Even before Town Residential’s bombshell announcement that it would close its core resale and leasing divisions last month, some skeptics were characterizing traditional residential firms as a dying breed and predicting that they’d soon be obsolete.
They point to the paper-thin margins as well as the rapid changes in technology and consumer behavior. And in the age of discount firms, star agents, open data and huge sums of venture capital, traditional brokerages are getting financially assaulted from all sides.
Two days after shuttering Town, its founder Andrew Heiberger said as much, noting that the financial pressures left him no choice but to close the firm, which claims it sold $13.25 billion during its eight-year run.
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“Due to extremely high commission costs and a fierce recruiting climate it was just not possible to make sustained profit,” he wrote in a LinkedIn post.
While some have noted that Town also spent lavishly, New York’s entire residential brokerage business is grappling with all the same outside forces — even as rival firms scramble to scoop up Town’s remains.
“There is as much unrest in residential brokerage around the country as there has been in my 31 years in the business,” said Steve Murray, founder of real estate data firm Real Trends, who added that companies like Redfin, Zillow and Compass have fueled a tech arms race and taken competition to a new level. “A multifront war is how the incumbents see it.”
According to Murray, the assault is eating into gross margins, the lifeblood of traditional brokerage firms.
Even the heads of some top Manhattan firms have acknowledged the precariousness of the business.
“It’s very hard for a company to succeed today because of the pressure on margins,” said Hall Willkie, co-president of Brown Harris Stevens.
In addition to commissions, his firm is spending heavily on IT, economists, market reports, online advertising and glossy publications. “Ten years ago, we thought we’d get rid of offices; instead, you have to have fancy offices,” Willkie said. “The agents demand it; the customers demand it. Everything has to be top-drawer.”
Despite those efforts, many startups argue that the brokerage Goliaths have not evolved enough.
David Walker, CEO of Triplemint — a venture-backed New York City firm that launched in 2013 and uses data to predict when sellers are likely to list their properties — said consumers are “not okay with the traditional process.”
“They say, ‘Where is the increased value? I use apps to move around the city. I can get a mortgage online in three clicks’,” said Walker, whose firm has 70 agents but doesn’t disclose sales figures.
That argument has resonated on Wall Street, where giants like Realogy — the parent company of the Corcoran Group, Sotheby’s International Realty and suburban firm Coldwell Banker — and Douglas Elliman, which is owned by publicly traded Vector Group, have struggled with profitability.
“We are not bulls on the long-term importance of brands in residential real estate,” Anthony Paolone, an analyst at JPMorgan who covers Realogy, wrote in March. Although agents will continue to play an important role in complex transactions, he added, brokerage firms’ earnings are in flux.
“I always say to people, it’s not a great business. If my name wasn’t on the door and you said, ‘Would you go into the business today?’ I don’t think I would,” said Jed Garfield of the Manhattan-based firm Leslie J. Garfield & Company, which specializes in townhouses.
“The notion that a real estate brokerage business makes money — I don’t know anyone who owns or runs a brokerage business, whether it’s huge or small, that’s like, ‘Oh yeah, I’m crushing it.’”