Not only is the era of windfall sellouts over for independent real estate firms in brownstone Brooklyn, but community storefronts may be in for tough times as the economy falters and outer
borough properties take a hit.
As prices in Brooklyn have leveled off, and in some cases dropped, the powerhouse firms that were once gobbling up their independent counterparts have slowed their acquisitions. Yet the competition they’ve created could make it harder for the remaining independent firms to compete going forward, especially as they have smaller budgets.
Diane Ramirez, the president of Halstead Property, one of the firms that has expanded in Brooklyn in recent years, remembers how small- and mid-size firms folded in the 1990s “because they couldn’t pay the bills” when things got rocky.
While Ramirez, whose firm is headquartered in Manhattan, was decidedly bullish on today’s market, she said, “in a challenged market, I would say the most vulnerable
are small and mid-size firms.” She noted
that profit margins are strong now, but the future “has to do with how much they can control the bottom line, and the expenses and the income.”
“I don’t think we’re in that situation
yet,” she said, referring to tough times. “Certainly, we will have to see where the marketplace goes, but the most vulnerable are
the small and mid-size [firms] because
properties will stay on the market a bit long,
and they have to continue advertising and [paying] staff and that sort of thing. It’s
more challenging.”
William Ross, who sold his Brooklyn firm William S. Ross Real Estate to Halstead in 2004 and is now executive director of sales at the larger firm, said established independent firms weather downturns better than newer startups.
“If you have a storefront, rents can be pretty big, and advertising is an enormous expense. If the velocity of sales isn’t strong enough, you can’t generate enough income,” he said.
Ross said firms have no choice but to advertise any exclusive listings they get. “At a time when sellers are fearful and buyers are demanding, I think sellers might gravitate toward firms with deeper pockets that could help them more,” he said. “Whether that’s true or a misconception, it doesn’t really matter if the sellers believe it.”
Although the larger firms tend to snag exclusives on many of Brooklyn’s newest multi-unit developments, independent brokers still largely rely on personal referrals and handle single co-op and condo sales and rentals.
Some of the small firms are now offering lower commissions in order to compete with Corcoran, Prudential Douglas Elliman, Halstead and Brown Harris Stevens, to name some of the Manhattan-based firms that have expanded in Brooklyn in the last few years. While few independent brokers are willing to publicly declare how low they’ve gone on commissions out of fear that prospective clients might expect to begin negotiations at that figure, many privately concede they have dropped to as low as 3.5 or 4 percent. The large firms typically charge 6 percent.
Allen Barcelon started Boerum Hill Realty three years ago and has just two agents working for him out of a storefront on Atlantic Avenue near Smith Street. He said business is still relatively good.
After Halstead Property’s high-profile acquisition of Harbor View Realty last fall, someone from the firm approached Barcelon about buying him out, he said. However, he decided he wanted to stay small.
“I’m not convinced I need to go there,” he told The Real Deal. “I’m not making a ton of money, but I’m really happy being able to support myself.”
Barcelon has not had any buyout offers since Halstead’s, a reality that might have been different a few years ago when the
big brokerages were in aggressive expansion mode.
Nearby, Pietro Costa opened Vespa Properties on a stretch of Court Street that’s home to at least three other independent brokers, as well as offices for Halstead
and Elliman.
Costa, an artist, and his business partner, Denver Butson, a poet whom he worked with at another independent Brooklyn brokerage, opened Vespa in January 2007.
Costa noted that the wave of buyouts that swept through Brooklyn “happened when the market was booming.
“I think were they making those decisions today, they might not have done that,” Costa said.
He said that he and Butson did not start Vespa hoping for a big buyout down the
road and have not been approached about selling. But he said they would not consider selling anyway, as they started an independent firm because they wanted control over their work hours and business.
Vespa offers a stark contrast to the corporate brokering of the big firms it competes with. Alongside its co-op and condo listings, it hosts musical performances, art exhibits and poetry readings at the office.
Costa described working for a large corporate firm as being “like trading stocks on Wall Street.”
Vespa employs three agents and an administrative assistant in addition to the two partners. The agents had no prior real estate experience when they were hired.
Frances Kipito, a broker for Vita Realty, another independent firm on Court Street, said while they still are getting customers in to their open houses, buyers are more hesitant to make the decision to buy property. She also said although most of Vita’s business comes from local Brooklyn residents and referrals rather than responses to advertisements, competing with the advertising power of larger firms can be difficult.
“Advertising costs are very high, of course — that’s a given,” Kipito said, explaining that the reality holds true no matter what market conditions are like. “Any larger company will have more advertising dollars than a small broker.”
In the past, firms generally could count on getting between 3 and 6.5 times their EBITDA (earnings before interest, taxes, depreciation and amortization, a measure of annual cash flow) if they were bought out. According to Real Trends, a real estate data and analysis firm, this figure has dropped to around 2.5 to 3.5 percent.
Marilyn A. Donahue, who sold her self-named Brooklyn Heights firm to Elliman four years ago, said: “I think they would have paid more before than now. Before, they needed the bodies and the information.”
Some say that after poaching agencies over the past few years, the bigger firms now have the foothold they need and that they aren’t willing to risk further expansion right now.
One independent Brooklyn broker, who declined to give his name, said he was approached about selling his firm several years ago. But he admitted that his business has dropped about 30 percent since 2004 and said he doesn’t expect it to pick up any time soon, particularly because he can’t afford the same kind of advertising that his bigger competitors can.
“We’re very hands-on,” he said. “We see everybody. It’s probably a way of doing business that’s doomed … I can’t run a full-page ad in the New York Times.”
The broker pointed out that while business is down from several years ago, he is still turning a profit. He said he would still consider selling if a buyout offer was sufficient and he could quit, rather than working for a new employer. (Many contracts for buyout deals require principals of the boutique firms to work for the larger company for two to five years.)
Still, Janet Guerra, associate broker at Brownstone Realty in
Cobble Hill, said that in some ways, smaller firms are better positioned to get business during a slowdown, because clients believe they will get more attention.
“They [smaller firms] have actually been busier than ever getting listings,” Guerra said. “We haven’t really felt [the downturn].”