Small is lucrative: Start-ups grab growing share of sub-$50M investment sales market

New York City’s newest investment sales shops — which have been launched by brokers splitting off from established firms — are handling an increasing portion of the city’s smaller building sales, an analysis from The Real Deal shows.

The newbie firms, like Rosewood Realty Group (and, to a lesser extent, others like Pinnacle Realty of New York and ERG Property Advisors), have not displaced the old-guard firms, many of which were founded in the 1980s. But they are starting to give them a run for their money.

This month, The Real Deal ranked the city’s investment sales brokerages based on the dollar volume of deals they did at $1 million or more that closed in the five boroughs in 2011.

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We put the biggest spotlight on firms that did deals valued at less than $50 million in order to look at the smaller and mid-size investments sales firms that rarely get attention in the press.

For example, former GFI Realty Services broker Aaron Jungreis, the frenetic founder and president of Rosewood, has grown his barely four-year-old firm into one of the city’s most active companies. It did $364.8 million in deals under $50 million last year — the third-highest dollar amount for the under-$50 million category in the city.

It clocked in behind the higher-profile and more established brokerages like Massey Knakal Realty Services, which dominated with $750.7 million in sales under $50 million, and Eastern Consolidated, which racked up $379.6 million.

Indeed, there is plenty of money to be made on deals that aren’t mentioned in the same breath as the city’s trophy properties.

Last year, investment sales totaled $25.6 billion in New York City, with $7.2 billion of that between

$1 million and $50 million, data from Massey Knakal shows.

While the smaller firms don’t attract nearly the attention that the institutional brokerages like CBRE Group, Eastdil Secured, Cushman & Wakefield and Jones Lang LaSalle do, they are chasing a surprisingly large amount of commission money.

In fact, The Real Deal estimated that the total amount of potential commissions for deals under $50 million last year was between $130 million and $175 million, much larger than the total estimated for deals above $50 million, about $75 million to $110 million. (That’s based on commission rates ranging from 5 percent to 1 percent for deals $50 million and less, and rates of

1 percent downward, to about 0.3 percent, for billion-dollar deals.)

“That is not such a crazy concept,” Jungreis said. “On a smaller deal you can negotiate and ask for a higher commission.”

Grabbing market share

While Massey Knakal, Eastern Consolidated and Rosewood grabbed the top spots on the list, Besen & Associates and Marcus & Millichap rounded out the top five firms for deals under $50 million last year. Those firms brokered $294.7 million and $229.1 million in sales, respectively.

Still, Massey Knakal — which has made high-volume brokerage its bread and butter — has seen its market share shrink over the last few years.

For instance, Massey Knakal brokered $626 million in 2009, when there were only $6.3 billion in sales citywide and the market was bottoming. In 2011, when there were $25.6 billion in sales citywide, an increase of more than 400 percent, the firm brokered $880.9 million in sales — only 35 percent more than they did two years earlier.

Meanwhile, Rosewood only brokered $62 million in sales in 2009, but did about nine times that last year.

For its part, Massey Knakal — which was founded in 1988 by Robert Knakal and Paul Massey — expects sales in 2012 to exceed last year.

Amit Doshi, executive director at Besen & Associates, said new companies are not cutting into his business

“[Massey Knakal’s] business is more highly correlated to the number of buildings selling rather than to the dollar volume based on the type of buildings we sell,” Massey said. “We expect large market-share gains in 2012 cementing our position. [The first quarter] of 2012 was our best quarter since 2007.”

Other new firms like ERG Property Advisors (which ranked 15th with $97 million in sales under $50 million), Pinnacle Realty (which ranked 16th with $84.2 million in sales), Highcap Group (which ranked 18th with $64.7 million in sales) and Cignature Realty Associates (which came in 21st with $54.0 million in sales) are making serious inroads. They’re ranking even higher in the $1 million to $10 million deal range, and along with one or two other firms, they’ve collectively taken a $742 million bite from their more established competitors. (The ranking included only commercial firms that are not affiliated with the city’s residential brokerages, some of which have commercial divisions, such as Halstead and Prudential Douglas Elliman.)

