Commercial Real Estate Podcast

JF3082: What’s Next for Offices? ft. Max Browne

Written by Joe Fairless | Feb 11, 2023 8:00:00 AM

Max Browne is a commercial real estate broker primarily focusing on office tenants at Kennedy Wilson Properties. In this episode, Max shares what types of office tenants are currently moving to LA, how the increasing popularity of hybrid work schedules is impacting this asset class, and which amenities are achieving the highest level of success for office landlords in Los Angeles. 

Max Browne | Real Estate Background

  • Commercial real estate broker primarily focusing on office tenants at Kennedy Wilson Properties, which has one of the largest landlord retail platforms in Los Angeles.
  • Based in: Los Angeles, CA

 

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and I'm here with Max Brown. Max is joining us from Los Angeles. He's a commercial real estate broker primarily focused on office tenants at Kennedy Wilson Properties, which is one of the largest landlord retail platforms in Los Angeles. Max, can you tell us a little bit about your background and what you're currently focused on?

Max Browne: Yeah, thanks for having me on, Slocomb. This will be fun. I'm currently focused on office tenant rep primarily, primarily in Southern California. My group is a little bit different than other brokers and advisors in my space, in that we do operate nationally, which is exciting, and it allows us to run with more corporate clients as well.

My background - I grew up with a heavy athletic background; I played all the sports growing up, I played football in college, I was a quarterback at USC from 2013 to 2016. I played at Pitt in 2017 as well, and gave the NFL a run for a little bit there, and ultimately pivoted into a marketing path. I did that for a few years post football, and then at 25 made another career transition to get into brokerage. I'm 27 now, turning 28 here shortly... So I've been in brokerage for two full years, going on three, which - for those that know trajectory and the timeline there, I'm past the dog days of brokerage, but still fresh and new into the industry. But so far, it's been great, and I certainly love working in this capacity.

Slocomb Reed: Max, I see this conversation heading in a couple different directions... Two kind of key themes I'd like to focus on, and we'll just see what comes up from there. I had a five-ish year career as a full-time residential real estate agent transacting sales, and not tenancy, in Cincinnati, Ohio. There are a couple of differences between office tenants and residential home sales. There are also a couple differences between Los Angeles and Cincinnati. But I'm going to ask about what the office market looks like in LA right now. But first, I have to tickle on my own curiosity here.

Let me start by saying that in Cincinnati, we as real estate agents, commercial or residential, flat out tell all tenants that there's not really much incentive for us to represent them, because there isn't any sort of tenant agency commission or fee that is customary to be paid here. So the idea in Cincinnati of someone focusing on a thing that is never paid for is pretty intriguing. So let me ask, what does office tenant agency look like from a brokering perspective?

Max Browne: Yeah, and I've certainly heard that and experienced that a little bit through my investment sales work as well. I mentioned I do a lot of leasing, but we have done investment sales, and I know what you're referring to in terms of the tenant side not always being allocated a fee there. But on the leasing side, it's customary in all the markets that I've worked on from an office leasing perspective - and a retail leasing, but an office leasing perspective, that the tenant rep broker, their site will be allocated a fee. In fact, the fee for tenant reps is actually larger than the fee for landlord reps in the office leasing world. It's customary, at least in Southern California, for the office tenant rep to receive a 4% fee, and the landlord side to receive 2%. And that's largely because as the tenant rep, you control the deal, in many respects. You have the desired tenant that is going to occupy space from the landlord side, and you can somewhat create a market and a bidding war for "Hey, if you have a group with a need for 10,000 square feet, and there's five Class A office buildings in a market - well, you can let those five landlords compete over your tenant in terms [unintelligible 00:05:03.20] And so you're negotiating that, negotiating terms, but I also think you bring value to your client in that you know the elements where you can negotiate, you know, TI packages, tenant improvements, you know how much can you push there, and what's the appropriate allowance to ask for there; you'll know rental rates, and where to push there. You'll know certain deal points, whether it's protection versus COVID, whether it's security deposit, what's appropriate, what's not appropriate; all those different elements, you're advising your client on what is industry standard, and that brings a level of value that - I can't speak to the residential side, but it brings a level of value where tenant rep brokers are commonplace in my world.

