The Real Deal New York

Residential Brokers Go Commercial

October 15, 2007
By Melissa Dehncke-McGill

Commercial and residential real estate have long followed parallel tracks in New York, each market rising and falling in its own cycle, and never the twain meeting – at least not in a single brokerage.

Andrew Farkas, the mastermind behind the last attempt to combine residential and commercial real estate, bought commercial brokerage Insignia/ESG and residential brokerage Insignia Douglas Elliman in the late 1990s.

There was talk of synergy between the two, but both companies were sold within a few years.

While residential and commercial brokerage are clearly different cultures, several companies are still willing to try anew to bridge the divide.

This time around, plans for a one-stop real estate shop in New York focus on building integrated operations from the ground up, with residential and commercial brokers assisting and educating each other, an example now underway at Citi Habitats, a division of the Corcoran Group.

Citi Habitats focused on residential real estate exclusively for nine years before starting up a commercial brokerage division last year, and new CH Commercial executive managing director Michael Forrest says that could help the brokerage in many ways.

Forrest, a former Newmark broker, says residential companies give away a lot of business, but having a formal commercial division captures more potential business from each client.

“That’s the name of the game these days, to be one-stop,” Forrest says. “Recently, we brokered a relocation deal that involved office leasing as well as residential leasing for 90 employees. The commercial division was feeding the residential division there.”

Daren Hornig, part of a group that purchased residential brokerage Dwelling Quest 10 months ago, decided several months later to start up a commercial brokerage arm as well.

For residential brokers, there is a significant learning curve in getting to know the commercial side of the business, though there are also significant financial incentives.

“The biggest problem, where most – if not all – residential companies have failed in the commercial arena,” says Hornig, “is they don’t understand the commercial side.”

Hornig says a standard office or retail lease is 20 to 200 pages long and negotiates everything from how much it costs to use freight elevators for shipments, to chilled water services, cleaning specs, air conditioning use time, the hours of operation, growth factor, and proper subleasing options. The deal cycle is also often much longer than for a residential deal.

“There are thousands of elements to negotiate in a commercial lease transaction,” Hornig says. “You need to be a real partner in understanding attorneys, engineers and others, because the impact on a company’s business is so great.”

Hornig, also a former Newmark broker, says it was important to create a combined operation, rather than try to impose it on brokers at a later stage.

“The large residential brokerages could start commercial operations too, if they can create the right culture and environment that enables lead sharing,” he says. “But it would almost be too difficult for them to put that in place. Since we bought this company, we’ve been putting a culture in place. We are smaller and more nimble with 80 people.”

Fillmore, the largest residential company in Brooklyn, has been a player on both sides of the fence for 25 years, after it established a separate commercial office to complement the commercial agents sprinkled throughout Fillmore’s 20 locations.

Fillmore president John Reinhardt says commercial services make up about 25 percent of the company’s business. “A lot of companies in town try to dabble in commercial, but they have no real force or they co-broker with someone like us,” he says.

The challenge, Reinhardt says, is getting brokers trained properly, “because a bad commercial agent can damage your reputation just like a bad residential agent.”

There has also been a perception on the commercial end that those brokers are more corporate and professional than the residential broker, Hornig says.

“Commercial real estate went through a renaissance in the late ’80s and ’90s with computers, and now transactions have in-depth financial analysis,” he says. “Similar to how Eddie Gordon [founder of the Edward S. Gordon Co., later Insignia/ESG] changed the commercial business in the late ’80s, the successful commercial real estate brokers understand that with hard work they can easily make over half a million a year. A commercial broker knows what it takes to make 200 cold calls a week.”

Reinhardt believes the average commercial broker is numbers oriented, but the best also have good people skills. “One great feature about the commercial agent is they are more meticulous in their call backs,” he says.

Reinhardt also says that commercial brokers have “limited patience dealing with the residential broker’s questions about FAR (floor area ratios), zoning and the important information needed for anyone looking to purchase or lease a commercial property.”

But none of that is a bar to residential brokers learning about the commercial side of the business and getting involved.

“We offer the residential broker a commercial training seminar that gives them the ABCs of the business,” says Forrest of Citi Habitats.

“It gives them threshold tools to capture a retail or office deal and they can hand it over to a more experienced broker.” The goal is to turn the broker into a “hybrid broker.”

Fillmore is also training its residential agents. The company recently opened a new location in Brooklyn Heights, and James Clark, the manager of Fillmore’s commercial office, went to the new location to educate brokers.

“Just because they haven’t done a commercial deal doesn’t mean that they couldn’t be wonderful with training,” Reinhardt says. “We have agents that grow into it, fall into good connections and move to our commercial office or they stay where they are and are that office’s only commercial agent.”

Forrest says the goal is to get residential brokers to take part in a deal actively, rather than just providing a referral.

“We try to empower the residential broker with an infrastructure that allows then to capture the business, ask the right questions to get a meeting and win over the business.” says Forrest.

At Dwelling Quest’s office in Midtown, having the two sides of the business in the same location means brokers on both sides of the fence learn from one another, Hornig said.

“When you see people in the office and they are big producers it sets the tone,” he says. “The residential people are getting the financial and presentation skills from the commercial side.”

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