The last couple of years have been big ones for the residential real estate industry here in the city; not just in terms of square feet moved and dollars made, but in terms of mergers and acquisitions among some of New York's biggest, most prominent brokerage firms. More than half a dozen brokerages joined forces with other companies in 2003, absorbing or acquiring other businesses like a slow-moving flood.
While far-reaching effects of most of the shake-ups were more apparent from inside the purchasing - or purchased - companies, the merging of major brokerages will certainly trickle down to prospective apartment buyers and sellers. According to Andrew Heiberger of Citi Habitats brokerage in Manhattan, "2003 has been a monumental year. A lot of small brokerages have disappeared, and many of the larger firms have been acquired or merged. I think these changes are a direct reflection of current market trends."
According to David M. Michonski, chief executive officer of Coldwell Banker Hunt Kennedy, which acquired the firm of Charles H. Greenthal in September of last year, mergers are becoming a necessity to do business in the breakneck world of residential real estate; not only in New York City, but around the nation. "Mid-sized firms [are] feeling the squeeze. Today, you must either be big or a boutique. Being in the middle means you are being squeezed on all sides. Your agents may like being a smaller firm, but they expect you to do everything the big guys can do. To do so, you cannot be a boutique. You have to streamline and standardize or go broke. It comes down to often feeling you cannot ever please your agents and so one day, you say, "˜I'm going to sell.' That's how it comes about - not only here, but all over America today."
But is that all there is to it? And who are the major merged players? Let's take a quick look at the very different landscape of New York after the mega-mergers of 2003 and early 2004.
When Dottie Met Douglas
A year ago, Dottie Herman, president and CEO of Long Island residential brokerage Prudential made her bid for Manhattan's Insignia Douglas Elliman in a move to back up her firm's slogan, "from Manhattan to Montauk." Several high-level conferences and a cool $71 million-plus later, Herman's company had expanded to include Elliman's more than 1,000 New York City brokers, thousands of listings, and millions upon millions of dollars in sales.
"I already had 1,400 brokers on Long Island and in the Hamptons," says Herman, "and with Elliman, there were 810 agents, and now over a thousand agents just a year later - and that's just with the city part. Add that to all the agents in Long Island, Queens, and the Hamptons, and you're looking at about 2,400 agents combined."
Making Prudential Douglas Elliman the largest residential real estate broker in the New York metropolitan area, and a major force to be taken into account by other huge firms like The Corcoran Group, Sotheby's, and Terra Holdings, owners of the also-newly-merged Halstead Properties/Brown Harris Stevens.
But how does such a massive marriage take place? What sets the wheels in motion? For Herman, it was an idea, followed by a simple phone call.
"I set out to pursue companies. I did some research on my own, and looked for some acquisitions, and met with some people from some different companies - smaller companies than Douglas Elliman - and actually, I just said, "˜let me go for the top,' and I made a call, and it just so happened that they would consider selling - though I didn't know that officially. I just took a chance and called them. A year later - on St. Paddy's Day of 2003 - I purchased the company with my partners."
It was an expensive phone call. The official figure varies, but Herman says her company shelled out "71.75 or 73 million dollars - give or take. At that price, it really doesn't matter!"
Feathering the Nest
In an acquisition that created one of the largest high-end real estate firms on the East Coast, Terra Holdings - the parent company of Brown Harris Stevens, Halstead Property, Halstead/Feathered Nest, and Vanderbilt Appraisal and Consulting - purchased a majority interest in Long Island-based Dunemere Associates Real Estate, a brokerage firm with a strong presence on the eastern end of Long Island and in The Hamptons. The transaction in January 2004 added five offices and 100 more brokers to the Terra Holdings' family.
According to Terra Holdings co-chairman Arthur W. Zeckendorf, "Many people who want high-end properties in Manhattan also reside in The Hamptons. This acquisition will create unbelievable resources for our clients and our brokers, as well as enable us to offer a powerful combination of relationships, expertise, knowledge, and services. The acquisition certainly strengthens our position as the most substantial residential real estate holding company in New York City."
The acquisition represents yet another partnership between a firm primarily based within the city and one with a strong presence out on Long Island and in The Hamptons. Given the popularity of The Hamptons as a summer and holiday retreat for many co-op or condo-owning Manhattanites, it's no wonder the city's brokerages are turning their collective eyes eastward and wanting a piece of that real estate pie.
The Grass is Greenthal
Adding even more names to the stew of merged corporations is Coldwell Banker Hunt Kennedy, which announced the acquisition of the residential sales division of Charles H. Greenthal in August of 2003, creating yet another vast brokerage with more than 250 agents in five local offices and close to $1 billion in annual sales volume.
