Running a small residential real estate company in Manhattan was always a tough proposition, but increasing consolidation has added to the challenge.
In the current market, characterized by the two biggest firms buying everything in Manhattan that isn’t nailed down, a tough business is tougher, say the smaller players in the multibillion-dollar market.
Business costs are rising, and while boutique firms tout their personalized service, they face challenges in terms of public perception, the ability match the advertising reach of their larger rivals and staying on the cutting edge in terms of technology.
Barbara Fox, president of Fox Residential Group, which has 40 agents in Manhattan, plays up the notion that boutique agencies have top management that is able to stay on top of all deals and offer better service, unlike bigger firms.
“I not only do my own deals, but I’m aware of and on top of almost every single deal that goes on in the office at any one time, and that’s really the difference between a large firm and a small firm,” said Fox.
But Fox acknowledges she would not want to start a small brokerage today, 15 years after her effort.
“I’m sure there are firms popping up all the time, but it’s very hard for people to get a foothold in the industry now,” she said. “It takes a long time to rev up, so you have to have money to cushion you.”
Steve Murray, founder of research firm RealTrends, said that nationwide, 300,000 more brokerages have joined the market in the last few years, bringing the total to 1 million brokerages.
“For everybody in the business, it is harder now, with brokerages paying out more commissions to keep good brokers and business costs going up,” he said.
David Michonski, chairman of Coldwell Banker Hunt Kennedy, transformed his company from one of the smaller firms to one of the city’s largest over an eight-year span. He said growth was the only option in the nation’s most competitive market.
Smaller companies are often burdened with all the costs of larger firms, he said. For example, Michonski’s company uses one concierge and a public relations director for an agency with over 300 agents today, just as it did years back when it had only 75 agents.
More importantly, small companies face the expectations of agents who demand the same resources provided by larger competitors.
“There’s the constant comparison with the large firms and you have to have the resources to keep your agents, unless the agents don’t want to be on the cutting edge, and there are fewer such agents in the business today,” said Michonski.
Perception can also put smaller firms at a disadvantage, especially when new ambitious agents are looking to enter the business.
“I think the biggest disadvantage is the perception by the industry and the consumers,” said Douglas Wagner, president of Benjamin James Associates, which has around 85 agents. Does it affect the bottom line? “How can it not?” said Wagner, “because the grass is always greener in a big firm with more name recognition.”
Over the past decade, technology costs have risen, and that has increased pressure on smaller firms, even though some view technology as leveling the playing field.
Michonski said many real estate executives now spend up to 50 percent of their time – and massive amounts of money – on technology, particularly their online operations. “I think it’s the primary reason why the small firms have sold out and moved on,” he said, adding that his company estimated about $500,000 worth of technology expenditures were involved in its acquisition of the residential sales division of Charles H. Greenthal last summer. “We just ripped up everything and started over,” he said. “People just didn’t make those investments.”
Many other small firms, however, have made the necessary but costly investments in technology. Barry Dulany, co-owner of Brooklyn Heights-based Harborview Realty, a high-end boutique firm of 15 agents, said there was no need for computers and everything was done on paper when she started out 25 years ago. But seven years ago, she computerized her operations, and has regular technology expenses keeping her systems up to date.
Fox also brought in a full time technology person to run her computer system five years ago, when her company’s former driver switched to overseeing its technology. “Keeping up with technology is the hardest part, and we’ve launched the fourth incarnation of our Web site. You have to keep going on it,” Fox said.
But Wagner thinks technology would pose more problems for a larger operation than a small one, given the sheer volume of their operations.
Michonski would probably agree. He said his company has spent about $700,000 since last summer on computer system upgrades and other technology enhancements.
Many boutique firms also face pressure because they focus on the small, high-end segment of the market, where competition is especially fierce. That’s especially true when the luxury market takes a nosedive, as it did two years ago. Even last year, Michonski said that of the 6.2 million apartments sold in New York City, only 30,000 were in the high-end category, carrying multimillion dollar price tags.
Small firms also face additional pressure from increased consolidation, with the country’s second largest residential brokerage, HomeServices of America, announcing plans last summer to start up in Manhattan by the end of 2005.
In other parts of the city, things might be easier for boutiques firms. Dulany noted that Brooklyn hasn’t seen the consolidation wave that has gripped Manhattan. In the Bronx, Linda Stephens, manager of an ERA Champions Realty franchise with about 40 agents, said it is easier to run a small brokerage in the outer boroughs than in Manhattan, where most of the clientele are “corporate” types who operate like “sharks.” She said she is not worried about rising overhead because her revenues are keeping pace with costs, she said.
To start from scratch today, Michonski said his company would have to raise at least $3 million, compared to the $1 million it started with in 1996. The market today carries greater risk, greater cost of capital, and allows less room for mistakes and greater chance of going under.