Diversify and Conquer Manhattan Brokerages Extend Their Reach

In the last four or five years, the tri-state real estate industry has borne witness to seismic shifts in the balance of power among real estate brokerage firms. Companies that are giants in their own right have merged with others, creating titanic real estate empires stretching across every borough, reaching into the Hamptons at the easternmost tip of Long Island, and even stretching down the East Coast into Florida within the tonier enclaves of Palm Beach and Miami.

Just in the last two or three years alone, many long-established brokerages have been absorbed by their larger colleagues; Halstead bought out William B. Ross Real Estate in Brooklyn Heights and Cobble Hill; Brown Harris Stevens acquired William B. May's Brooklyn operations; Prudential Douglas Elliman bought out both Marilyn A. Donahue Real Estate in Brooklyn Heights and Cobble Hill and Custom Wise Real Estate in Long Beach; and Coldwell Banker Hunt Kennedy acquired Charles H. Greenthal less than two years ago. Last but not least, the Corcoran Group extended its range of influence by purchasing Cook Pony Farm Real Estate and McCann Coyner Clark Real Estate in the Hamptons.

As Goes the Market

The absorption and acquisition of so many smaller companies by larger ones has forever changed the face of residential real estate brokerage in the city, according to Andrew Heiberger of Citi Habitats brokerage in Manhattan. "The real estate market is really a market now in the truest sense of the word - it was a business, but now it has become a market. Small brokerages and many of the larger firms alike have been acquired or merged with other companies."

And those mergers and acquisitions are making it possible for previously Manhattan-centric brokerage firms to extend their zone of influence into the outer boroughs, the communities of Long Island, and even as far away as Florida.

"It's about market share," adds Frederick Peters, the president of Warburg Realty Partnership. "Ever since the 1980s, there has been this whole notion of merger/consolidation and both provide you with additional market share that gives you more leverage in a variety of ways. You also hope you can enjoy economy of scale as a result."

According to David M. Michonski, chief executive officer of Coldwell Banker Hunt Kennedy, which acquired the firm of Charles H. Greenthal in September of 2003, it's the mid-sized firms that have felt the pressure mounting to offer more services, yet deliver the kind of one-on-one relationship buyers and sellers expect when the figures for even one-bedroom apartments have reached the high sixes and sevens.

"Staying in the middle ground means being squeezed on all sides," says Michonski of the situation facing many smaller, still-independent brokerages. "Your agents may like being in a smaller firm," he explains, "but clients expect you to do everything the big guys can do. To do that, you have to streamline and standardize."

Others agree. "You can't do a bang-up job with 80 salespeople anymore," says Neil Binder, a principal and co-founder of Bellmarc Realty in Manhattan. "It takes too much money to be able to compete in advertising, in systems, promotional material and all the rest. The demands are becoming unachievable for the middle-sized firm. The small firm can continue to do well by focusing on niche work."

"It's also about ego," Binder continues. "People believe that bigger is better. Another reason is to fill in a void in the market. For example, Corcoran bought Citi Habitats because their presence in the rental segment of the market was not that significant, and by buying Citi Habitats, they thought they could fill that hole."

Breaking In, Breaking Out

When it comes to the reasons and rationales for merging and expanding, Michonski speaks from a position of experience. Coldwell Banker Hunt Kennedy announced its acquisition of the residential sales division of Charles H. Greenthal in August of 2003, creating a vast brokerage with more than 250 agents in five local offices and close to $1 billion in annual sales volume and properties all over Manhattan and Brooklyn.

An example of the opposite - of a company moving to break into the Manhattan market from outside, rather than vice versa - is Dottie Herman, president and chief executive officer of Long Island residential brokerage Prudential, who made her bid for Manhattan's Insignia Douglas Elliman two years ago. Prudential's corporate slogan under Herman's steerage was, "From Manhattan to Montauk," and Herman wanted to back that up with more Manhattan-based brokers, more listings, and a wider sphere of influence - so her company shelled out some $71 million, and bought Douglas Elliman, along with the company's 1,000-plus brokers, thousands of listings, and hefty New York City sales portfolio.