According to Michonski, "Charles H. Greenthal was selling about $350 million of real estate a year when we acquired them last year, and they had 69 agents. We were able to cut $1 million a year of overhead because we already had that overhead in place and it meant that money dropped right to the bottom line. It gave us the ability to spend $500,000 on improvements both within our company and the former Greenthal office and position ourselves for quantum growth in 2004. All new servers, T-1 lines, e-mail servers, all new computers, printers, new software and a doubling of our space at 555 Madison Avenue, elegant furniture and fixtures, and more staff, have all been the result. We have been able to dramatically upgrade our marketing pieces and the additional number of listings is driving much more traffic to our Web sites."
"Reactions in the industry have been uniformly positive, but that is because Greenthal was perceived as such a large, old, prestigious player in the market and while we are the oldest national firm (founded in 1906) we were perceived as the new guys on the block. New money bought old money so that old money could make money. It is an old tale.
"Within our company the reaction was mixed. The Coldwell Banker Hunt Kennedy agents were jubilant, but the Greenthal reaction was more fear of the unknown and what this would all mean. We expected a lot of what is called "breakage" in the business - i.e. people leaving - and we got it. But we kept about 80 percent of the production, and that phase of the acquisition is now behind us. The people who have stayed are thrilled and next week will go off to Las Vegas for the Coldwell Banker International Business Conference where they will be on a national stage, and they're loving it. We knew it would be tough to blend the culture of old New York that Greenthal represented with a fast paced culture of growth and innovation, so we let the natural breakage happen and we are stronger for it now. It is going to be great and we are all excited because we are traveling at high speed and the thrills don't stop. At our speed you see a lot of scenery, too."
NRT, a subsidiary of Cendant Corporation, the world's leading residential brokerage firm that recorded a total of $149 billion in sales volume in 2002, is continuing its presence in the New York market with its latest acquisitions. NRT/Cendant, which acquired The Corcoran Group for $70 million in 2001 and The Sunshine Group, Ltd., in June 2002, made two more acquisitions in 2003. First, it acquired The Sammis Group Inc. and National Homefinders Signature Properties of Long Island LLC, for $2 billion in¼August 2003. On a combined basis, Coldwell Banker Sammis and National Homefinders Signature Properties closed more than 5,400 transactions in 2002 totaling $1.9 billion in sales volume.
And most recently, the company has added Sotheby's to the fold. In February 2004, Cendant acquired Sotheby's International Realty, which is centered in 24 international offices across 20 countries. Its two Manhattan locations consist of around 120 brokers.
According to the official announcement, Cendant acquired the residential real estate operations of Sotheby's for a 100-year term, of which the second 50 years is a renewal option. The total cash price and license agreement was approximately $100 million, the release states, "plus an ongoing license fee based on future royalties from the development of Sotheby's International Realty franchise system and company-owned operations."
The acquisition was a natural fit for Cendant, says Bill Ruprecht, president and chief executive officer of Sotheby's Holdings Inc., the parent company of Sotheby's worldwide auction, real estate and finance operations. "Cendant, which is the premier operator in the residential real estate sector, and a proven manager of quality brands, is uniquely suited to be our partner. This new partnership with Cendant and its plans for significant investment over the next couple of years will give both Sotheby's and the Sotheby's International Realty brand dramatically more exposure among high net worth families throughout the United States."
The Broker Bunch
And what does all this shuffling and reconfiguration mean to the brokers and other professionals working for newly merged companies? Herman, for one, sees it as a positive move with expanded opportunities for both the Elliman and Prudential brokers.
"The brokers in the city are great - they appreciate our vision, and some of the city brokers have taken desks in my offices in the Hamptons, and we've done a lot of business. It's just about relationships; sometimes when you buy something like a whole company, you don't know what the chemistry's going to be like, but it's a great fit. It's a little crazy, but it's great."
Bigger companies also mean more back-up - and more work - for brokers. Says Heiberger, "There will be a lot more advertising costs as well, and somebody has to pay those, whether it's the company, or the broker. Larger companies are going to fare better because they'll be better able to absorb that cost, and not take it out of the broker's hide. [Big companies] are going to have to provide these services to get top brokers to work for them instead of someone else."
New and Improved Services
Great as enthusiasm is for the opportunities and improved service offered by larger firms, it's still leavened with a measure of caution about how the way properties are marketed and shown. According to Michonski, "It's not always positive. It means more exclusive listings will be sold in-house, since the larger the firm is, the more likely it will have a buyer for the property in-house. [A bigger company] means that a property can get sold that much more quickly, but a seller must be sure that they list with a firm - large or small - that guarantees that their property will be co-brokered immediately and to everyone, and that the firm doesn't "˜pocket' the listing. That shortchanges sellers. Properties are sold at their highest price only when they receive the broadest exposure to all buyers in the market - not just the buyers of that firm."
Overall, though, brokers and CEO's are seeing the consolidation of the city's heavy-hitters 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. There is less dependence on one or two deals a month making or breaking your bottom line. It means you err on the side of high ethics and not getting sued. All 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."
Clearly, recent mergers have benefited the CEO's and head honchos of the firms involved, and have resulted in even stronger support systems and expanded resources for the agents pounding the pavement for their clients, but what effect will the consolidations have on people trying to buy or sell a home or apartment?
