A Minneapolis start-up threatens to upend commercial real estate

A Minneapolis start-up wants to do for commercial real estate what Priceline and Expedia did for travel.

Just as third-party websites diminished the need for travel agents, this new company is trying to harness technology to remove a layer between a business hunting for office space and an owner looking to fill its building.

The new venture, called Crelow, began its phased rollout over the weekend in Minneapolis and plans to expand market by market across the U.S. in 2015. If it succeeds, the technology would likely disrupt an industry built on handshakes and relationships.

"Commercial real estate is the land that time forgot," said Patrick Hagen, chief customer officer and co-founder of Crelow. "There has been no curb-jumping idea in this industry like we've seen in travel, in investments, in taxi cabs."

All four of the company's founding officers are known entrepreneurs in the Twin Cities. Jim Simpson, the chief executive, started the ad agency Periscope with his brother in 1994. The other three Crelow employees — Hagen, Klay DeVries and Matt Christianson — all worked for Simpson before he sold his share of Periscope in 1998.

While the team has done diligent research, they'll need participation from an industry known for agreements built on familiarity and reputation if it's going to succeed.

"It's still an insider's industry, until Crelow changes that," Hagen said.

The concept is a tenant fills out a detailed profile on the new website, which outlines their office space preferences like geographic boundaries, amenities, workspace style and architectural features. A leasing broker or owner visits the site, finds a smattering of tenant profiles (listed under an alias), sees one that they could tailor an available space for and then makes a bid.

Bids pop up on a tenant's screen, much like Priceline's airfare comparisons offered to air travelers.

The service is free up to this point. A bid signals a potential match and here is where the first fee comes in: if the tenant likes the basic description of the space being offered, they agree to pay $100 to view the complete profile of the office spaces being bid. It's a flat fee to view and communicate with an unlimited number of suitors and is fully refundable if and when a lease is signed. Crelow's founders say this payment is like an insurance policy that protects the system and verifies the tenant is real and genuinely interested.

Unlike other real estate websites that operate as property listings, Crelow seeks to bring the market to the tenant. With no databases to maintain, the company's infrastructure can quickly be applied to other markets. Simpson said a free pool of tenants looking for space will be irresistible to leasing brokers and owners.

"When a leasing broker comes to our site, they'll see, for the first time on a website, all those tenants sitting there, looking for space," Simpson said.

"I got tired of writing these huge checks to a tenant broker and then telling a tenant that they can't afford that reception desk or that extra square footage because there's just not enough money in the deal. And there goes this tenant broker with a big commission where I could've easily helped them with their business," he said. "Rent is typically one of a company's top three costs of doing business. So if they can save 13 percent on it, that's a compelling argument."

At first, the founders believed the cost savings would be the most persuasive point.

"But as we talked to tenants, they told us that finding the perfect fit for their office space was a bigger concern and this nagging fear that they weren't seeing all the available property," Hagen said.

Crelow estimates that the leasing broker will walk away with 70 percent more in commission fees, taking a slice of the pie that previously went to the tenant broker, while the owner leases its space faster and tenant gets a better-fitting space without all the pass-through costs.

Of course, not everyone wins and not everyone views this development as a silver bullet.

Crelow team members say they recognize that many businesses need help in negotiating lease terms and understanding industry jargon, which is why they will be rolling out FAQs, tutorials and a glossary. Tenant brokers could move into a consulting role with an industry trend toward "broker-by-the-hour" services, the Crelow team said.

"It's not a zero-sum game," Hagen said. "There is room and appetite for an alternative in the marketplace. We don't need the entire market. Even if we just had 4 percent penetration, we're a huge business."

Hagen and Simpson pitched their idea to nine investors and, in 12 days, were fully funded. Longer term, Crelow's income will come from leases being signed. For the matchmaking service, property owners must agree to pay 15 cents per square foot per year after signing a lease.

"The folks that are going to have indigestion are the tenant brokers," said Kevin Lewis, executive director of Building Owners & Managers Association of Greater Minneapolis. "It's an interesting concept to trigger conversation."