those locations and produce reports on all the buildings in their territories.

Rand also took another step others say makes sense for new commercial operations: He decided to specialize. He picked the middle part of the market, where he wouldn’t be bumping up against national commercial firms but where he could outgun smaller local shops.

Others recommend looking at a particular segment of commercial, such as office leasing, as a specialization. “I think specialization sets you apart from the madding crowd,” says Hawkins. “When you’re a smaller operation, you’ve got to have something that the bigger [operators] don’t have.”

When it comes to drumming up business, use your residential business as a resource.

Global Commercial Network in Scottsdale, Ariz., started roughly six months ago as the commercial arm of Global Network of Homes LLC., a residential operation that deals with high-end clients, says Brian Strachman, vice president of the commercial operation. “The people who buy $1 million to $2 million houses are likely to have an interest in commercial,” Strachman points out. He’s paying referral fees to his residential associates to refer commercial business his way.

Rand also encourages referrals, offering his residential salespeople 25 percent fees for commercial leads. They have the option of splitting commissions 50–50 instead if they work the deal with a Rand commercial practitioner. But to discourage residential associates from taking on commercial work themselves, Rand charges them a 25 percent consulting fee if they try and then need to get advice from his commercial side.

Providing and encouraging educational opportunities through CCIM courses, property management courses, and local REALTOR® board commercial courses will better equip your commercial people to grow the business as well, says Paul Durgin, vice president with Conway Commercial in Norwell, Mass.Education is important “so that from a very basic level, you can speak the language and also you have a basic understanding of the commercial business,” says Hatlestad.

Image building in the commercial space encompasses advertising but also extends to your commercial office’s appearance. Fowler moved his commercial operation to a better office building that tripled his rent costs, but the move paid off in a better image, and more business, for the operation.

Commercial is a different world from residential, but the two can co-exist and complement each other if you plan carefully and have a long-term vision for how your commercial operation will fit into to your overall business.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.