Hughes Marino’s Senior Executive Vice President David Marino says price gouging by landlords who aim to capitalize on unsuspecting tenants is on the rise in the commercial property sector.
“I say, ‘Look, you’ve got to realize that lowering prices doesn’t create demand,’” Marino says. “The reality is landlords try to maintain their economics. As one real estate developer told me a number of years ago, ‘Hey, I’m in the last great unregulated industry.’ The truth is commercial real estate is completely unregulated. And landlords share information, and use the brokerage community as a fluid source of information to make sure everyone stays in lockstep.”
It’s far from a fair shake for the tenants.
With the power resting in the hands of landlords and the brokerage community, Marino says he and his team felt it was time to build something different where tenants could also have a fair shot at landing optimal deals. And while Marino says there are no simple solutions for implementing systemic change, he says Hughes Marino does all it can to assist tenants in avoiding price gouging by competing landlords in competitive commercial rental markets.
Hughes Marino Seeks Solutions for Tenants
Overcoming the obstacles of the current economic climate is something Marino says his firm has done since its inception. Hughes Marino ushered clients through past economically unfavorable waters, including the 2008 mortgage crisis. This year, as work from home hybrid trends continue to dominate offices across the nation, he says, in many markets, there is an excess of available office space and subleases are hitting the market in droves.
“This inventory is coming on the market at an accelerated rate now in 2022, as more and more companies attempt to rationalize their real estate footprint needs,” he explains.
He also admits that while some people are again seeking a more cohesive in-office corporate culture, others have plans to never return to an office environment.
“Another bulk group of people, ranging from 20% to 50%, are only coming back a few days a week or month, using a hybrid office share,” he adds.
“Companies just don’t need as much space as they used to, given the broad change to remote working and hybrid models.”
The tenant representation leader also says it has created an issue where companies are ditching high-quality space for sublease as tenants are merely attempting to score some economic relief by accepting 50 to 70 cents on the dollar. It’s something Marino says could be a wise move for businesses — but it could tempt landlords to engage in less ethical behavior.
Marino says it’s been a strange dynamic with people asking him why landlords would be asking the same price they did before the COVID-19 pandemic.
Why Landlords Try To Protect Their Investments
The lack of industrywide regulation has given way to legal troubles for some landlords. In an October 2022 lawsuit filed in the Southern District of California, a group of renters filed a lawsuit against landlords there, alleging the landlord’s use of RealPage — software that is able to manipulate the real-time availability of rental inventory and compare the pricing in neighboring areas — helped them to collude and keep rents artificially high.
The lawsuit also states that the software claims it can “drive rental rate improvements, every year, between 5% and 12% in every market.” If all landlords engage in this, it could lead to a false median of prices.
“So the landlords all work together to keep a floor on asking rates,” Marino said. “And I guarantee you, they talk. When COVID hit in 2020, the first thing that happened was all the landlords got on the phone and said, ‘What are you going to do? Are you going to lower prices?’ And people are like, ‘No, no, no. We’re not lowering prices.’”
As some unsavory landlords shepherd phony price jumps, Marino says the brokers end up getting involved, too, especially when the opportunity to make hundreds of thousands of dollars more is on the table. He says it typically ends with raising tenant prices and adding time to their leases.
In turn, that could mean doubling the commission for brokers from 40% to 80%.
Again, Marino points out it’s not in the best interests of the tenant.
What Happens When Firms Like Hughes Marino Step In
Transparency remains a key part of Hughes Marino’s recipe for success according to the executive. As his company has grown over the years, he says competitors aren’t always delighted with its progressive tenant-driven approach.
“Competitors are nervous and anxious about the moves we’re making,” he explains. “Hughes Marino is also recruiting some of the top tenant representation talent away from local firms in each market as they expand, and the big brokerage firms don’t like it.”
He says advocating for the tenants has made all the difference and that more cookie-cutter brokerages don’t appreciate being a whistleblower on
the conflicts of interest that exist between landlords and their brokers.
“It’s something that our competition doesn’t really want to hear about,” he says. “Frankly, if you are competing for tenant business, it is a competitive advantage to represent tenants and it has become a niche specialty.”
Working closely with lease renewals, Marino also says they have no financial incentive to relocate tenants unless the current landlord cannot fulfill the requirement or keep up with competitors.
He also explains that being available to clients is another major part of negotiating deals for prospective tenants. He adds that it’s about creating “a robust negotiation and creating an auction environment for that tenant and their credit and their size to get the best deal for the tenant.”
Shifting power away from landlords and brokerages is another way he believes the playing field can be leveled to offer fairer pricing options.
“It’s not like corporate America is organized around their leasing,” he says. “There’s no lobbyists. Meanwhile, landlords are incredibly organized.”
Marino’s 11-year old firm has nine offices in five states — California, Washington, Colorado, North Carolina, and Massachusetts. To date, he says, he’s overseen 2,000 property transactions.