Slocomb Reed: Especially that last part makes a lot of sense; commercial contracts within real estate are much less boilerplate than residential contracts. The variables, the terms are so much more deal-specific or tenant-specific. Real quick, that 4% tenant agency commission and the 2% listing - what is that based on and who pays it?

Max Browne: It's based on the total value of the lease. So if it is a $2 per square foot lease for five years, which is fairly standard, that's 60 months, over the entire term of the lease, all 60 months, you are getting 4% of the value of that lease. And obviously, us brokers know that you're splitting a chunk of that with your broker, the group you work for, for most of us... But yeah, that is the overall value of the entire lease.

Slocomb Reed: The value being all of the rent that will be paid by the tenant.

Max Browne: Correct.

Slocomb Reed: Gotcha. I have a small office building here in Cincinnati, individual office suites for white collar professionals, like therapists, accountants, and architectural designer people who meet one on one with their clients... And I was thinking, if you brought me a tenant to sign a one-year lease for one of my office spaces, your 4% commission would be $288.

Max Browne: It's funny you say that, I have done a deal very similar to that, where I got paid 300 bucks. So it was helping out a family friend. But if I'm going to do the work - hey, 300 bucks is a Valentine's Day dinner out here in LA, so I'll take it.

Slocomb Reed: Yeah, that's a very nice Valentine's Day dinner here in Cincinnati. Max, you make it sound in Los Angeles like tenants, at least tenants who are represented by brokers in the commercial space, particularly office, have a lot more control over the process and the terms of a lease than landlords do. Is that specific to this kind of late COVID, post COVID market that we're experiencing at the beginning of 2023? Is it just now that they've had so much control?

Max Browne: I think it's a great question, and astute observation. I definitely think it's a byproduct, especially in my lane, of a post COVID world, in that the commercial real estate office market in general is struggling right now. So if you do have a [unintelligible 00:08:07.15] that has a requirement, you're the date that everyone wants to take to prom type of thing. So naturally, you have more control. In a different era, or a market where maybe -- like, let's take the Austin office market, which was much more competitive in the past few years. I mean, they still have vacancies... But I know in like 2020 they were much more competitive there, where there was not tons of vacancy. Well, then maybe the pendulum will swing back towards the landlord side, and they have the control.

So I think it goes in cycles; every cycle is different. I think every market is different, and every deal is different as well. You mentioned the therapist use a little bit there... If you're in a market that only has a handful of open therapist suites and you happen to have one of them as the landlord, and there's a bunch of interested groups there - well, then naturally, leverage goes on your side. So it totally depends on the deal, but I'd say at large, currently, the office tenant reps if you do have a requirements certainly have more leverage in the landlords.

Slocomb Reed: Max, tell us a little more specifically what's happening in LA right now. What kinds of spaces are in high demand, which kinds of spaces are seeing lower demand, and then also what kind of office tenant is moving into LA right now?

Max Browne: The spaces that are still seeing substantial traction are the ones that are amenity-rich; the higher-end spaces. And the reason for that is if you're a CEO or a CFO trying to go back into the office right now, out of the comfort of working from their home, you need to have amenities that attract them back to the office, whether that's as simple as coffee and barista, and as extensive as redoing parking lots into pickleball courts, and grilling areas, and entertainment areas, and just much more open space, natural light. Those spaces are still hot commodities.

I would say in Southern California specifically, the Culver City market has done well, because you have more of that creative space. I think gone are the days of the much more '80s and '90s, where it's office-heavy, not a ton of natural light, it's a lot of walls and whatnot... Now it's all about open space, it's all about collaborative areas, it's all about natural light, and feeling like when you go into the office, you're able to interact with your co-workers rather than being on an island. Because if you're on an island, you can do that from home, and now the use of the in-person office is different. There's certainly much more of a collaborative feel.

