Grading the new guys
A look at how the commercial market’s most recent contenders are measuring up
Building a commercial brokerage business in New York City is a slow, patient game. Success, real estate executives say, is measured in years, not months.
But since the credit crunch, a slew of national (and international) commercial firms have jumped into the fray in New York, launching offices here or significantly changing up the ownership structure of existing companies to give them new life.
Real estate insiders say that these firms — each of which reported more than $5 billion in national or international transactions last year — need to have a New York presence in order to be credible on a larger stage, and to service clients who either are in the Big Apple already or have business here.
This month, The Real Deal looked at the crop of these firms that have made the most serious inroads here in the last five years — those with at least 15 brokers or salespeople — to evaluate just how well (or not so well) they are performing. Using transaction information from CoStar Group, we looked at the leasing and sales volume the firms have handled and then, based on standard commission rates, estimated how much revenue they’ve raked in locally. We also factored in each firm’s global transaction revenue, which was self-reported to the trade publication National Real Estate Investor.
The firms that TRD examined — Avison Young, Lee & Associates, Cresa, Transwestern, DTZ and Coldwell Banker Commercial Alliance (CBC Alliance) — have all taken different approaches to tackling the New York market.
Some, like CBC Alliance, have purchased existing firms with the goal of building on a local brokerage infrastructure. But in other cases, existing local firms have partnered with national companies and tapped into their name recognition and financial resources. For example, Sierra Realty, a small local firm, partnered with the Los Angeles-based Lee & Associates and adopted the national firm’s name and model.
Then there are firms like Avison Young, DTZ and Transwestern, which have simply opened New York offices and started from scratch.
“Each firm is coming to New York with a different objective and different plan,” said Peter Hennessy, who runs the New York Tri-State office for commercial firm Cassidy Turley. “Some may be looking to establish a highly productive, although relatively small, office, and others maybe are looking to establish and gain a significant market penetration.”
Real estate professionals said launching or revamping a commercial brokerage in New York often starts slowly.
“Barriers to entry are high in New York brokerage,” said Joseph Harbert, the president of the eastern region for commercial brokerage Colliers International. “[Some of] the new firms that are trying to grow in New York are doing it organically through recruitment of individuals and teams. Historically that turns out to be a long process.”
Hennessy — who was on the launch team for the New York office of the Staubach Company in 1997 — said it took seven years before that office generated $15 million in revenue. But once it did, it doubled that and generated $30 million within two years. (Staubach was considered a success; the firm was bought out in 2008 by Jones Lang LaSalle for $613 million.)
Nonetheless, all of these new firms have serious competition on their hands. Long-entrenched companies like Cushman & Wakefield and CBRE Group dominate the top of the market, and other players, like Colliers and Newmark Grubb Knight Frank, hold tight grips on the market slightly below that.
Yet the lock those long-established firms have on the market often provides an incentive for junior brokers to join the newer firms.
“In the large firms, some people [effectively] have exclusives on market share,” said Jason Meister, a vice president at Avison Young, where he noted that he has greater freedom to pursue accounts than at a more established firm.
But regardless of whether new firms can go head-to-head with market stalwarts right away, they must find a way to earn their keep.
One insider said a firm needs to generate about $150,000 per broker just to keep the lights on. Arthur Mirante, the president of the Tri-State Region for Avison Young and a principal at the firm, pegged the average revenue per broker at an established commercial brokerage in the city at about $300,000, with some making far more, of course.
Newmark— the only firm that publishes its revenue-per-broker statistics — reported earlier this year that its average for 2012 was $489,000.
Below is a look at how the new firms are measuring up in terms of activity and revenue, and what their strategies are going forward.
Avison Young — the largest privately held brokerage in Canada — has made the most aggressive (and costly) plunge into Manhattan real estate of any commercial firm in nearly a decade.
The firm, which opened its New York City office in April 2012, has paid out millions of dollars to develop its local presence. In order to do that, it turned to the Vancouver-based private equity firm Tricor Pacific Capital, which gave the company a $40 million infusion in 2011.
The Manhattan office at 623 Fifth Avenue is just one of roughly 40 Avison Young has launched nationally since 2009. All are part of independent regional partnerships that will be rolled up into the Canadian-based firm once they reach a certain level of stability, said Mirante.
