Recently, you might have heard us discuss how we think that leasing agents are significantly less incentivised at the individual level here in the UK than they are in many other real estate markets around the globe. For example, Mike led the discussion that saw 160 Aldersgate leased to DLA Piper for 20 years at £11 million per year (£220 million lifetime lease value). For our investors, this was a game changing deal, and Castleforge was rewarded commensurately. However, we estimate that the leasing agent personally responsible for landing this mammoth of a deal would, in the UK, have seen her bonus affected by less than 1/10th of 1% of the total lifetime value – or less than £200,000. This, we believe, leads to an agency business model that encourages senior leasing agents to have as many plates spinning as possible, with as many different buildings and clients as possible, rather than focusing on one particular instruction, client or building at any given time.
The UK agency community argues that this relatively low pay structure does not affect its focus, but we beg to differ. And although previously it was difficult to find counter examples to compare to this market standard, a recent development in the serviced office market allows us to offer up the following into the record as Exhibit A.
Consider the case of a large UK public utility provider that took a new lease for 200 desks in a London WeWork building, having been stolen from a competitive serviced office provider. Funnily, it wasn’t the considerable incentive package that surprised us: a short commitment commanded as large as a 35-50% discount to the incoming tenant off the market desk rate for the area. We already know of the intense competition between serviced office providers for landing major corporates that has led to, in many cases, 50% discounts on all-in occupational costs. What shocked us was the fee that we understand was paid to the leasing agent who brought the tenant to WeWork: a cool £1 million, which represented a huge portion of the secured desk revenue.
By way of comparison, on an equivalent 10-year, 16,000 square foot commercial lease (about 200 desks even at high density) at a healthy £60 per square foot, one would typically expect to pay an agency around 15% of the first year’s headline rent: in this case, about £145,000. So, serviced office providers are now paying agencies some seven times the traditional market fee for a comparable office space needed to satisfy a tenant on a traditional commercial lease – and all for a lease commitment significantly less than a more typical 10-year term. Nor is this example unique. WeWork seems to be not only buying market share through tenant incentives accruing directly to the corporate occupier, but is now also buying agent loyalty through vastly higher agency fees. Word on the street is that some agents are guiding their clients first to large serviced offices before opening up the requirement to more traditional landlord availability.
By the way, we are not accusing anyone of foul play! Businesses should be free to negotiate whatever fee structure they like, of course. But we are pointing out that this is an exceptional (and, potentially commercially unsustainable) practice, made particularly effective by a relatively low payment structure for agencies in the UK combined with WeWork’s powerful degree of funding.
Indeed, the fees being paid to agents by all of London’s serviced office community are so high that most major agencies now have specialist serviced office leasing departments. Further, we hear from agents themselves the pay is so lucrative in these departments that they are attracting their agencies’ best and the brightest. We reiterate: incentives matter.