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COMMERCIAL REAL ESTATE QUARTERLY REPORT

Commercial brokers are swimming in empty space

In a distressed market, the stakes are higher and deals are more elusive.

July 19, 2009|Roger Vincent

Real estate broker Carl Muhlstein maneuvered his silver BMW convertible through downtown Los Angeles traffic, one hand steering the car and the other pressing a cellphone to his ear.

"Come on," he teased. "Insult me with an offer."

While some who swim the deep and often lucrative waters of commercial real estate have retreated to the golf course, Muhlstein is among those pushing on -- joking, nudging and networking in hopes of making deals in a time of no deals.

"The conversations are tougher, the challenges are greater, the stakes are higher," Muhlstein said, as odds grow that a multimillion-dollar transaction may end badly for somebody. "Will the landlord lose the building? Will the tenants stay in business?"

Among his tasks is finding a buyer for Park Fifth, a stalled $1-billion high-rise condominium and hotel development proposed for a block next to Pershing Square downtown. At Playa Vista, he advised the owners of the enormous Spruce Goose hangar -- built by famed aviator Howard Hughes -- to take it off the block because prices are depressed.

Muhlstein tries to use humor to cope with hard times in the commercial real estate industry, a business in such pronounced distress that some experts predict its problems will thwart the nation's hopes for an economic recovery.

Nearly 16% of office space in Los Angeles County is sitting vacant as tenants close up shop or move out of expensive properties. Nearly a third of the space around up-market Playa Vista sits empty; office buildings in the Inland Empire and parts of Orange County are completely vacant.

It all adds up to less work for brokers like Muhlstein, who make their living facilitating the sale and leasing of these properties.

Commercial brokerages such as CB Richard Ellis, Grubb & Ellis, Jones Lang LaSalle, and Cushman & Wakefield, where Muhlstein works, have contracted during the recession, collectively shedding thousands of workers as profits plummeted in the slow market. Many brokers, who survive on commissions, are among the departed.

Still, brokers are a persistent lot, drawn to the business by the opportunity to earn lots of money. When the market is good, top producers can earn $100,000 to more than $1 million a year on commissions of 2% to 5% on the value of a deal. The risky, competitive field is still made up almost exclusively of men, a disproportionately high number of whom learned to battle at the top levels of collegiate sports.

Although brokers sometimes dress casually to woo laid-back clients in creative fields, the default uniform is a dark, well-tailored traditional suit, starched shirt with French cuffs and perhaps a pocket square to complement an expensive tie.

The entrepreneurial underpinning of the job is a draw to many, giving them control of their destinies in a way most salaried employees can't achieve.

"I have never been a big fan of somebody telling me how much money I can make," said Matt Heyn, who at 31 is among the younger generation of brokers at CB Richard Ellis.

Heyn drives about 25,000 miles a year leasing office space in northern Los Angeles County and parts of Ventura County. Like other brokers, he said his job is increasingly demanding, with little time truly off duty, even on nights and weekends.

"These days, if you don't return an e-mail within an hour, people ask why you haven't gotten back to them," said Heyn, who confessed that he was initially interested in commercial real estate because he thought the flexible hours would give him time to play golf.

Even though he is working fast and putting in long hours, anxiety about the economy has meant that transactions are taking longer to put together. Deals that could have been reached in six months in the past now are taking as long as a year to fall into place -- if they go through at all, he said.

Retail broker Myron Sokolsky of Grubb & Ellis said he worked for almost a year on a transaction that would have brought a new branch of a big national bank to Palmdale. At the last minute the bank decided that Palmdale wasn't ready, Sokolsky said, and canceled the move.

To meet its contractual obligations, the bank has paid rent on the space for a year and a half but hasn't moved in, which means Sokolsky is still waiting for the second half of his commission, an amount due only when the tenant takes occupancy. Meanwhile, Sokolsky spends hours each weekend visiting shopping districts to see how the stores are doing.

The former fashion retailer is trying to outsmart the slow market by divining which businesses are struggling, and then approaching their landlords to suggest replacement tenants.

A few brokers seem to have lost hope; many are living on savings. They may not be poor, but they're not on the gravy train.

Said Muhlstein: "Too many brokers are defeatist. Some guys are going to matinees and playing golf instead of focusing on their clients."

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