I think the types of tenants that are coming in now, I would say it's not industry-specific. We've had law firms, we've had much more creative uses... The groups that we're seeing now are CEOs that are looking down the pipeline, saying, "I know, inevitably, I am going to have to have some portion of office workers return back to the office", which will be interesting to see, as our economy potentially embarks on a recession, and leverage goes back into the hands of the C-suite employers and away from employees; that could change the tide for CEOs to say, "Hey, guys, we're coming back into the office." Because I talk to more CEOs that want people back in the office than the other way around.

Obviously, the leverage right now is currently on the employees, and that's why you're not seeing widespread return to office. But our business, as we all know, goes in cycles. And is the office going to go back to what it was pre-pandemic? No. But I do think there could be a cycle that has a brighter future for the office than we currently see.

So it's much more of a mixed bag in terms of the type of tenancy coming in there, but it's certainly groups that are saying, "Let me be opportunistic right now and get a rental rate that I wouldn't even been able to fathom three years ago. Let me lock that in now for five years to come, and maybe get a space that was out of my budget, out of my range three years ago, it's now in my wheelhouse. I know I want to see my employees in-person." Those are the types of groups that are thinking that way, that are the ones that are ultimately signing the leases right now.

Slocomb Reed: Max, while our listeners and I are trying to visualize what this space looks like, is there a fairly defined size of space, or frankly, size of tenant, number of employees that you work with, or that you're seeing find success in getting new spaces leased right now?

Max Browne: Yeah, we do a lot of corporate services work, and I frame it that way where we're representing publicly-traded companies, and we handle their portfolio nationwide. The value-add for them is that we're they're one brokerage team, rather than having to work with a different brokerage team in every market. So from an efficiency standpoint, we certainly serve that need.

And I say that because a lot of the groups that were much more the bigger users, the groups that needed 20,000, 40,000, 60,000 square feet - we're seeing them cut their space needs in half. And I would say we're seeing a lot of requirements in that 4000 to 7000 square foot range. And the reason why is that's big enough where you can feel like you can have a substantial amount of employees come in; even if they're rotating, or not coming in frequently, it's a big enough space where you can really have a true presence there and have a couple of conference rooms, private offices, open areas... But it's not so big where you have huge chunks just vacant.

So I would say the 4k, 5k, 6k square foot [unintelligible 00:13:27.18] I would say is the most popular mark; that once had 10k to 15k to 20k square feet, that in their mind say "I still want some sort of home base, but I don't need the full expanse of space that I once had." I think that's a popular square footage requirement for groups that are still active in the market.

Slocomb Reed: Scaling down into the 4000 to 7000 square foot. That makes a lot of sense; multiple conference rooms, a handful of private offices, some common area... I see what you're saying there.

Break: [00:14:00.01]

Slocomb Reed: When it comes to the hybrid work schedule that I know the Wall Street Journal has referenced several times in the last year or so, are you seeing anything like that play out in -- obviously, in the size of space that these companies are looking for, because they're going smaller, but are you seeing it play out at all in the terms of the lease agreements that you're negotiating?

Max Browne: That's a good question. I would say the first part of that is - yeah, hybrid work, to no one's surprise, is certainly the new norm, in terms of gone are the days of everyone going in five days a week. I have not seen it reflected in the lease terms, though. And the big reason why is, if you're going to rent space, it's your space 24 hours a day, seven days a week, and holidays, if you want it. The idea that you're going to have some sort of co-working situation - I haven't seen widespread use of that. What's most common for me is groups doing a Monday through Thursday work schedule in the office, with Fridays optional; that's popular to see, or even three days a week. But in terms of though, to your question, the specific lease terms, I have not seen hybrid specifically [unintelligible 00:16:05.11] A little bit, I guess, with some of the buildout parameters of - we call it hoteling from a desk standpoint... So if four years ago everyone had an assigned desk, and as a result, you needed more square footage because of that, because Joe and Sally and Tim were coming in every single day... Well, now that's not necessarily the case, because they're on a rotating schedule; every team's coming in in a different capacity, so you're having buildouts that reflect that, where it's much more open desk, where you can come in one day plug in, and then move all your stuff out in the same day, rather than having to be an established desk for someone. That's impacting the buildout, and it's impacting the tenant improvement allowance that comes in the lease. So I guess that would be one area. But widespread, it hasn't had a huge impact on the lease terms itself.

