Q & A with Sperry Van Ness CEO Kevin Maggiacomo

After slowing the pace of its aggressive expansion strategy in 2009, commercial brokerage Sperry Van Ness is retooling for 2010. After some hard work, its restructured franchise model is fully in place and the company is waiting and watching for a market recovery.

Of course, CEO Kevin Maggiacomo knows it might get worse before it gets better. With a leaner business model, he bets Sperry’s 15 Florida offices will weather the storm and emerge from the tempest stronger.

The strategy appears to be paying off in South Florida. After a slow first and second quarter, deal volume is beginning to pick up. In August, Sperry, a franchise operation headquartered in Southern California, sold 103 condo units for $6.15 million as a bulk package. The seller, West Palm Beach’s Grand Isle Condo, was facing foreclosure. In October, Sperry sold the former Marketronics Building in the Sawgrass International Corporate Park in Sunrise for $1.825 million.

The Real Deal caught up with Maggiacomo to get his opinion on the commercial market debacle, the outlook for recovery, how his firm has adjusted and what brokers must to do to survive in 2010.

Most people expect real trouble for the commercial market in coming quarters. What’s your take?

The market has already gone through a dislocation. Sales volume went from $500 billion in 2007 to $140 billion in 2008, and the industry’s run-rate implies an additional 78 percent decline from 2008. Moody’s CRE pricing index has fallen 36 percent, and many assets have declined much further in value. National vacancy rates for all core product types now exceed 14 percent. This is what I would call a bloodbath.

Should we expect to see improvements in the next quarter then? Or will it get worse?

The preceding does not mean that things can’t get worse, because they can. Some $550 billion of commercial mortgage debt is scheduled to mature over the next two years, most of which was originated in the market’s glory days, was aggressively underwritten, and can’t be refinanced today. “Extend and pretend” is in play, where the bet is that the economic principles will improve somewhat during the extension period, thereby allowing for a refinance when conditions improve and the credit markets unfreeze a bit.

Sign Up for the undefined Newsletter

By signing up, you agree to TheRealDeal Terms of Use and acknowledge the data practices in our Privacy Policy.

Will the “other shoe” drop?

While this strategy has been dubbed a stay of execution, and certain distressed assets will eventually have to be liquidated, the tactic is key to minimizing further dislocation. I don’t see the other shoe dropping, and Treasury providing lenders and the CMBS market with a runway. Things could get worse, but I don’t see a significant decline in values over and beyond that which we have already experienced.

What trends will we see in the commercial market in the months ahead?

First, we see sales volume steadily increasing. There now exist some tremendous buying opportunities in the commercial real estate space. Smaller deals in the $1 million to $5 million range are transacting, are financeable, and have fallen by an average of 40 percent from what they cost in the first half of 2007, when the market reached valuation highs. If an asset makes sense for an investor based on location, product type, the fact that some sort of operational redundancy exists, that asset is a buy provided a longer, five- to seven-year hold is palatable. There are indications that reality is setting in for sellers, the cap gap is narrowing, and we will see an improved ratio of offerings to closings in the coming months.

How is Sperry Van Ness adjusting its strategy? What changes have you made or are you making?

We had a sustainability edge, given that the majority of Sperry Van Ness offices operated as franchises, but we still owned corporate stores. In the fall of 2007, before the market had significantly declined, then-President Jerry Anderson, co-founder Mark Van Ness, and our executive team predicted a major bloodbath and a significant decline in volume and values. We called for a complete restructure of our business, which included the sale and subsequent franchising of our corporate stores. We are now a pure franchise organization. We operate our business with 68 percent less in operating expenses, have a scalable, variable expense model, have zero debt, cash reserves, and are hitting our margins.

What will it take for commercial brokers to survive in 2010?

The commercial real estate broker today needs to recognize the need to change their approaches, throw out the old playbook, and embrace this new and emerging market. For some, this might mean change in strategy and a new focus on smaller, $500 million to $2 million deals.