Landmark NAR Settlement Could Impact A Handful Of CRE Deals, But For Most, It's 'Business As Usual'

Fallout from the National Association of Realtors' settlement of a $418M antitrust lawsuit earlier this month is set to profoundly shake up the residential real estate industry and how it does business. 

But commercial brokers, attorneys and policy watchers are greeting what amounts to potentially earth-shattering changes in commission structure on the residential side with a general shrug of the shoulders, despite a few exceptions that pertain mostly to condo sales and crossover agents who dabble in commercial real estate deals that turn up on multiple listing services.

“I don’t think it’ll change the big picture on the CRE side,” said Shams Merchant, a Fort Worth-based real estate attorney with Jackson Walker, pointing out the fact that commercial transactions have always been different than residential sales, with commercial landlords and sellers free to negotiate commissions with buyers or tenants' brokers as an incentive to lease or sell a property.

On CRE's side is the fact that “there’s no industry standard” to spark antitrust concerns and no organized clamor to do so, Merchant said.

In mid-March, NAR agreed to pay $418M in damages over four years to settle lawsuits levied by home sellers who argued the organization's longstanding rules on broker commissions resulted in excessive fees. As part of the settlement, NAR said it would revisit its standard 6% sales commission fee for residential Realtors in a move some real estate observers said would “blow up the market” for brokers that are among the world's best-paid.

The rule changes from NAR’s settlement will ban it from allowing a seller’s agent to set compensation for a buyer’s agent, remove commission information from multiple listing services, no longer require agents to subscribe to MLS and mandate that buyer agents enter into individualized buyer-broker agreements with clients.

Researchers say the shift could result in Realtors’ commissions falling by as much as 50% annually and up to 2 million U.S. agents leaving the field. But commercial real estate brokers and transactions likely won’t be impacted to a significant degree, according to experts who spoke to Bisnow.

“We deal directly with our clients on listings, so we’re not using the MLS,” said R.J. Jimenez, an Oklahoma City-based industrial broker with NAI Sullivan Group. “The software we use isn’t proprietary to Realtors only, so I think that’s what helps out.” 

What's more, Jimenez said, no agency holds a monopoly on commissions in the commercial sphere. In the aftermath of the NAR settlement, Jimenez launched a social media thread asking brokers if they anticipated any changes on the commercial side due to the settlement.

Answers ranged from “It doesn't” to “We get paid based on how much value we bring to the sale. Not whether the buyer likes the pool and kitchen.” Some speculated the rules change could prompt more residential agents to move over to the commercial side, while others tossed doubt on that idea, saying that “good selling agents will educate their seller on paying a buyers agent so as to not reduce that buyers pool that cannot afford to pay for their agent.”

While the fallout may push some Realtors out of the profession, it's unlikely that they'll move in droves to the commercial real estate sector because they're just so different, sources told Bisnow.

It takes years of consistency for commercial brokers to get to a place where deals are regularly happening, while many residential agents do real estate part-time or as a side job, Merchant said.

“You can’t do that on the commercial side," he said. "It’s a full-time job."

Since the settlement announcement, NAR has stressed that it does not set commissions, only requiring that listing brokers communicate an offer of compensation. But most U.S. agents specify a commission of 5% or 6%, according to the New York Times, leading to the antitrust charges.

The impact of the NAR settlement on day-to-day CRE exchanges is expected to be minimal, but the lawsuit could potentially seep into some limited segments, Merchant said.

“The mom and pop owners who own one or two properties might be more reluctant now to pay the tenant broker’s commission,” he said. 

Those types of property owners don’t have as much capital to pay out tenant brokers’ commissions, and the NAR lawsuit shows them they don’t have to. That could lead to more tenant brokers entering into exclusive representation agreements with their tenants, he said. Those agreements would specify that if the landlord does not cover their commission, the tenant will, he said.

“This is common, but it may become more common going forward,” Merchant said.

In addition, residential Realtors are already sometimes involved in commercial transactions and will have to shift to abide by NAR rules, said Ed DiMarco, a Realtor based in Naples, Florida. 

DiMarco, who sometimes works with small-to-midsize commercial property transactions, said that he would always choose to be a member of NAR. Naples has a smaller commercial market, and most listings are on an MLS, he said.

“I probably find more [of my] listings on the actual MLS managed by the National Association of Realtors,” DiMarco said. “They've also been going after commercial for over a decade now, real hard, and they have some great tools.”

The lawsuit settles what DiMarco has always seen as a conflict of interest. A broker’s expectation to be paid by the seller rather than their own client can make them partial to the seller, he said. DiMarco has always done buyer agreements for that reason, no matter what the seller might be offering.

“Now it’s going to be standard, and I think that will also help a lot of agents … who have been afraid to ask for them because you can always find agents that don’t require them,” DiMarco said.

In smaller markets like his, Realtors are often involved in commercial transactions, DiMarco said, adding the NAR lawsuit outcome will absolutely impact commercial brokers commissions, an argument he outlined in a LinkedIn blog post. 

The lawsuit will also impact developers of residential condo towers, like those represented by Preston Patten, an Austin-based shareholder and attorney at Winstead law firm. If a buyer of a residence has a broker, they will likely have more upfront cautionary measures and paperwork, he said. 

But for office, industrial and other commercial asset classes, Patten said he doesn’t expect much change.

“It will be business as usual from my perspective,” he said.

One company that handles residential listings might be set to benefit from the lawsuit's fallout, however. CoStar’s stock price rose 8% on March 20, the same day that the settlement news broke. 

CoStar’s Homes.com does not sell homebuyer leads to buyer’s agents, instead providing them free to the property’s listing agent, theoretically insulating it from effects on buyer agents that the new rules impose, according to YahooFinance. CoStar did not immediately respond to a request for comment.

Homes.com doesn’t monetize buyer agency and take a portion of agent’s commissions like its competitors do, CoStar said in an investor slide deck, according to YahooFinance.

“I do think CoStar is in a position as it stands, depending on how they play their cards, to get ahead of the game with this move,” DiMarco said.

But players in the commercial world at firms like JLL and CBRE are very sophisticated and specialized, so their processes will remain the same, Merchant said. 

“In commercial, we’ve always done it differently anyway. The seller broker never had to upfront set the commission like they did in residential,” he said. “That was the whole lawsuit. They would have to set the commission up front and provide it through the MLS. We’ve never done that in commercial.”