“April is when the big problems kick in:” LA residential firms face reckoning

Rent deferrals, pulled listings - it's all on the table

Los Angeles /
Mar.March 31, 2020 05:42 PM

The global economy may have begun melting down in March. But for Los Angeles residential brokerages, the month was the calm before the storm.

While a statewide shelter-in-place order brought about by the coronavirus pandemic suspended most new listings and home showings, brokerages could point to closings of deals in escrow to paint an optimistic picture of their industry.

But according to leading brokers, agents, and appraisers in the L.A. market, that business is drying up. Brokers must now face reality in the form of deferred lease payments, slashed home prices, and pulled listings.

L.A. County home sales and transaction volume could drop as much as 40 percent in April, said Michael Nourmand, president of Nourmand & Associates.

“April is when the big problems kick in,” said Stephen Shapiro, managing director of Westside Estate Agency.

Shapiro’s firm is debating between paying rent for its office on Beverly Hills’ posh Canon Drive, or seeking a deferred payment amid local government calls to suspend commercial evictions.

“Probably one of the biggest bites of any company is rent,” Shapiro said. “I promise you other brokerages are not paying rent.”

Firms including Coldwell Banker, Compass, Douglas Elliman, Hilton & Hyland, and The Agency wouldn’t say whether they are skipping April rent payments. In fact, Jason Oppenheim of The Oppenheim Group was the only broker who stated he would pay April rent.

Nourmand said he planned for now to pay rent on his firm’s Beverly Hills, Brentwood and Hollywood offices, but added he may talk to his landlords “to give us a little bit of slack since we’re a family-owned business.”

The optimist’s dilemma

Many brokerages are putting on a brave face, acting like Leslie Nielsen in the “Naked Gun” surrounded by flames, and declaring, “Nothing to see here!”

“Coldwell Banker has invested heavily in robust tools and technology to enable our offices and affiliated agents to remotely provide the same level of real estate services that our clients have come to know and expect,” Jamie Duran, president of the brokerage’s Southern California region, said in an email. “Our agents are still taking listings, conducting virtual open houses and online showings, and even closing properties from the comfort and safety of their own homes.”

With the exception of Realogy-owned Coldwell Banker, L.A.’s top firms are all privately-owned companies with no obligation to disclose financials or upcoming challenges. Also, it’s not all bad news at the moment.

“L.A. County closings are actually up year-over-year in total in the month of March,” said Jonathan Miller, founder of appraisal firm Miller Samuel, indicating a market that still had momentum from a strong start this year and saw a flurry of trophy deals.

But within the month of March, sales are going down. In the first week of March, according to data Miller provided, there was an average of 215 home sales per day in Los Angeles County. By the fourth week of March and the first full week after California Gov. Gavin Newsom’s shelter-in-place order, the average dropped to 141 each day, or a 34 percent decline.

An analysis by The Real Deal reveals that total sales volume has dropped 22 percent since March 19, the day Newsom issued the shelter-in-place order.

In the third week of March, there was an average of $154 million in total daily sales. By the fourth week there was an average of $117 million in sales each day, a 24 percent week-to-week decline. Agents admit the drop would have been even steeper were it not for deals in escrow.

“At this time we are seeing momentum in deals that were already in motion,” said Tomer Fridman of Compass.

Slashed prices, pulled listings, and cutbacks

Deals that are closing are coming at a discount.

The prolific wife-husband duo of Rayni and Branden Williams are still selling, though Branden Williams said one transaction came at a 15 percent discount due to “the market coming down.”

“We’ve been putting out fires,” said Shapiro of Westside, noting multiple discounts of 20 percent happening at his brokerage. Shapiro voiced concern about listings agents who did not live through the 2008 financial crisis, and may have too much “pride and ego” to be willing to have the necessary conversations about price cuts with their clients.

A separate problem for agents is homes that have just hit the market.

“You have some sellers who want to put their property on hold on the MLS for 30 days, some want to wait out a year,” said Ben Bacal, a broker at Side-affiliated Revel Real Estate whose deals include the “Billionaire” spec mansion developed by Bruce Makowsky.

“I’m seeing sellers doing price drops,” Bacal said. “Very healthy ones, anywhere between 20-40 percent off in the high end. For example, a property that is asking just under $50 million, is now willing to take an offer in the $30 million range or low 20s.”

Commissions from such big-ticket sales help keep the lights on at boutique shops like Hilton & Hyland. The Beverly Hills firm was dealt a blow this week when Jeff Bezos pulled out of paying $90 million for the estate of Paul Allen, land that was listed by four Hilton & Hyland agents.

Billy Jack Carter, the brokerage’s general manager, downplayed the present crisis.

“Despite the recessions and market downturns, we have remained debt-free for the 27 years that we have been in business,” Carter said. “We are fortunate to be selling in a premier destination city, which we expect to be less impacted than many other metropolitan areas.”

Carter demurred on questions of layoffs, stating, “We’ve always been very careful to hire out of necessity, which has kept us well-positioned for any economic downshifts.”

Brokerages- who make the lion’s share of their revenue by taking a cut of commissions earned by independent contractor agents – couched staff layoffs as an unlikely measure of last resort.

A public filing by Coldwell Banker parent Realogy indicated no pink slips, but “temporary salary and work-week reductions for a majority of our employees.”

Compass, the LA County’s second-biggest brokerage by sales volume behind Coldwell Banker, has announced nationwide layoffs of 15 percent, and Compass spokesperson John Wagner said cuts in L.A. County were at about that number too.

However, Wagner added, “Our day-to-day operations will be the same and the remaining Compass employees will continue to operate at the highest level possible.”

Optimism by many brokerages contrasts with other real estate industries like hotels, which have made no secret they’re getting walloped by the fallout from the pandemic, and construction, where companies admit they’re baffled about what work they can do.

“Brokers have to be optimistic,” said Craig Gilbert, an appraiser active in the county. “Their job is to sell. And right now they are selling a refrigerator to an eskimo.”

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