How do CRE Brokers Get Paid?

How do CRE Brokers Get Paid?

A common question people ask in the commercial real estate industry is “How do brokers get paid?” Although the payment to a broker is involved with every commercial real estate transaction, it seems many people lack clarity on the subject. Truth be told, the process of getting paid as a broker can get a bit complicated. The fact that commission rates can vary also contributes to the confusion around how brokers get paid. Whether you’re interested in becoming a broker one day or you’re thinking you might want to work with one, this blog post will explain how brokers get paid for their work.

How do CRE Brokers Get Paid?

What many people do understand is that commercial real estate brokers get paid based off commission. The commission is typically paid by the seller of the property, but the buyers of the property may also owe the broker a payment as well. Who pays the commission depends on who the broker is representing in the transaction. When representing both parties, both the seller and buyer will pay the broker a commission fee. If there are two brokers involved with the deal, they will split the commission between each other. However, the amount in which the broker is paid varies due to anti-trust laws.

anit-trust laws impact how cre brokers get paid. Anti-Trust Laws

Due to anti-trust laws, it is illegal to set a commission rate across a market or industry. This means the commercial broker and their client need to negotiate a commission rate before agreeing to work together. Negotiating a price for a commission can be great for both the client and the broker, as the costs of different properties vary greatly. Additionally, some properties are easier to find than others, which changes how difficult the broker’s job is. According to our partners at SVN | Southgate Realty, most commercial brokers get paid between four percent and eight percent of the sale price from the property. However, this may increase or decrease based on the complexity of the deal. So, be sure to consider how hard the broker will need to work when negotiating their commission rate.

How Does Commission Work?

In commercial real estate, a property can be sold or leased. The amount a commercial real estate broker earns is based on the price of the property. So, if the broker and the seller agree on a seven percent commission rate and the property purchased was $1,000,000, the broker would earn $70,000. However, if another broker was involved to represent the buyer of the property, the $70,000 would be split between the two.

For commercial real estate, because leases are typically paid on a monthly basis, there is a different way to calculate the commission of a broker. With leases, the broker is paid based on the length of the lease agreement and the monthly rate. For example, if a property is leased for three years at $15 per square foot, and it is 2,000 square feet, the lease value would be $90,000. We find this from 3 years x ($15 x 2,000 SF). If the seller and broker agreed on a seven percent commission rate, the broker would make $6,300.

Who Pays the Broker?

The person who usually pays the broker(s) involved with commercial real estate transactions is the property owner or landlord. Almost always, the seller or landlord will pay both brokers who are representing clients in the commercial real estate transaction. This is because the landlord wants to get the property off their hands and needs the help of the broker to do so. If you are looking to purchase a property, do not skip out on using a broker because you think you will get a better deal. Brokers are very resourceful, and you typically won’t spend any money on their services when you are buying the property.

Looking for a Commercial Real Estate Broker in Salt Lake City?

We hope this blog post cleared up any confusion you had about how brokers get paid. If you are looking to buy or sell a commercial property in Salt Lake City and need assistance from a broker, please feel free to contact us. Our highly skilled and experienced advisors will help you get an excellent deal and can answer any questions you may have. We always strive to make the transaction process as easy as possible for our clients. So, please feel free to reach out so you can work with one of our advisors today!

Utah’s Commercial Real Estate Market, California’s Investment

Utah’s Commercial Real Estate Market, California’s Investment

Last year the top investors in Utah’s commercial real estate market were from California.

 

Given the economy and amount of capital in California it shouldn’t come as a surprise that investment dollars spill over into Utah. What is surprising is the profound number of Californian investors – double that of the next closest state, which happens to be Utah. California represents 37% of the top 100 investors while Utah comes in second at 18%. The remaining 48 states don’t really show up in any significance, with the exception of Washington – 8%.

 

Interest and cap ratesBy comparing the cap rates, which measures the rate of return on investments in Utah to that of the largest three markets in California, it is easy to see why investors place their money here. It is only part of the story however. After all, there are markets with better cap rates. But, investing in Utah over California is a sound practice. In 2017, the average cap rate in Los Angeles and San Francisco was 4.6%, in San Diego it was 5.3%. For the same time period, the average cap rate in Utah was 7.3%. That is a difference of over 200 basis points.

 

Investors feel safe making an investment in the top three California markets, which is easy to understand. An enormous economy and an equally large population mean that apartment buildings, office towers, retail centers and industrial warehouses will rarely be vacant. But, the same is true in Salt Lake City, where low vacancies tend to rival those of California.

 

Salt Lake City survived the Great Recession in good form, in some metrics better than California. Vacancy rates climbed to just below 7%. That rate is on par with Los Angeles and lower than San Francisco at 9% and San Diego at just over 10%. Meaning, Salt Lake City fared better than two of the three big California markets at retaining tenants. The only metric where the three California markets beat Salt Lake City was in the way that rents rebounded. The Salt Lake City commercial real estate market took longer to bounce back to pre-recession values. It wasn’t until 2016 that rents in Utah reached the levels where they were in 2008. Whereas, rents in Los Angeles and San Diego rebounded in 2014 and in San Francisco rents never lost momentum, but were able to climb to new heights within two years of the recession.

 

All of the fundamental metrics are good reasons for investment in Utah.

 

However, the biggest factor which attracts investment in commercial real estate is the increasingly familiar news of international corporations moving to the state. As companies like Adobe, Amazon, Overstock.com and Goldman Sachs locate here, the big money in real estate follows. And, it makes perfect sense. For an investor looking to purchase a building where a large corporation is a tenant, the return is much higher in Utah than California, yet the chances that the corporate tenant vacates the space, is equal. Thus with the same amount of risk, an investment might yield up to 200 basis points more in Salt Lake City than it would in San Francisco.