Developers ditching exclusive contracts

New condo developers hire agents from multiple brokerages

Apr.April 01, 2009 11:27 AM

The real estate downturn has caused a dramatic shift in the world of new development marketing, with some developers now forgoing exclusive marketing and sales teams at their new construction residential projects.

Frustrated that the recession has slowed traffic at fully staffed, lavish sales offices, developers instead are hiring multiple agents from different firms, hoping to reach a broader audience and motivate brokers to work harder against their competition.

Experts say the strategy is often more cost efficient for the developer and may well be a more effective way to sell apartments. But it could have far-reaching consequences for brokers and real estate firms, which have grown accustomed to the guaranteed revenue generated by exclusive marketing and sales agreements.

“I think that developers will recognize the value of having a diversified team and not just one exclusive broker,” said Josh Guberman, president and CEO of Core Development Group, who hired four rental brokerages to find tenants for two newly renovated apartment buildings at 235 and 235A North Henry Street in Greenpoint, Brooklyn. “This is a new world and you really have to look at creative ways to market.”

Kathy Braddock, co-founder of Charles Rutenberg Realty and real estate consulting firm Braddock + Purcell, called hiring multiple firms “a great idea” and said “it could very well be the wave of the future.”

She added, however, that if more developers drop the old formula, brokers who specialize in new development “will have to adjust and regroup.”

In recent years, major real estate companies like Halstead Property, the Corcoran Group, Brown Harris Stevens and Prudential Douglas Elliman have grown their subdivisions devoted entirely to new condos, assisting developers with every stage of the process, from the initial planning to branding, marketing and, ultimately, selling the units.

At the same time, a bevy of boutique agencies specializing in new construction have proliferated, including Shvo, Core Group Marketing and the Marketing Directors.

Developers who hire these firms nearly always sign an agreement guaranteeing that the real estate company earns commissions on all the units sold, as well as fees for marketing, salaries and other expenses.

Changing the model

While such exclusive agreements have become the norm, they are relatively new, as is the idea of selling an entire building’s worth of units at once. The model was pioneered by Trump protégée Louise Sunshine, who formed the Sunshine Group in 1986 to specialize in marketing new luxury condos.

Her approach — portraying new developments as the height of luxury — was novel at a time when newly built residential buildings were rare and co-ops were the preferred form of home ownership for well-to-do New Yorkers, said Braddock.

“Sunshine began in a world when condos were very scary to most New Yorkers,” she said. “We had to convince them that condos were viable.”

Today condos rival co-ops in respectability and surpass them in price, but “nobody ever changed the model,” said Braddock. “People just kept repeating the same thing.”

The system did not change, in part, because until now, it worked.

In the hot real estate market of recent years, developers depended largely on branding and advertising to sell their projects, and many real estate firms were able to staff sales offices at new condos with inexperienced agents without a negative impact on sales.

In other words, “the market was so hot, you could have had a monkey standing in most of these new developments to make sales,” said Braddock.

That has now changed. With prices declining, developers are questioning whether they should entrust all their sales to one company.

Peter Moore, principal of Peter Moore Associates and the developer of the newly converted American Express Carriage House at 157 Hudson Street, is one of them. Instead of hiring an exclusive sales firm at the historic Tribeca building, which has been restored and transformed into 17 loft apartments, he and his co-investors have hired several brokers to sell the homes.

“A diverse group of brokers in a difficult marketplace has its benefits,” he said. “No one broker, or team of brokers, can do it.”

Erez Itzhaki, CEO and founder of Itzhaki Properties and the developer of Modern 23 at 350 West 23rd Street, went through two exclusive sales agents, first Richard Ferrari at Prudential Douglas Elliman and then the Bracha Group, also from Elliman. But he was frustrated by the slow pace of sales after the economic downturn deepened this fall.

This winter, he closed his sales office, fired the Bracha Group after only two months and hand-picked five agents to replace them: Kirk Rundhaug from Core Group Marketing; Lauren Muss, a senior vice president at Corcoran; Christopher Leavitt, also from Corcoran; Leonard Steinberg, an executive vice president at Elliman; and Tanner Garland, a vice president at Stribling.

Itzhaki said he selected the members of the team through interviews and recommendations, looking for “brokers who didn’t start two years ago, when it was easy to make money.”

“I wanted brokers who can think outside the box, who had roots in the industry, who know how to get buyers,” he said.

Expanding the sphere

Another benefit to the strategy is the increased exposure that comes from hiring several real estate firms and being advertised on multiple Web sites.

“Everyone has a different sphere of influence,” said Braddock. “No matter how good someone is, they can’t touch everybody. By having not just one person do this but bringing in people from five firms, you have a much greater chance of selling it faster.” The method seems to be working so far, said Rundhaug.

“There are five different firms talking to their people to get people into the building,” he said. “Word is spreading. And that’s what needs to happen right now because it’s a very tough market for all of us.”

Itzhaki said the new team of brokers did more showings in the first two weeks they were on the job than there were in the entire year since the development has been on the market. “I’m getting super exposure,” he said.

The strategy also may save developers money, as they don’t have to pay for full-time sales office staff. Instead, each of the brokers schedules their own showings. Moreover, in Itzhaki’s case, the agents pay the marketing costs, much as they would in a resale, but he said he is paying them larger commissions to make up for it.

Depending on how commissions are divided, the strategy has the potential to motivate brokers further, as they don’t automatically get the proceeds from every sale in the building. At Modern 23, Rundhaug said brokers from the firms have set up a pool of commissions that they will all receive at the end, though they still get more money if they sell a unit on their own.

“We all show each other’s units,” he said. “It’s an incentive and beneficial for everyone.”

In Guberman’s case, the competition is a little fiercer. He hired Corcoran,, the Developers Group and Northside Realty to rent out units at 235 and 235A North Henry Street, the two Greenpoint buildings he recently renovated. Once the market strengthens, he plans to sell them as condos.

“There’s an inherent Darwinian competition between [brokerage] houses to see who is going to do the best job,” said Guberman. And he’s taking it a step further: “I’ll see who performs, then when it’s time to sell these as condos, the team that worked the hardest will have a leg up.”

He said the tactic is more effective than hiring one exclusive sales firm after another. “I’ve seen a lot of new developers changing brokers the way you change winter coats,” he said. “There’s not a big change in performance.”

Guberman acknowledged that hiring multiple agents may not sit well with brokers, who are used to the guaranteed paycheck that new developments used to provide.

“I don’t think [the strategy] will be very well received initially by the brokerage community,” he said. “But I think it’s fair, given that it’s the developers’ money and the developer’s product.”

He acknowledged that strategies like his, which reward stronger brokers, are likely to reduce the number of agents in the industry.

“I think there’s some reluctance to step up their game to such a level,” he said. “You’ll see a migration of brokers to other industries.”

Braddock said that as exclusive contracts become increasingly rare, firms that focus on new developments will have to adjust their business model, especially since there are fewer new developments in the pipeline to begin with.

“We’ll see consolidation, with not as many new developments or as many brokers,” she said. “We’re in a huge shift.”

Still, brokers can only do so much, said Thomas Demsker, president of Demsker Realty. A development has to be priced right in the current climate, he said, or no broker, no matter how skilled, will be able to sell it.

“[Developers] are grasping at different techniques, whether they work or not, rather than just cutting the price,” he said. “That’s what they’re afraid to do — that’s the kryptonite. But they might as well just bite the bullet.”

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