Principals receive a greater financial return once that happens, Mirante said, because they are then entitled to a share in profits for all of the other “rolled up” Avison offices.
Mirante, a former CEO at Cushman, anticipated that it would be another “two to three years” for the New York office to reach that level. Nevertheless, he told TRD that the office is profitable. He said it’s on pace to bring in about $10 to $15 million in 2013, with about half of that coming from leasing and sales commissions. (The balance comes from other services the firm provides, such as loan sales, advisory work and investment banking.)
A review of deals in CoStar, supplemented with deals provided by the firm, amounted to roughly two dozen Avison Young transactions totaling about 250,000 square feet of leases and $208 million in investment sales. That included the firm’s largest completed deal to date this year, for a 56,794-square-foot, 15-year lease inked by law firm Meister Seelig & Fein, which could have brought in a hefty commission of more than $1 million. The firm is also expecting to close its biggest deal of 2013 by year’s end, Mirante said. That’s the sale of the United Cerebral Palsy building in the Flatiron District, which sources said would trade for about $150 million. One source said it would yield an unusually high commission of about $4 million. The firm declined to comment.
However, most of the deals were smaller. And if standard commission rates are applied, the firm will pull in about $9.5 million in total commissions.
Avison, one longtime industry executive said, is attractive to brokers who work at larger firms, but are restricted from canvassing buildings their colleagues represent. Since launching here, it’s grown to 30 brokers and agents. Yet it’s still been a slow process of winning landlord agencies. Today it has just two, including its largest, the 788,897-square-foot 1501 Broadway, which Mirante landed through a relationship with the landlord. However, Mirante has at least two more in the works, he said. By comparison, in the last year, JLL landed about a dozen new agencies.
Mirante expects the Manhattan office to bring in some $80 to $100 million annually in four to five years.
The Los Angeles-based Lee & Associates has done more deals in Manhattan over the past year than any of the other new firms. However, that’s partly because it gained its foothold by teaming up with Sierra Realty — a local player that had a dozen brokers and an active book of business.
Sierra’s two principals, James Wacht and Peter Braus, opened Lee & Associates’ New York office in November 2011, with a modest portfolio of company-owned mixed-use buildings.
The new office, headquartered at 600 Madison Avenue, was bankrolled by senior Lee & Associates brokers throughout the U.S. who own shares of other offices within the company’s national network. To join that network, each firm pays a fee.
Today the New York office has 40 brokers and agents, according to the firm.
Wacht said only about half of the original Sierra team stayed. “Most did not measure up,” he said.
The new brokers were recruited from firms including Grubb & Ellis, where Principal John Cannon worked, and George Comfort & Sons. Wacht said he’s targeting brokers near the end of their careers with “another 10 years left,” as well as younger agents who are at the start of theirs.
Nationally, Lee & Associates and Avison are neck and neck, with both completing just over $7 billion in transactions company-wide, according to data from National Real Estate Investor.
Wacht estimated that the New York office would rake in about $10 to $15 million in total revenue this year. “That is certainly enough for us to be comfortably profitable,” he said.
Some of the firm’s larger Manhattan deals include a 10-year, 42,200-square-foot lease for the financial investment-software developer Vitech Systems Group at 401 Park Avenue South.
CoStar shows just over 200,000 square feet of deals for the firm, but Lee officials said they closed 159 deals totaling 426,000 square feet so far in 2013.
However, the vast majority of the office and retail leases the firm has brokered here since it launched are less than 5,000 square feet, according to CoStar.
Wacht said the firm is not going after mega-deals, and instead is targeting deals between 10,000 and 50,000 square feet.
“I am very happy hitting doubles,” he said.
Cresa has been open in New York since 1989 — far longer than any other firm on this list. However, last year the tenant-rep company brought on industry veteran Mark Jaccom to overhaul its local presence.
Jaccom, who has butted heads with a number of his colleagues throughout his career, spent 14 years at Studley and then at the helm of GVA Williams when that company became part of Colliers in 2006.
Sources say he was “eased out” of Colliers. For his part, Jaccom said he was “miserable over there.”
