WSO,
I recently got into a friendly debate with a Multifamily broker in my office (we're a CBRE/JLL/CushWake in a fast growing major southeastern city) on what kind of earnings over the course of an entire career be made by a top producing multifamily investment sales broker vs. being a top producing office leasing broker (doing mainly tenant rep with 20-30% landlord rep). He challenged me to do an IRR analysis over 20 or so years to see who actually makes more over the course of a career. In my market it takes about 5 years to really start crushing it in office and about 7-8 before that starts happening in MF. However the top MF broker nets 1.0 million in a good year and the office nets 700k in a good year. Aka after splits with the company but before taxes to Uncle Sam. I have all of my assumptions, which are listed below. However my question is, how do I do this to make sure all necessary metrics are a counted for? I have the earnings of a year 1, year 5 and year 15 office broker (actually numbers from a top team in my office) and he would fill in the blanks for MF.
Do I literally just go from years 1-20 in excel, and use the IRR function to see what the results are? No need to account for inflation, this is strictly assuming everything is going well, job growth and development activity keeps strong but the economy tanks every 8-10 years throughout your career. Let me know what you guys think... Am I keeping it far too simple? Are there other factors I am not considering? I am also having trouble deciding what the initial year 1 investment would be... Maybe just the cost of not having a more comfortable corporate job that pays you a steady paycheck... I dunno.
Office Leasing -
Year 1 - $33,000
Year 5 - $250,000
Year 15 - $700,000
MF Investment Sales -
Year 1- $10,000
Year 5 - $80,000-$100,000
Year 15 - $800,000-$1.2 million
Thanks for your help monkeys!
In my opinion, it’s comparing apples to oranges. The top MF guy now might make $X and only focuses on the city you’re in, but in 10 years a new top MF guy will have a regional practice and make $2X. Whereas the office leasing guy might be a tenant rep or might be a LL rep. If he/she is a tenant rep, again, might have a national practice. Both are great for making lots of money and both have just as much potential for someone who understands how to sell and likes their niche. An IRR analysis based on two people’s earnings, sure you can do it, but the amount of money they make is based on the individual salesperson and not leasing teams top out at $X per year and sales guys top out at $Y. Different folks will top out at different levels.
On top of that, the compensation you are taking from the brokers for this analysis is a small sample. For another group, it could be reversed or completely different. And your IRR analysis is totally dependent on those variables.
With all this said, generally both leasing and sales will have ups and downs. Leasing teams will generally be more consistent as businesses will always be leasing space and renewing leases, even if for less space. Whereas building sales may dry up in a downturn for a period of time.
Look, you're totally right. And I absolutely agree. However, I still told this guy I would do this analysis and I am really just comparing his earnings to the earnings of our top office team, which I have on hand.
With that said, I am really just asking what the best way is to analyze the earnings....? Just use the IRR function in excel and call it a day? Or is there a more in depth way to do it...?
You'll have your revenues, which you alluded to in your first post. You'll have your costs, which are the real costs and the opportunity costs of what you chose to forgo by taking that particular role. For example, if you're a broker on a $75K a Year draw for Year 1-3, you can think about it this way.
Broker
Year 1 - $(75)K Year 2 - $(75)K Year 3 - $(75)K Year 4 - $250K Earnings + $(225)K In Draw Repayment
Analyst
Year 1 - $90K (with a 20% Savings Rate) Year 2 - $100K + $1.8K (10% Return on Previous Years Savings) Year 3 - $120K + $3.98K (10% Return on Previous Years Savings)
Etc, etc.
Separate to what is mentioned above, the appropriate way to do this would be an NPV analysis. Figure out your revenues, costs, and revenues forgone (e.g. Investment Income), and then apply a discount rate commensurate with risk of achieving the projected cash flows. Discount the future cash flows back, and see where you are. For example, an Asset Management Professional will have more certainty of Future Cash Flows than a Leasing Broker. You assume that you and your broker friend will each become Top Brokers in your region, which may or may not happen, but the odds are stacked against you both. I would discount that cash flow at a much higher rate than the AM Analyst. How you determine the discount rate for an Office Leasing Broker and a Multifamily Broker will determine who "Wins".
The more interesting question is -> In a particular market, what is more achievable, being a top office leasing broker or a top MF IS broker?
This is exactly what I was after, thank you sir.
To your point, that is an interesting question. In my somewhat unbiased opinion (just a lowly analyst in my office), the earnings cap is a bit lower for the leasing guy, but for every top MF IS broker there are three top office leasing guys. Just what I have seen in my market at least. As pudding says, whether good economy or bad, there are always leases to be signed, whether downsizing, renewals, etc. It's a little easier to get someone to trust you with their 5 year office lease than it is for a sophisticated owner to trust you with their $50 mil asset. Just my thoughts though.
Thanks again!
Same thing is true in investment sales with folks hitting the end of their funds/extension periods and others needing liquidity... the checks are just smaller. All of the top multifamily brokers in Atlanta cleared well over a million bucks per partner in 2008 and 2009. Not germane to the conversation necessarily but a good lil' anecdote.
In my office the top teams make near similar numbers, but capital markets usually does a little better.
I've heard it takes longer to earn 700k+ on the capital markets side but it's significantly more stable/safer, is that correct?
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