The Real Deal New York

New development agents get stretched thin

As the sector struggles and units take longer to sell, brokers (and firms) specializing in new condos are doing more, but getting paid less
By E.B. Solomont | April 01, 2018 01:00PM

The developers of 111 Murray Street had reason to celebrate this fall after pulling off a $650 million loan that would partially refinance unsold units at the 800-foot condo tower.

But for brokers selling the $1 billion condo project — which is reportedly 80 percent sold — the loan is a heavier load to bear.

Discounts and longer marketing time for condos mean smaller paychecks for new development brokers, who are also being forced to stretch marketing dollars — in some cases one or two years longer than planned. “You’re sitting there and losing money if you’re not transacting or putting deals in contract,” said one top agent who put the luxury slowdown in bleak terms when it comes to brokerage earnings and profits.

New development is often seen as an overnight path to riches — but in today’s market that’s a false narrative, veteran brokers said.

Compass President Leonard Steinberg said that when he worked on 150 Charles — where buyers inked contracts for $750 million worth of apartments in three months — other agents viewed the project as an overnight success. He reminded them, however, that he started working on the project seven years earlier.

“We paused with the recession. We worked without contracts for a while,” he said. “The day we got paid was 10 years to the date we first started working on it.”

These days, brokers are spinning their wheels in a sluggish market, albeit to a lesser degree than during the recession.

Even though inventory is up, the number of new development sales in Manhattan dropped 19 percent during 2017’s fourth quarter, according to Miller Samuel. Data show the average sale price of a new development unit dropped by nearly 17 percent, to $4.1 million. And the absorption rate — or how long it would take for all existing inventory to sell out — for new condos was 8.2 months, some 24 percent higher than it was in 2016.

“In a market like this, when a project takes longer to sell, there’s going to be pain on all fronts,” Steinberg said. “If it takes four years instead of two years, that cost is astronomical. Every agent today is working harder to make less.”

Agent angst

It’s simple economics for many new development agents: Lower prices translate to lower fees.

“If anybody is saying they’re not negotiating, they are lying, ” said Douglas Elliman’s Tamir Shemesh.

Shemesh pointed out that brokerages have “tremendous” fixed costs that go up if a project doesn’t sell as quickly as projected. “We do have skin in the game,” he said. “We work longer hours to make the same dollars.”

But slower absorption also means that even if brokers pocket the same commission, they may work for five years instead of three before getting paid.

“There’s no money in new development for a broker if you’re sitting on a project for 18 months,” said Elliman’s Frances Katzen, adding that most successful brokers don’t rely exclusively on new development. “The better you do in resale, the more developers like to have you on their team,” she said. “They feel you have a pulse on the market and can finesse what’s needed.”
With slower sales at new developments, developers and brokers are finding themselves at odds over who pays for extra marketing — or whether it’s time to adjust prices.

For example, inventory loans — which use unsold units as collateral and can replace more expensive mezzanine financing — can be a lifeline for developers. But sources say developers often dig in on prices once they have one, ironically making it tougher for brokers to unload units.

“As soon as we hear they have it, at the next marketing meeting they’re like, ‘Well, we don’t want to negotiate,’” said one top agent. “It’s allowing these guys to kick the can down the road and not face the reality of where the market is.”

Last summer, HFZ Capital sewed up a $53.2 million inventory loan for unsold units at 11 Beach, while Yitzchak Tessler landed a $164 million inventory loan for his 72-unit project at 172 Madison Avenue. Compass, which had been marketing the project, walked away from the job in February, though the reasons are fuzzy.

“Compass probably wanted to reduce pricing to increase the velocity of sales, and Tessler said he was not going to do it,” one source speculated.

Tessler subsequently relisted several units with the Corcoran Group — some at higher prices.

In one of the biggest signs of the market shift, new development gurus — who were paid six- and seven-figure salaries — are fading from the residential landscape.