He added, “there were too many rules. There was the issue of who is yelling at who,” he said. “It is not something I enjoyed, but … I took a mom-and-pop company and got them a brand name.”
Now Jaccom is trying to turn an under-the-radar firm — which does few deals but has some top clients, like Amazon — into a major New York player too.
Jaccom — the CEO and principal equity holder in the Cresa New York office (he has a controlling stake) — called landlord-rep business the “dark side.”
Since joining the firm in July 2012, he’s doubled the number of brokers to 20 in the Manhattan office at 450 Lexington Avenue.
Cresa confirmed deal information for about 150,000 square feet of transactions over the past year. (Although company officials said the figure actually topped 200,000 square feet when factoring additional deals that they cannot reveal because of confidentiality agreements.) Jaccom estimated office revenue at about $10 million for 2013, and TRD estimated Cresa’s leasing commission at about $3 million based on deals in CoStar. In addition, about 30 percent of the office revenue comes from project management and consulting fees, Jaccom said.
But Jaccom predicted that would soon change. He said next year, the office is expecting to close a few deals between 250,000 and 300,000 square feet each.
The Boston-based Cresa, which did $7.8 billion in business company-wide in 2012, according to NREI, has 54 offices in the U.S. and four in Canada. The New York office, like the others, is independently owned, and pays an annual fee to Boston for administration and other expenses, Jaccom said.
Jaccom and Marcus Rayner control about 60 percent of the New York office’s shares.
The other 40 percent has been (and will be) allocated to other senior brokers as they hit certain dollar targets.
In addition, each partner gets a cut of the annual office profits, which Jaccom said helps in recruiting brokers.
As for the competition, he said many of the second-tier firms in New York, like Colliers or DTZ, are in a tough position trying to compete with the main four national firms: CBRE, JLL, Newmark and Cushman.
“They are all trying to grow and one day be CB or JLL. But I don’t believe they have the dollars to do that,” he said.
But he said Cresa, like his former firm Studley, has a niche because it’s a tenant-rep firm.
“We are competing head-on with Studley,” said Jaccom, who had a falling out with senior management before leaving that firm.
Patrick Robinson is an old hand at launching real estate firms. His latest has been creating and ramping up a New York office for Transwestern, the 35-year-old, Houston-based full-service firm.
Robinson, the president of the Northeast region for Transwestern, opened the Manhattan office, which is located at 400 Park Avenue, in February 2011. He told TRD his staff is on pace to bring in about $5 million this year.
The firm has, however, ramped up at a slower pace in New York than rivals like Avison Young and Lee & Associates. Since 2011, it’s grown from four to 19 brokers and agents in Manhattan, firm officials said. It also has four principals, including Robinson.
“We are going to grow in a methodical way, to reach profitability sooner rather than later. It looks like 2014 is going to be our break-even year,” said Robinson, who (along with Hennessy) was also on the team that launched Staubach in New York.
Transwestern’s New York office has completed about 183,000 square feet of deals in the past 12 months, company officials said. It also manages and leases about 2 million square feet in New York for the Metropolitan Transportation Authority, as well as for property owner Brause Real Estate and others. (Nationally, the company reported $6.2 billion in transactions in 2012, according to NREI.)
David Brause, a principal at Brause, said the decision to hire Transwestern to represent 254 West 31st Street was prompted by the fact that he’s known Transwestern principal Lyndsay Ornstein for years. “When we are making a decision, it is all about the people,” he said.
Robinson touted the fact that Transwestern is a privately held company, owned by the employees, with no outside investors to report to.
The office has no specific expansion plan: “There is absolutely no growth target or revenue or number of people,” Robinson said, when asked about the company’s planned benchmarks.
“There is no goal to be big. The goal is to be highly relevant — and to be profitable.”
DTZ’s Manhattan office has been ramping up its head count over the past year — even as the firm began the process of breaking off from its parent company, a public engineering and property firm known as UGL.
Unlike the other new firms included here, DTZ wholly owns its local offices.
The firm’s Manhattan office — which opened in 2008 — added 11 new brokers and agents over the past year, bringing its total brokerage head count up to 39.
