LA resi brokerages shop till they drop

Douglas Elliman and Pacific Union have been buying up smaller firms to control a larger piece of the residential market, but its the latter’s parent company, Fidelity, that’s worrying insiders

(Illustratiom by Keith Negley)
(Illustratiom by Keith Negley)

From TRD LA’s fall issue: 

In a city where new development projects switch brokerage hands at a dizzying pace, competition is fierce. Case in point: Douglas Elliman just lost the $1 billion Metropolis condo project after it struggled to deliver sales throughout its four years of control. Now, The Agency has the reins.

Los Angeles’ residential brokerage scene has only gotten more cutthroat as firms based outside the city enter an already crowded field, hopeful that they’ll land a generous helping of the city’s prosperous market.

“Everyone feels that L.A. is safe — even when the market went down, we were the first to pop back,” luxury broker Jade Mills told listeners at The Real Deal’s Sept. 14 industry event. “Confidence level is driving everyone here,” Mills said.

Everyone, it seems, including out-of-town power players. Just this summer, the industry saw two major brokerages test that confidence, solidifying their presence in the Southern California market.

Big-time East Coast firm Douglas Elliman scooped up the smaller Beverly Hills-based Teles Properties in July, and the Bay Area’s Pacific Union expanded its footprint down south with the purchase of Partners Trust a few weeks later, hot on the heels of acquiring the John Aaroe Group. Pacific Union, which is majority-owned by Fidelity National Financial, has said both firms would eventually operate under the Pacific Union brand.

Now, there are rumblings that another L.A. residential player Fidelity has a stake in, Brentwood-based Gibson International, will change its name to Pacific Union, leading insiders to question whether Fidelity is attempting to control the market in a monopoly.

“If I was their competition, I would be calling my lobbyist in Sacramento and asking they look into this,” a luxury broker said on the condition of anonymity.

Despite the attention-grabbing headlines, however, the rampant brokerage consolidation is not expected to have a big impact on the day-to-day work of brokers.

“Make no mistake: These individual agents are stand-alone entities for the most part,” said Paul Habibi, a UCLA Anderson School of Management professor. “When you’re an agent and you’re hanging the Partners Trust shingle, granted, you’re a representative of that brokerage, but you’re pretty much an entity for yourself and looking out for yourself.”

Stephen Kotler

Tami Pardee of Halton Pardee + Partners agreed, and said that individual agents and their client relationships have more value than the brokerage name they’re operating under at a given moment.

Others, such as Jeff Hyland of Hilton & Hyland, welcome the consolidation, as it means there are “fewer players in the sandbox” for his firm to compete against.

And it is a competitive market indeed. As of the second quarter, there was only 4.5 months of supply on the market, down from 5.9 months in the year-ago quarter, according to data compiled by Douglas Elliman. Active listing inventory dropped a little over 4 percent to 2,732 in the same period. Meanwhile, increasing interest in the market sent the number of transactions up roughly 25 percent year over year to 1,806 in the second quarter.

The luxury market proved even more competitive, with listings averaging only 84 days on the market — a 27 percent drop from the 115-day average in the second quarter of 2017.

Against this backdrop of a red-hot resi market, TRD took a deeper look at these acquisitions, which  have more than a few industry leaders raising their eyebrows.

Elliman’s big buys

Douglas Elliman’s August acquisition of Teles Properties was not entirely surprising to industry leaders who’d followed the firm’s move west. When the company entered Aspen’s wealthy market in 2014, it did so by acquiring the premiere brokerage in the posh area, Joshua & Co.

After opening its first L.A. office in March 2014, with 65 agents and brokers, at 150 El Camino Drive in Beverly Hills, Elliman took time to get to know the market and assess the competition.

Rumors circulated that the firm was shopping for L.A. brokerages to compete with Compass, which launched in L.A. in 2015 after deepening its pockets with an additional $50 million in funding slated for expansion. But Elliman disputed that characterization.

“We were actually in the position that we weren’t looking to acquire a company,” said New York transplant Stephen Kotler, who is the CEO of Elliman’s Western Region. “I was introduced to [Teles Chairman and Chief Executive] Peter Loewy, and as the talks continued we both saw a perfect opportunity for us at Elliman to speed up our expansion in California and to find a company with the same DNA Elliman has.”

Loewy, another East Coast transplant, was running the operation at Teles Properties alongside partners Sharran Srivatsaa, Peter Hernandez and Evan Ageloff. He started his career as an attorney and joined Teles as general counsel in 2009. He was later promoted to his current role of CEO and chairman in 2010.

Teles, albeit a much smaller player, had substantial market presence beyond the City of Angels. The Beverly Hills firm owned 19 offices across California and Colorado, operating with roughly 500 associates prior to the acquisition. The purchase allowed Elliman access to a fifth Colorado office, in Boulder, complementing the offices it already had in Aspen and Snowmass Village.

Loewy said his firm wasn’t looking to be bought, but he felt he found the “right partner” in Elliman.

“When we were approached by Elliman, it felt like it was the same company, the same culture, and that we could expand to our greatest desires,” he said. “We were expanding pretty quickly with Teles, but we weren’t able to go on the other coast.”

After the acquisition, Elliman named Kotler as president of the firm’s Western Region, while Teles founder Hernandez stayed on as president of the brokerage in California. Other executives stayed on with “integral roles,” said a release. Teles associates will also remain in place and continue to operate in the firm’s 19 offices, which will change over to Elliman branding in the next couple of months, Kotler said.

Despite raking in extra offices, Elliman’s agenda isn’t slowing down.

The company launched its 21st office, in the recently renovated Malibu Sands, on Sept. 7. According to its website, the firm already has 60 listings in the prosperous city.