For Herman, it wasn't an issue of whether to go big or go boutique. "I already had 1,400 brokers on Long Island and in the Hamptons," she says, "and I had the choice of selling my company - which I chose not to do at that time - or growing into Manhattan. I could have started from scratch like I did in the Hamptons, or take the opportunity to buy Douglas Elliman. I just happened to call them and they said they were selling. I walked into the city and took over the largest company in Manhattan; that gives you a major presence.

"With Elliman, we added nearly 1,000 more brokers," Herman continues. Add that to all the agents in Long Island, Queens, and the Hamptons, and you're looking at about 2,400 agents combined."

Which all added up to make Prudential Douglas Elliman the largest residential real estate broker in the New York metropolitan area, and a force to be reckoned with by other huge firms like the Corcoran Group - which acquired leading firms both in the Hamptons and in Palm Beach, Florida in 2003, and which also merged with the Cendant Mobility Network, the nation's largest real estate referral organization - Sotheby's, and Terra Holdings, owners of the also-merged Halstead Properties/Brown Harris Stevens.

Managing Mergers

So how exactly do two huge companies - or a larger company and a smaller one, for that matter - orchestrate a combination of powers? Is it really as simple as a phone call, as was the case with Herman?

When companies do decide it's time to expand into new markets, there are a number of ways they make their intentions known, depending on whether they're declaring themselves a target for purchase, or whether they're pursuing the buyout of another company.

"It happens both ways," says Peters. "Some firms will decide that they want to make themselves available, and discreetly let it be known through a lawyer or an investment banker that they are potential targets. Then there are other cases where one of the larger or national-level companies will decide that there's a competitor that they think is a good fit for them and they will approach that company directly."

Regardless of how the process is initiated, it's usually a matter of months (and sometimes years) of proposals, negotiations, renegotiations, and playing ball before the final agreements are signed and two firms become one. For Herman, the process may have begun with a phone call, but ended after a great deal of deliberation and diplomacy. Herman says she has been involved in 15 acquisitions over the past two years, and says that even deals much smaller than her acquisition of Douglas Elliman take a lot of effort and patience.

"Mergers take time, because sometimes people are emotionally involved with their business," Herman says. "Negotiations are difficult. You have to get through price and everything and sometimes you are not the only bidder - which was the case with us."

"Negotiations are a piece of art," agrees Hunt. "They're a sensitive subject and at certain point confidentiality is very important."

Extending Their Reach

Another acquisition that made news when it was announced was that of Terra Holdings - the parent company of Brown Harris Stevens, Halstead Property, Halstead/Feathered Nest, and Vanderbilt Appraisal and Consulting - when it purchased a majority interest in Long Island-based Dunemere Associates Real Estate in January of last year. The move created one of the largest high-end real estate firms on the East Coast, and was engineered to give Terra Holdings a strong foothold on the eastern end of Long Island and the Hamptons - partly to be a contender against the expansions of Prudential and the Corcoran Group into the Hamptons market. The transaction in January 2004 added five offices and 100 more brokers to the Terra Holdings' family.

The Terra Holdings/Dunemere acquisition illustrated another benefit of cementing partnerships between firms primarily based in the city and those with a strong presence on Long Island and destination communities like the Hamptons: many of the buyers purchasing apartments in the city like the idea of a one-stop real estate broker. After all, how convenient is it to be able to call the broker who helped close the deal on your Upper East Side condo - with whom you've already got a good working relationship - and discuss your dreams of a little cottage in Southampton? Given the importance of that good working relationship between broker and buyer in New York City proper (especially considering the time many buyers spend with their broker trying to find just the right place to call home), it's not surprising that many forward-thinking brokerage firms have moved to offer their services and their brand name further and further afield.

Is Bigger Really Better?