Yet despite beefing up its staff and its affiliation with the Australia-based UGL — a massive, fully integrated firm that puts DTZ on par with global companies like CBRE, JLL and Cushman — DTZ has not gained much traction when it comes to office leasing in the New York market.
The firm handled just 93,000 square feet of deals in Manhattan in the last year, according to data in CoStar, which is most certainly an under-count. Using a standard commission formula, those deals would bring in about $2 million in revenue.
However, David Gialanella — who was tapped in July to lead the New York Tri-State region for the Los Angeles-based company — said those revenue numbers may be deceiving.
“You can’t look at us as a local brokerage company,” he said. “Our entrance into this market is part of a global strategy.”
Globally, the firm reported brokering a massive $25.8 billion in transactions, according to NREI.
Gialanella, a former New Jersey CBRE executive, said that in addition to its Manhattan transactions, the local DTZ office, which is located at 1271 Sixth Avenue, also generated revenue through its involvement in deals outside of the city and country.
“That business starts in New York and goes elsewhere, and the revenue clears through New York,” Gialanella said. Today local transactions comprise about 25 percent of the revenue for the office, but that should increase in the coming years as the firm moves from exclusively tenant-rep business to representing landlords, Gialanella said.
Dirk Hrobsky, a managing member of DTZ’s New York office, said the office was “nominally profitable.”
“We have been very smart in managing our spending,” he said.
In the Americas, the company only expects to earn about 13 percent of its total $1.1 billion in revenue for fiscal year 2013, or $143 million, from its brokerage, the company reported in October. The balance will come from facilities management.
But there are changes afoot that will impact the New York office. Last month, DTZ replaced its global chief with Tod Lickerman. The former JLL executive will be at the helm as the company spins off into an independent public firm, a process that’s slated to be completed by 2015. “We have about two years to aggressively grow … and get as favorable a valuation of the real estate group [as possible],” Hrobsky said, referring to the initial IPO.
Richard Selig and Peter Sabesan have led their brokers through two significant changes over the past three years.
The two were longtime principals with the local brokerage Hunter Realty Organization. Then, in January 2010, they purchased the franchise rights for Coldwell Banker Commercial in New York City from the global public company Realogy. CBC, according to NREI figures, did $6.8 billion in transactions nationally last year. (The duo declined to disclose the purchase price.)
“[We wanted] a national presence so our clients could have a one-stop shop in the country,” Selig said, speaking from his office at 1430 Broadway.
The pair did not keep exclusive ownership of the franchise for long. In August 2012, they sold their franchised office to the Midtown-based private equity firm Waterfall Asset Management, which kept them on as principals. Waterfall renamed it Coldwell Banker Commercial Alliance and went on to buy (or open) three more offices nationally — one in Denver and two in California. And it now has plans to open offices in Dallas and Miami.
Each CBC Alliance office is a separate partnership, but Waterfall is the majority shareholder of each office. The national CBC Alliance office, which is headed by Obie Walli, is based in Waterfall’s Midtown headquarters.
Selig said the duo sold to Waterfall because the private equity firm had the financial resources to turn the brokerage into a force in New York. “And there is a lot of money behind us now,” he said. “We have better packages to offer [new hires].”
In addition, as a hiring and retention incentive, the company provides brokers an option to gain an ownership stake in the broader Waterfall business. Walli called that the firm’s “secret sauce.”
Since Waterfall took over, Selig said the firm has hired about a half-dozen brokers, although others have also left, so the headcount has remained somewhat steady. As of last month, there were 23 brokers and agents, according to DOS data.
One of those hires, Steven Pressler, formerly of Promenade Real Estate, brought with him the agency to high-profile buildings like 720 and 724 Fifth Avenue in the Plaza District.
Selig said the firm, with Waterfall’s backing, plans to hire an additional 10 to 15 brokers over the next year and add more building agencies — either though individual hires or buying smaller firms. That should boost transaction revenue at the full-service commercial firm from what TRD estimated is $4.5 million for the past year.
Walli said the company, like Lee & Associates, is targeting smaller deals, between 5,000 and 40,000 square feet.
“We are not in the business of chasing elephants,” Walli said.