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Brokerage Breakups

01/03/2011, By Candace Taylor

Brokerage breakups

Second wave of closures hits firms on lower end, but new high-end and nontraditional firms emerge January 01, 2011 07:00AM

Just when it seemed like New York City had gotten past the string of brokerage closures that occurred early in the downturn, an abrupt shift in market conditions has led to a second round of shutdowns.

But this time those closures are being offset with openings of new firms amid a general realignment of the city's brokerage world.

The most recent repositioning closely mirrors the new market landscape. In early 2009, the sales market was largely frozen, especially on the luxury end. In response, both large and small firms closed their offices. Several agencies shuttered entirely, including some with reputations for higher-end sales, like Coldwell Banker Hunt Kennedy and JC DeNiro. But as the market began its slow recovery, the closures stopped, and brokerages began renting new office space again.

But in this second wave of reshuffling, the tables have turned. With $30 million homes now trading while lower-priced sales lag, firms that rely on rentals and entry-level sales are the ones struggling.

In November, the 150-agent sales and rental firm Century 21 NY Metro ceased operations. Also late last year, the rental firm Blackstone Properties -- once known for its ubiquity on Craigslist -- closed all of its offices and abandoned its original business model. In their place are new companies that focus on capturing high-end business, like Andrew Heiberger's Town Residential (see "Can Heiberger do it again?") and start-ups with nontraditional business models, like Ilan Bracha's new Keller Williams Realty franchise (see "Bracha's new gig").

Industry veterans say the recent shift in market conditions came faster than expected, catching firms like Century 21 NY Metro off guard. Meanwhile, the prolonged economic downturn has made it more difficult for small and midsize firms to compete with giant companies. As a result of these factors, experts predict more closures in the coming months.

"You're going to see more of this, even [this] year," said one industry insider. "You're going to see the consolidation of some midsize companies that you know the names of, who are going to say to themselves, 'Can I continue to compete and be a boutique, or do I have to join up with somebody big?'"

Founded in the summer of 2008 by Kevin Ellerton and David Yomtobian, Blackstone Properties quickly made a splash in the Lower Manhattan rental market by advertising eye-catchingly low-priced properties on Craigslist.

The technique was criticized as duplicitous by rivals, but in the discount-crazed post-Lehman marketplace, it worked. The firm quickly grew to 80 agents housed in five offices. But by November of last year, Blackstone had closed all of its offices, with only about 18 agents left. The company has now abandoned its original business model and it gives its remaining agents -- who work virtually -- higher-than-average commission splits. It is also doing commercial transactions and investing in stocks and other ventures.

Meanwhile, Century 21 NY Metro found itself in dire straits too. An independently owned franchise, the firm was founded in 2006 with the combination of two firms, Dwelling Quest and Century 21 Kevin Brown. (Some of the original owners, including Brown, were no longer involved by the time the firm closed.)

This fall, the company began having trouble paying its agents and staff, and sought new investors before closing its doors early last month. CEO Marc Lewis became chairman of boutique firm A.C. Lawrence, which took over Century 21 NY Metro's office. AC Lawrence also hired many of Century 21's agents, who were told they wouldn't be paid the commissions owed them unless they joined A.C. Lawrence, sources said. At press time, a number of agents said they were still owed money.

Lewis has repeatedly refused to talk to The Real Deal about what caused the demise of Century 21 NY Metro, but sources said one factor was the complicated ownership structure and buyouts that left the company in debt. Another problem was Manhattan's notorious distrust of national brands. Industry veteran Paul Purcell, cofounder of Rutenberg Realty and former president of Douglas Elliman, said Century 21 NY Metro had trouble gaining traction with New Yorkers, who associate the brand with the suburbs. "Century 21 was always a Sears type of brand," Purcell said. "It's much more down-market -- everything here is sort of upscale."