Despite the trepidation many prospective buyers may have about dealing with a large corporation when making a decision as personal as where to call home, most industry players agree that broader services and a wider reach mean that the brokers - the people dealing directly with clients, showing them apartments, and coaxing their deals toward closure - have more resources and support behind them than they would have at a boutique. They have a wider array of properties to show clients, and a bigger network of associates who may be able to help them find their client that perfect apartment, summer home, or retirement haven in Palm Beach.

For her part, Herman sees expansion as a positive move that enhances professional opportunities for both the Elliman and Prudential brokers.

"You can't do what you can do for a client when you're small, because you don't have the capital," Herman continues. "You couldn't have my technology, or my reach. We just sold a $45 million dollar home in the Hamptons that was the highest in the Northeast - and a New York City-based broker sold that. Real estate is real estate. I'm a big believer in the client, and being able to serve that client wherever they have to go. We spend a lot of money, and you need to do that in this business."

"There's a taboo against big business," adds Heiberger, "but in real estate it is a necessity. It makes more resources available. With the information age, real estate is kind of like a new field in this country. Brokerage has been around 300 years, but it was kind of a local boutique-neighborhood business and companies like NRT have made it a global business. Certain New York firms have paved the way, using the city as an international venue to globalize this business and internationalize this business. Our clients come from everywhere."

But there can be the danger of too much growth. Hunt is a believer in growing larger, but is cognizant of not letting the business grow so wide and fast that core company values get left in the dust.

"In this business you have to keep investing all the time. Change is so fast, you don't want to miss out," Hunt says. "Mergers can be good for business, but our goal is to not to get so big that we are impersonal. Our growth mechanism is to create our own culture to better serve the client. I think if the chemistry is right, it's terrific but if it's not right, it becomes a challenge."

The Flatiron to Florida

Extra costs and the logistics of running larger companies aside, brokers and CEO's are seeing the consolidation and diversification of the city's real estate heavyweights as a good thing with positive ramifications throughout the industry.

"The larger the brokerage, the greater the resources," says Michonski. "The better the marketing, the better the training, the more professionalism in the marketplace. All the large brokerages in Manhattan are now affiliated with national firms: Douglas Elliman with Prudential, Corcoran with NRT, and Hunt Kennedy with Coldwell Banker. That brings national standards to bear in the Manhattan market."

Herman agrees. "We're in the service industry. You have a relationship with an agent and with a company, and you trust them - they can help you with your second home, they can help you relocate to Florida if that's what you're doing. It's a business about relationships."

And those relationships are strengthened by larger firms' ability to provide the kinds of services that buyers have come to expect in markets they might not immediately think of - like the Hamptons, or popular retirement cities in Florida. By teaming up with each other, broadening their scope, and diving into markets outside of the Manhattan/Brooklyn box, brokerage firms are broadening the spectrum of services they're able to offer clients, and put themselves in a better position vis-Ã -vis their competitors.

The New York City real estate market is still white-hot in 2005, and shows no signs of cooling off any time soon. Brokers and firms that have made fortunes moving properties in the cutthroat areas of Manhattan and Brooklyn are joining forces with their colleagues (and their competitors, just as often) and applying the skills and savvy they've acquired in the urban market to the untapped markets outside the city limits. And while it's unlikely that a company born and raised on a steady diet of Manhattan-style energy would ever turn its attention entirely to the goings-on in Palm Springs or Quogue, one thing's for sure, says Herman, "mergers and acquisitions only work if the culture works. The truth of the matter is that when you buy a real estate company, the assets are really not the brick and mortar. The assets are the people."

Michael McDonough is a freelance writer and a frequent contributor to The Cooperator.

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Comments

  • "how convenient is it to be able to call the broker who helped close the deal on your Upper East Side condo - with whom you've already got a good working relationship - and discuss your dreams of a little cottage in Southampton? " This is glib journalese. There are no "little cottages" in Southampton. And if you live on the Upper East Side, you are smart enough to go directly to Southampton for a look at the market with all the local brokers in site. Nobody is going to ask his Manhattan condo broker for guidance on buying a house or a mansion in the Hamptons. The writer is fantasizing for journalistic effect.