Town Residential, which hired design guru David Lipman in 2014, has since cut ties with him. Lipman did the branding for One57 and was hired to work on Town’s long-term brand strategy.

And Elliman, which hired Roy Kim in 2015 as its first chief creative officer for development marketing, eliminated the position following Kim’s departure last year. Sources said the high-flying role was not in line with today’s market reality.  “The financial challenges facing new development today are not a secret,” Kim said in October.

Even Compass, which is flush with venture money, hasn’t sought a replacement for Louise Sunshine, who came out of quasi-retirement to provide new development consulting for the firm.

Although there’s little doubt that Compass can afford a replacement, sources said hiring big-name executives — or celebrities for that matter — is falling out of vogue.

Sources said the Jade Jagger-designed condo at 16 West 19th Street fell short of expectations. (The “pod” design for the kitchenette, bathroom and closet was dubbed “weird” by Brick Underground.) Likewise, “you don’t hear anything” anymore about DHA Capital’s collaboration with rocker Lenny Kravitz at 75 Kenmare in Nolita, noted one observer.

“Companies are being smart with their money,” the observer said. “Why would you spend money like a drunken sailor when you know you’re in the middle of a storm?”

Profit pain

Brokerages that rely heavily on new development have borne the brunt of the slowdown.

“I would not say it was a stellar year from a sales viewpoint,” Elliman Chair Howard Lorber said in a March 1 earnings call.

Although the firm sold $26.1 billion in real estate nationally — up from $24.6 billion in 2016 — its New York sales volume dropped to $12.7 billion from $14 billion.

For most of 2017, Elliman struggled with profitability thanks to fewer new development closings.

“New development in this industry basically has a higher profit margin on the regular resale business,” he said. “We did better in closings in 2016 than we did in 2017.”

That slowdown, he added, was beyond anyone’s control. “Many times, due to construction delays and so forth, it’s hard to actually pin down when the closings will occur,” he added.

Realogy — parent company to Corcoran Sunshine Marketing Group — hasn’t been immune, either.

Although the firm’s new development closings were up in 2017, that number is expected to drop this year, the company said in its annual report. “We have a great pipeline that’s [going to] start to close within ’19, so it’s just a pause in ’18,” CFO Anthony Hull said during a late-February earnings call.

In a sign of the times, several top firms toned down their holiday parties and annual award ceremonies this year. In lieu of holding its regional “Ellies” award ceremony at Radio City Music Hall this year, Elliman opted for Cipriani, a high-end but more subdued location. (The firm said the decision had nothing to do with cost-cutting.)

Corcoran, meanwhile, held its award ceremony in the morning — instead of throwing its usual evening bash. And Town, known for its raucous holiday parties at venues like Tao Downtown and Tavern on the Green, instead threw intimate soirees for individual offices. CEO Andrew Heiberger attributed the shift to the market slump. “I just didn’t think that throwing a gala-sized party this year was consistent with the market,” he told The Real Deal in December.

Although Town is privately held, the firm self-reported a decrease in business last year. For the full year, the firm said, its sale and leasing volume was $1.9 billion — down from $3.6 billion in 2016. Town does a combination of resale and new development deals.

“You’re in big trouble right now if you’re heavily new development, because the amount of sales that are happening are minuscule on new developments compared to the overall amount that’s happening in any given month,” Heiberger said.

In addition, last month, the firm announced a restructuring of its office footprint, with fewer retail locations. In addition to a new 15,000-square-foot flagship at 888 Seventh Avenue, Town has three other locations, down from 10 offices in 2013.

Although Town said the shift reflects a new (and smarter) way of doing business, it’s also less costly.

So far, brokerages have not turned to rampant layoffs like they did in 2009. But they are more willing to negotiate their commissions.

One marketer, who requested anonymity, said his firm takes a smaller commission in exchange for the developer paying administrative salaries.