According to Heiberger, "From the standpoint of the buyer, [the mergers] are going to be good. Buyers are going to get more services, there's going to be increased competition to get the buyers, so companies are going to have to one-up each other to stay competitive." Herman agrees. "Our buyers are thrilled," she says, "because 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 - particularly considering the staggering costs they're paying to own property in the New York area. According to Heiberger, "Our customers and clients are much more educated and expect first-class service, and that extends way beyond the standards of yesterday - they expect far more for far less. They expect 24/7 access to you, significant advertising budgets for their listings, free marketing packages prepared for their units, weekly attendance at open houses, prominent Web site exposure"¦ the list goes on and on."
And - as any Civics 101 textbook will tell you - competition is the backbone of capitalism. By teaming up with each other, brokerage firms can broaden the spectrum of services they're able to offer clients, and put themselves in a better position vis-à-vis their competitors. But it isn't necessarily all about who's got the slicker Web site or the most accommodating concierge service.
"Obviously, I didn't get to where I am by being uncompetitive," says Herman. "I'm very competitive, but I've found that at the end of the day, the person or company that's going to win is all about the people delivering the services to the customer. Whoever does that the best - whoever delivers what the customer wants today"¦is going to succeed. Certainly we're going to have competition, but we don't spend a lot of time on what they're doing."
Brokerages joining forces will likely benefit those looking to unload property as well. According to Heiberger, "It's also good for the seller because they'll be able to negotiate lower commissions. Because these conglomerates are going to have resources, they're going to be able to afford to take lesser margins. I think overall, it's going to raise the standards of the real estate experience. It's going to be more service-oriented, and that will extend far beyond real estate. You can't just turn over keys to an apartment these days, or sit at an open house and expect to get your full commission. You're going to have to maximize the leverage that the [larger company] affords you. I call it a "˜lifestyle grid' on which real estate is just one of many services provided."
Another benefit of bigger and more diverse brokerages is the ability of sellers and buyers to not only market or shop for their home, but to seek out an agent who can relate to the buyer or seller's circumstances, identify with their goals, and communicate with them on their level. Says Michonski, "Some [consumers] will relate to someone older in the business while other younger residents might relate better to the technologically savvy agent. Today the average broker is 53 years old, and the average buyer is 36. There is plenty of room to co-exist. But over time many of the older brokers will retire and the younger ones will take over."
But, says Michonski, it's not so much a matter of age, or even of the size of the brokerage at an agent's back; "The key question is, can seasoned agents learn the computer? Can they adapt to 2004 marketing? Can they learn that co-brokering to everyone is their primary fiduciary responsibility? Can they personally market themselves? These are the real challenges."
And speaking of challenges; what about the oft-mentioned, long-awaited-but-never-finalized Multiple Listing Service - or MLS - for New York City? The rest of the civilized world enjoys the options, convenience, and efficiencies that an MLS affords people looking to buy or sell a home, so why doesn't the Big Apple have one, and will the new behemoth realty firms be able to prod the process forward? Is an MLS even something that New York still desperately needs?
According to Herman, the answer is probably not. "I can only speak from my own work - in my offices in the Hamptons, there's no MLS. In the offices in the city, there's no MLS. In Long Island, there is an MLS - but it's not about the term "˜MLS.' It's really about a working system that works for the consumer and helps them see properties, and helps the seller to market their property to not only the customers, but to other brokers, and we have an attempt at that level of cooperation through REBNY (the Real Estate Board of New York "“ed.) So call it whatever you like, but an MLS is really just a distribution service for listings by brokers that compete - that's what it does. I think New York City has come a long way in trying to do that, and it looks like that's kind of what REBNY's trying to accomplish. The word is not so important."
According to Heiberger, "Despite perceptions, there is an MLS right now. There's a mandatory co-brokering rule - there's not an MLS computer system, which is backwards - but there is an MLS in theory. So with the exception of that 72-hour lead time - which some companies have the advantage with because they have the listings first - I maintain that maybe 2 percent of my sales are made within 72 hours of the property going on the market, and if they are made within 72 hours, it means you've under-priced it. In turn, you're going to have a whole bunch of angry sellers and a damaged reputation. An average apartment that's priced properly probably sells in 90 to 120 days, so aside from that little gap, there already is a co-broke system in place."
The Final Say
While there are sure to be more mega-mergers in the near future for New York real estate giants, one thing's for sure: even those for whom buying and selling property here is an everyday routine still have an enthusiasm for the city and the role they play in its prosperity. "I love it," says Herman of the real estate game in Gotham. "I think it's interesting, it's the best investment, and it's not only a place to live. Over time, real estate can't be beat as an investment, particularly here in New York City and the tri-state area, because of supply and demand. We're on an island, and there's not a lot of land, and while in some years the market might appreciate or depreciate more than others, it's not like the stock market where you could lose your whole investment. It's solid."
Hannah Fons is Associate Editor of The Cooperator.