Slocomb Reed: When it comes to amenities, you mentioned several things, including turning parking lots into pickleball courts; maybe pickleball -- I've heard of it; maybe it's more of a thing in Southern California than it is in the Midwest, that it would attract office tenants back in... But what amenities are you seeing have high levels of success right now for landlords?

Max Browne: Yeah, it's one of those things where the pickleball court by itself won't necessarily attract a tenant back in... But when you combine the pickleball court with outdoor amenities for entertaining, with retail options in the nearby location, or on the ground floor, even if you have a workout facility on the ground floor, which we've seen a lot of office landlords invest funds in that as kind of an all-inclusive type of dynamic - when you pair all of that together, well, then maybe for the type of person that's on the fence for coming back into the office, if they're saying, "Hey, I can have my entertainment. I can hang out. I can take my lunch break out here. I can take my call out here, and I can get my workout", that's where maybe you attract a tenant back in.

And I also think it's a competitive advantage as well. Now, the baseline for what's normal for a class A office building - it's risen. It's become higher of what a corporate user from an office perspective expects when they are signing an office lease. And if you don't have one of these elements, you're simply not going to get the requirements. So in that regard, I think it has leveled up the tenant experience, but it's one of those things where I don't think one specific factor is going to get you back into the office, but when you combine them on top of one another, you give people options - well, maybe they're much more attracted to get out of their den and into the office building.

Slocomb Reed: Max, for you what makes an office space A class, and also what would make it B or C?

Max Browne: I would say class A for me is high rises in a central business district that are upgraded to the current standards, whether that's environmental, whether that's just the overall quality of the building, if it's been updated in the past, call it 10 or 15 years, and it's a tower - I would say that usually falls into class A. I would also say creative spaces that have been updated within the last 10 years to have amenities and appliances that reflect current times... That's class A.

Class B are spaces that are still nice, they're not rundown, but they haven't seen the level of upgrades that you would look at as recent; there's still a level of the building being worn. Again, it's not low-level buildings, but it's certainly not spaces that an Apple or a Google or those types of users would be moving into.

And then Class C are buildings that need some love, that need some upgrading, that are certainly more value-add opportunities for investors that are looking at it through that lens. Again, they're still functionable, they still provide a certain level of value, but I would say those buildings haven't been updated in the past 20 years or so.

Slocomb Reed: Class C spaces probably also make more sense for tenants who are going to have to do a fairly heavy buildout to meet their own needs, wouldn't they? I imagine the class C space has a lower base rent, which justifies more TNI or more expense on behalf of the tenant to customize.

Max Browne: I think there's some truth to that. I think it works both ways. I think, to stay on that example, the Apples or Googles - they're gonna have very high buildout demands and specifications, but they're still gonna go into a class A office building because they just know that they have the budget to withstand that.

To your point though, if I am a group moving into a class C office building, and I'm not as sophisticated as some of those groups - yes, it certainly leads to the possibility of having more dollars allocated for a buildout. But every situation is different. The reason that a class C building even exist is because the landlord has not invested capital into improving the building. So you just never know... I think some groups that aren't as client-facing, or don't need the amenities, or just want a place to call home here and there - maybe they're more apt to take in a class C space; it just totally depends.

Slocomb Reed: And when it comes to the upgrades that make the difference between the classes, can you give us any tangible examples of what differentiates a B to an A space with specific upgrades?