Another problem for nationwide brands is that they often must pay franchise fees in addition to the already high cost of doing business in Manhattan, said real estate attorney Michele Peters, who until late 2009 operated the firm Weichert Realtors-Peters Associates. The company closed in December 2009, due largely to high overhead costs amid the downturn, said Peters, who has since returned to law full-time.

What drove the last nail in the coffin for Century 21 NY Metro, however, was rapid changes in the marketplace over the past year.

A miscalculation
With the high-end market frozen in the aftermath of the Lehman collapse, Century 21 seemed ideally poised to ride out the storm, with its hybrid sales and rental formula and its emphasis on lower-priced deals.

The company's sweet spot was renting apartments for less than $2,000 a month to recent college graduates, said Jorden Tepper, the company's former director of sales. And when rents dropped in the recession, Manhattan saw a frenzy of leasing activity as New Yorkers took advantage of concessions and discounts.

"The rental market was doing very well in the first year of the downturn," recalled Tepper, who left the company weeks before it folded, joining Prudential Douglas Elliman. In response, Century 21 channeled more of its resources into rentals, he said, causing an exodus of sales agents.

"They loaded up on rental agents and really neglected to maintain the necessary level of a sales operation that it would have taken to prepare for the return of sales," said Tepper. That turned out to be "a miscalculation," he said, when the sales market "returned a little earlier than people expected."

Meanwhile, the summer of 2010 was hard on rental firms, especially those that focused on lower-priced deals. Landlords -- hoping the downturn was over -- abruptly raised rents and revoked incentives, putting an end to the frenzy of movement by deal-seeking New Yorkers. And amid the construction slowdown, fewer new rentals were coming on the market than in the past. Many of those that did, like the Beatrice and 2 Cooper, cater to the very wealthy -- not to 20-somethings with guarantors.

"The summer was very difficult," said Gage Rand, executive vice president at Blackstone. "Supply was very tight."

At Century 21 NY Metro, "the rental numbers were off substantially," Tepper said.

In addition to the challenges facing individual companies, the continued economic downturn has made it increasingly difficult for small and midsize firms to be competitive.

"The smaller firms are having difficulty because the cost of running your business is increasing, and there's less business," said one industry veteran.

For example, maintaining a website and driving traffic to it -- now crucial for attracting customers -- is very expensive, experts said.

Customers are "always hearing about the Corcorans and the Ellimans," explained Brett Malvin of CondoDomain, a Boston-based, web-only real estate brokerage that recently entered the New York market. "We have to show them that we are capable of producing the same results, that we have the resources to compete."

In response to these conditions, many of the new firms now popping up are deviating from traditional business models. Keller Williams offers all brokers a 70/30 commission split, and caps the total amount an agent must pay to the brokerage per year. Broker Kevin Kurland, who started Kurland Realty in 1997, just announced a new firm, the Spire Group, which is based on a 100 percent commission model. CondoDomain offers customers a range of fee options and buyers get a check for a portion of the broker's commission at closing.

Other new firms are looking to capitalize on the current strength of the high end of the market. Brooklyn-based Dalazar Private Real Estate, founded in early 2010, has a Paris office and works with a number of international buyers. In addition, "we only sell really high-end properties," explained founder Alain Azaria, a former Elliman agent, who said he is planning to open a Manhattan office. The firm is currently listing a $5.55 million townhouse in Brooklyn Heights.

The most high-profile start-up of 2010 was Town Residential, a new venture by Citi Habitats founder Andrew Heiberger.

When Town launched last month, Heiberger made it clear that he will be targeting the über-high end by hiring Brown Harris Stevens' Wendy Maitland to oversee sales.

"We're going to have a high-level, educated population of representatives," Heiberger said.

Whatever a firm's model is, today's challenging conditions mean more closures are likely. "The industry in general is in a state of cleansing," said Bruno Ricciotti, a principal at Bond New York Real Estate. "It's requiring everyone to really provide value in a way that they didn't necessarily have to before, and those that don't won't be here next year."

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