Increasing numbers of residential real estate agents are moving into the property development end of the business, which is an unexpected offshoot of a white-hot real estate market where almost anything sells, often at gasp-inducing prices.
There has been an “old guard” consulting with property developers and handling project marketing for almost a decade in New York City, including Helene Luchnick and Shaun Osher at Prudential Douglas Elliman. But now ranks of young Turks are entering the market.
The expanded role makes sense not only for individuals, but for brokerages as well. Dawn Tsien, president of Coldwell Banker Hunt Kennedy, says her company’s new development marketing division “provides developers with wide ranging expertise from market research, design review of floor plans and finishes, recommendations for other professionals such as attorneys, architects, designers and ad agencies – to create the right product for the right price for the target market.”
For some, getting in on the ground floor, so to speak, has paid off.
“A lot of brokers think there is a gold mine in development, and for some there has been,” said Leonard Steinberg, an Elliman agent making his first foray into development. “For others, it hasn’t been that lucrative.
“The first wave of residential brokers started consulting with developers around 1996. Before that, the market wasn’t ripe for that kind of work.
“From basically the mid-1980s until 1996, there was really no development, because interest rates were very high,” said Luchnick, an executive vice-president at Elliman who developed a property in 1981 by converting a Soho loft building.
She bought the structure housing her husband’s antiques store, converted it into lofts, including her own apartment of two decades, and sold the rest of the spaces. The experience was invaluable, she said: “I became knowledgeable about building department codes and how to get a certificate of occupancy.
“When the market turned in the mid-1990s, Luchnick took the plunge and consulted with a developer who converted the Spears Building into 30 lofts in West Chelsea, practically uninhabited at the time. She became the building’s marketing agent, initially asking $250 per square foot and seeing a price increase of 27 percent over the course of sales.
“We just didn’t know what reaction we’d get from the public, “she said. “It was an overwhelming reaction. I remember standing there on the opening date, there was no roof on the building, and it was pouring rain, and people were signing contracts.
“Now, about 20 projects later, she’s currently marketing Schaefer Landing, a condominium complex in Williamsburg consisting of 210 apartments being sold in two phases. The first phase of 75 apartments is 90 percent sold.
Osher, an Elliman executive vice president, also moved from traditional residential brokerage into development in the mid-1990s. He had sold a couple of commercial loft buildings, initiating him into property development.
The move “was a result of knowing what the market was, what buyers were looking for, and what developers should be building with respect to what the market is in need of,” he said.
Unlike Luchnick, Osher likes to work with developers to find sites or buildings ripe for development or conversion. Luchnick often consults with a developer before a purchase is made to present her vision of the best strategy for the property’s development. Both brokers handle the marketing of a property once it’s developed. Since the mid-1990s, Osher has done about 10 development projects, the latest of which, 260 Park Avenue South, still has six units available, but set records last September, with 50 percent of its 110 apartments sold in three weeks.
“Obviously, the benefits of this are, when you have a building you’re marketing, it’s like getting a lot of exclusives at one time, so you’re assured a certain amount of sales,” Osher said. “That’s why a lot of brokers are trying to get into this end of the business.
” While traditionally, developers sought to spend less than $300 a square foot for land costs and $200 a square foot for construction, recent purchases have obliterated those price points.
The record for the highest price paid in 2004 per foot of developable land was an astronomical $770 for Beth Israel’s Singer Division building and two adjacent apartment buildings at 170 East End Ave. The Zeckendorfs and partners bought the Mayflower Hotel and a vacant lot for $690 per buildable square foot.
Those kind of ingoing prices create a whole new level of risk for consulting brokers.
“You’ve got to speculate that down the road, which is at least two years away, hopefully people will be willing to pay the prices to not only cover those costs, but make a profit and allow for contingencies,” Steinberg said.
So veterans, while encouraged by the market, are cautious. They have advice to brokers mulling development work – Luchnick recommends focusing on one geographic area of the market – but they note that entering the field requires, aside from specialized knowledge, the assumption of extreme risks.
It may take two years for a developer to bring a development to sale. And even then, he or she could produce a shoddy development, and a broker’s name could be forever tied to it.
“You’re usually associated with the development that you represent,” Osher said. “If for some reason the developer delivers a substandard product, you will always be associated with that project.”
Another risk brokers assume is that the project may never be completed.
“You could spend two to three years on a project and never close,” Osher said. “The developer could declare bankruptcy, the buyers could be given a right of recision. That’s a very big risk.” All those risks sometimes prompt brokers to choke and undersell – which not only hits their pocketbooks, but can be a fate worse than death to their reputations.
“I’ve seen a lot of projects recently that have been sold at $850 a foot, where the market has borne $1,100 a foot,” Osher said.
“The risk is a broker underselling the project and ruining their reputation.” A market downturn could hurt agents who are newer to development. The income that comes from selling units in bulk in this market may not look so good stretched over the course of two years, Steinberg said, especially as the sales commission is typically lower when marketing a larger development.
“In a hot market like this, you can sell out a building in a few weeks,” Steinberg said. “In a down market, it can take two years.” Osher agreed that the inevitable market correction will separate the wheat from the chafe.
“In a strong market, when everything is selling, everyone is a genius,” Osher said. “In a market correction, the brokers who are experienced will bring to market properties that will sell in a good or weak market.”
“That’s where most of the people who are inexperienced will be flushed out of this end of the market.”
TRD