Most recently, the company expanded its East Coast reach with the acquisition of Boston brokerage Otis & Ahearn on Sept. 29. The latest purchase will provide Douglas Elliman with four offices in the increasingly condominium-rich metropolitan city. The sale, which closed this month, increased the firm’s foothold to 117 offices nationwide and 7,000 agents across the country, according to company statements.

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Sailing down the coast

Coming in from farther north on the coast, but with eyes on the same market, was Pacific Union.

The Bay Area’s leading brokerage made its first splash into the warmer waters when it acquired the smaller, high-end Los Angeles brokerage John Aaroe Group in December 2016. At the time, John Aaroe had nine offices with roughly 400 associates. Pacific Union was a much larger animal, tallying 28 offices with over 700 agents.

The deal seemed promising for John Aaroe Group, led by namesake real estate veteran John Aaroe. Press releases from both firms said the companies would operate as two different entities and retain management and associates of each brokerage.

“The John Aaroe Group brand has invaluable equity in the L.A. market, as Pacific Union’s does in theirs,” Aaroe said in a blog post at the time of the acquisition.

With Aaroe under its belt, the Bay Area brokerage led by Mark McLaughlin now had 1,100 real estate professionals across 38 offices and ranked in the top 10 among the nation’s leading firms, according to a release, which also stated that together the two raked in $10.5 billion in annual sales in 2015.

Mark McLaughlin

Today, nine months later, the promised “locally focused management” is nowhere to be found and the original Aaroe name is en route to rebranding, leading the acquisition playbook to be called into question by real estate professionals. Its founder, Aaroe, announced his retirement a mere 10 days after his firm closed its 10th location, in Calabasas.

The fate of Aaroe’s company now lies in the hands of a San Francisco team —something many people think is cause for concern. “He was a well-known local brand, but now that it is Pacific Union, will that local management disappear?” Hyland asked. “Will it now just be a large corporate organization?”

Habibi of UCLA said it’s likely largely a cost-saving measure. “Consolidation has been known to streamline cost structure,” he said. Anything that works to leverage marketing and technology, as well as decrease unnecessary overlap, helps a company achieve economies of scale, he explained.

Pacific Union, it seems, is working on decreasing any unnecessary overlap. Some claim the firm was behind the Calabasas closure after the office failed to produce in its short-lived existence. Moving Gibson’s operations to a former John Aaroe Group office would certainly decrease some overlap, as well.

Partners Trust rebrands

Yet before the John Aaroe saga could come to a close, Pacific Union proved its appetite wasn’t satiated, acquiring another boutique brokerage firm over the summer.

Partners Trust, a Beverly Hills firm led by Nick Segal, F. Ron Smith, Richard Stearns and Hugh Evans III, had roughly 240 associates across seven offices prior to the acquisition, which was announced in August. The company has closed approximately $2.6 billion in sales in 2016 and over $10 billion since its inception in 2009, according to its website.

Once again, a Pacific Union acquisition release said, “John Aaroe Group and Partners Trust will continue to operate as separate brands with their current leadership in their respective offices.” But emailed statements from Pacific Union on Sept. 8 have said otherwise, announcing that both John Aaroe Group and Partners Trust will eventually rebrand as Pacific Union.

The combined firm, including the John Aaroe Group, expanded the brokerage to 47 offices across California with over 1,400 real estate professionals. The release projected 2017 sales volume in excess of $15 billion.

The elephant not allowed in the room

The conversation on acquisitions in L.A. would not be complete without discussing Fidelity National Financial.

With the 2014 purchase of a 66 percent controlling stake in Pacific Union, the title insurance company paved the way for an ownership stake in other premier firms in L.A. including the Mark Company, John Aaroe Group and Partners Trust.

Fidelity reported $183 million in revenue from Pacific Union in 2015, according to public disclosures. That was before Pacific Union’s shopping spree.

The firm is the nation’s largest title insurance company through its title insurance underwriters — Fidelity National Title, Chicago Title, Commonwealth Land Title and Alamo Title — which collectively issue more title insurance policies than any other title company in the U.S., according to financial statements.

Now, rumors are circulating that Gibson International — which Fidelity also owns a controlling stake in — will also rebrand to Pacific Union. The company is already planning on moving to a John Aaroe Group office in Brentwood, an agent with the company confirmed. Insiders are saying it will only be a matter of months before the Gibson name is changed to Pacific Union.

Leaders in the industry are noticing Fidelity’s growing presence and are starting to look at the broader implications.

Smaller, independent brokerages that don’t own their own escrow companies usually turn to title companies, like Fidelity, for their services. Title representatives often show up at brokerages’ meetings and offer helpful information to agents — perhaps a new mobile application that could benefit their clients, or even something as basic as a presentation on title logistics. In return, representatives hope to gain business from such agents.

Now, as Fidelity gains traction in the area, heads of competing brokerages are starting to turn away from these title representatives to avoid fueling their practice. One industry leader, who wished to remain anonymous, said he has stopped allowing Fidelity to speak at such meetings.

On the other hand, there are the larger, corporate brokerages that own their own title companies, such as Coldwell Banker. A problem may arise when the listing agent’s title company of choice differs from that of the buyer’s, sources say.

“The question is, how much pressure can Fidelity — owning 70 percent of these three companies — apply to agents to use them instead of someone else?” an insider said. Although illegal in the state of California, sources say there are “soft” ways a broker can coerce an agent to work with Fidelity.

“At some point the bureau in Sacramento will start investigating the cross-branding and ownership by Fidelity,” a source said. “It’s anti-trade and [goes against] antitrust laws.”

Fidelity declined to comment for the story.