“It makes it more difficult to carry a job when you were planning on a three-year process and it’s a four-year process,” said Stephen Kliegerman, who oversees new development marketing at Halstead Property and Brown Harris Stevens. “It’s less profitable because you’re spending more time, energy and resources on the same job for the same amount of money.”

Kliegerman said no one deal makes or breaks a company, but a marketing firm’s pipeline is key to its longevity in down markets.

Instead of lavish parties with dancers and entertainment, marketing is much more focused on events featuring the designer, architect or stager, he said.

“People learned that those types of things were extravagant and potentially unnecessary,” he said. “Now it’s focused on, ‘How did this project become this project?’”

The luxury slowdown has also shifted the conversation about who pays for marketing.

For big projects, developers typically set aside 1 to 2 percent of the project sellout for marketing, but that budget doesn’t increase if the project takes longer to sell. “You try to stretch it as best as you can,” said Halstead’s Ari Harkov.

Harkov said he’s marketing a small condo in Brooklyn, where he recently coughed up a few thousand dollars for staging and new photos.

But Harkov said the bigger expense is the time his team spends on projects that don’t sell. “Every showing, every week, every month we’re on a project,” he said, “there’s an enormous opportunity cost because we could be selling something else.”

But with increased competition for listings, sources said some firms are trying to undercut the competition.

One new development marketer noted that his firm will throw in some predevelopment consulting services for free. The source said he’s seen other marketers forgo a breakup fee, meaning if they’re kicked off a job they don’t get paid.

Some developers are replacing on-site sales teams — who typically “draw” income from future commissions — with resale brokers who show units by appointment only. “It doesn’t work if you’re getting a lot of foot traffic,” said Harkov. “But it’s a compelling argument for developers to avoid paying draws. There’s no out-of-pocket cash flow.”

One firm bucking the trend and shelling out more to stay in the new development game is Compass: Steinberg said the brokerage is pulling out all the stops to bolster its nascent new development business. “We have to invest whatever it takes to make our project successful,” he said. “We feel it’s necessary, as an added incentive to clients working with us.”

Buyer broker bonanza

Some brokers representing buyers are seeing a windfall in the current market.

Desperate to attract investors to their projects, many sponsors are offering higher commissions, or some payment up-front, to agents who bring them a buyer.

As TRD has reported, Extell Development is currently advancing 50 percent of commissions on units at under-construction projects across its portfolio.

Toll Brothers City Living has also offered portfolio-wide commission incentives. This year at Liberty Toye, an 81-unit condo in the East Village, developer Magnum Real Estate offered up to 8 percent to brokers whose clients went into contract on a two-bedroom by Jan. 15. (It offered 6 percent for studios and one-bedrooms, and advanced 1 percent of the commission at signing.)

Magnum’s Ben Shaoul called the results “incredible.”

“It sends the message that the developer is eager to sell and is willing to deal,” said Heiberger, who took over marketing at the project in November.

But those types of sweeteners can be a double-edged sword for brokers. “The reality is that when you bring the client down there and the client wants to reduce the price, the broker might forgo part of the 6 to 8 percent fee to keep the price lower,” Heiberger pointed out.

Meanwhile, some new development listing agents said they actually are commanding a premium in this market, because developers are willing to pay for an agent with more experience. “If you pay an extra 1 or 2 percent to get to a sellout that’s 10 percent better than with a discount broker, you’ve won,” said Elliman’s Michael Graves.

“Three years ago, you could put any broker on your project and it would sell,” he said. Not so anymore, he said.

Some sponsors are coughing up 3 percent commission for on-site agents — a bump from the 1.25 percent that’s common in new development. “This idea that there’s this 1 percent commission structure for development marketing is not true, not when you reach a certain caliber of the market,” said one broker who requested anonymity.

As for being stretched thin, Steven Rutter, director of Stribling Marketing Associates, said it’s just par for the course.

“Are they working harder for the same commission dollars? Sure. But when they take on a project, they’re very committed to seeing the project have a successful sellout,” he said. “If it takes longer, it takes longer.”