Amit Doshi, executive director at Besen & Associates, who began brokering deals in 1987, said the new companies were not cutting into his business.

“We were in the Bronx, Brooklyn and Queens before it was popular,” he said.

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That may be true, but now Besen has company.

The Long Island City–based Pinnacle — which was founded in 2009 by top brokers from the nearly 60-year-old Greiner-Maltz — focuses primarily on industrial properties in Queens and Brooklyn. But because city rezonings have created more development opportunities, they are now able to market those industrial sites as residential and retail as well.

“We have a foundation in industrial, but from there we do a lot of residential, retail and some office,” said David Junik, a company partner.

Junik and his fellow partners founded Pinnacle during the downturn, when brokers at other firms were also splitting off to start new companies. The slow market gave brokers time to “focus and develop [their] brand,” he said.

The end of the boom seemed to provide that incubation time for many brokers. Brooklyn-based TerraCRG was founded by former Massey Knakal broker Ofer Cohen in 2008, while Ariel Property Advisors was founded in 2011 by former Massey Knakal broker Shimon Shkury. And also last year, Cignature was launched by Lazer Sternhell, a former broker with Capin & Associates, which did $167.8 million of business under $50 million.

There are also several national firms that have launched in New York in the past year — such as Lee & Associates, Avison Young and Stan Johnson. However, as of last year, they had not yet made any significant impact on the city’s investment sales market.

Massey, who launched his firm after leaving Coldwell Banker Commercial Real Estate Services, didn’t seem too worried about the new competition. “Start-up firms are a natural constant,” he said.

Chasing commissions

When major global real estate investors like the Carlyle Group, Blackstone Group or local moguls like the Chetrit Group want to sell high-priced properties, they have a small set of commercial brokerage firms to choose from.

They turn to investment broker stars like Doug Harmon of Eastdil or CBRE’s Darcy Stacom, among a handful of others who handle sales of Manhattan’s most expensive commercial properties.

And The Real Deal’s ranking of all investment sales deals in 2011 not surprisingly puts those two firms firmly at the top — Eastdil with $7.6 billion in deals in New York City last year, and CBRE with $5.6 billion.

Behind them are Cushman with $1.8 billion and Jones Lang with $1.2 billion.

But there are far more brokerages chasing deals in the often nondescript buildings in far-off corners of the city.

J.D. Parker, vice president and regional manager for the Manhattan office of California-based Marcus & Millichap, said his firm was planning to add more brokers in the region.

“We’ve been making a heavy push into the $10 to $100 million market over the last two years,” he said.

But it’s a cutthroat business, insiders said, where brokers compete aggressively to represent buyers and sellers in transactions. While some deals on the low end — from about $1 million to $10 million — are brokered for 4 or 5 percent commissions, several brokers said they routinely did deals for 2 percent or lower.

One veteran multifamily broker, who did not want to be identified speaking about how low commission rates go, called himself a “wholesale broker,” who catered to long-standing customers. He would gladly take a $10 million deal at 1 or 2 percent, with an owner he’s known for more than a decade.

But success is not predicated on fees alone.

Jungreis — who has just 10 licensed brokers and agents at Rosewood — has the most successful of the recent start-up firms, due no doubt in part to a high level of energy.

That fast-paced activity was on view one morning last month, as he stood behind his desk fielding calls from two phones simultaneously for nearly 30 minutes as he communicated with a steady stream of buyers and sellers.

“There is a method to how, when we get a deal, in three to five to 10 calls, it’s done,” he said.

That strategy hinges, Jungreis noted, on getting to know buyers and sellers, and becoming his clients’ “eyes and ears, and really [trying] to understand what they want — what turns them on, what they hate.”