Max Browne: Yeah, I would say just high-level, the terms A, B, and C are somewhat subjective, just to make sure it's hard and fast. But I would say, tangible examples - I really put it to the timeframes, to the years. I would say if you're updated in the past 10 years, that's Class A; whether that's finishes on countertops, and flooring, and updated window lines. Nowadays, it's much more common to have full window lines with heavy natural light. Those are more Class A upgrades.

Class B upgrades are some of those things, but not all of those things. It's you've touched up the flooring, maybe the carpet, you've repainted, you've adjusted a few walls here and there, but you haven't done everything. And then class C, to my earlier point, is you haven't seen those upgrades; the landlord has not decided to invest tenant improvement dollars to upgrade the building. It hasn't seen that love in the past 20 years or so.

Slocomb Reed: It makes a lot of sense to put it in terms of years, because what those actual finishes are is, of course, as you said, subjective. Max, are you ready for the Best Ever lightning round?

Max Browne: Let's do it!

Slocomb Reed: Awesome. What is the best ever book you've recently read?

Max Browne: [unintelligible 00:22:16.04] I'm not a huge reader, but I'll say -- I loved Bob Iger's book, who once was the former CEO of Disney [unintelligible 00:22:23.18] Ironically enough, he recently just got hired on this past month, which kind of makes the book even that much more interesting. But his biography was my favorite.

Slocomb Reed: What is your best ever way to give back?

Max Browne: By producing content. I'm pretty active on social media, I share my work and life experiences through my following, and I think that value helps folks.

Slocomb Reed: A bit of an interesting question here that you are more broker than investor, I still want to ask... As an office broker in LA, what is the biggest mistake you've made, and the best ever lesson that resulted from it?

Max Browne: Like I mentioned, I'm still a relatively new guy in the industry... So the biggest mistake that I made is not prospecting for future leads, and getting buried in your current work. I think that's a mistake a lot of brokers make. It's easy to fill up the day with tasks that make you busy right here and right now, but you've always got to be prospecting for leads six, nine, twelve months down the line, or your pipeline will dry up. I learned that lesson the hard way in probably August of 2021, and have vowed to myself to not do that ever again.

Slocomb Reed: Any sales professional who doesn't give that answer is giving the wrong answer, Max... Now I want to ask more from the investor perspective, what is the biggest mistake you've seen an office landlord make in LA?

Max Browne: I would say not fully vetting the tenant that's coming into the suite. What I mean by that is jumping just to get someone in there, and not being sensitive to the credit worthiness of that tenant should their business operation dissolve in some way. I've seen a couple landlords get burned; they get so excited that a big group's coming in, and they do the TI work, and they make the space great, but the user itself ultimately folds, or their business model changes, and they don't have the security deposit on hand to protect themselves. And so you spent all this money building out the space and having this dream client or this dream tenant, and two years from then they ultimately leave for whatever reason, and you're ultimately out of luck. So protecting yourself for non-high-creditworthy tenants is a big one.

Slocomb Reed: That makes a lot of sense. Max, what is your best ever advice?

Max Browne: Best Ever advice... I'll go classic - don't ever burn bridges. I mentioned that about the career for me - I'll keep this short, but my athletic career did not go according to plan. Like I said, college football quarterback did not go according to plan. But in my professional life, I have counted on a lot of those relationships and experiences from my playing days, when things didn't go my way, when I easily could have [unintelligible 00:25:00.03] and burned bridges and said "Screw you" to people, but I didn't... And my later 20s is reaping the benefits of those decisions.

Slocomb Reed: That's awesome. Last question, Max, where can people get in touch with you?

Max Browne: I'm pretty active on social, TikTok, Browne Max. On Instagram as well @maxbrowne. Twitter, same thing, and then I'm active on LinkedIn as well, which is certainly more real estate friendly audience there. So I would love to connect with anyone in the biz.

Slocomb Reed: Those links are in the show notes. Max, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review, and share this episode with a friend you know we can add value to through our conversation today.

Thank you, and have a best ever day.

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