The Big Reshuffle: Midsized Firms Feel More Pressure Than Ever


It felt like just an ordinary day until an email came in from Eastern Consolidated CFO Peter Takiff at 5:03 p.m.: “We will have a company-wide meeting tomorrow morning at 10 a.m. on the 10th floor. See you then, thanks.”

The phones of Eastern Consolidated agents, brokers and staffers started buzzing. What was going on? Many speculated it would be the announcement of an Eastern Consolidated acquisition.

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Thirty minutes before the company-wide meeting on Friday, June 15, Eastern Consolidated co-Founders Peter Hauspburg and Daun Paris dropped a bomb in a principals-only meeting—they were shutting down the company as of the end of July. They reiterated the news in the company-wide meeting to the shock and disappointment of everyone.

The reasons they gave: a combination of a decline in the middle-market, they were unable to get a deal to sell the company without strings attached and they personally wanted to pack it in, sources said. One of the sources added: “I think the biggest one was they were done. They wanted to move to the next chapter in their life.”

As of last Friday, 90 percent of the 100 sales agents and 40 salaried staffers had said their final goodbyes, with many wheeling out suitcases with their belongings.

While the 37-year-old Manhattan-based full-service commercial real estate brokerage’s retail and capital markets divisions had been earning revenue on par with their 2017 numbers, the performance of the investment sales division was down, commensurate with the rest of the market, with “no clear indication of when conditions will improve,” Paris, the president, said in a prepared statement in mid-June. As Hauspurg, the chairman and CEO, told CO at the time, the climate for mid-sized firms focused on the middle market is “not getting any better.” (The Eastern co-founders declined to comment for this article.)

Unquestionably, the number of investment sales transactions is continuing to drop in New York City from 2016. There were 3,222 such deals in all of 2016, 2,756 in 2017 and 1,131 as of June 19 this year, according to data prepared by Ariel Property Advisors for Commercial Observer. For investment sales under $50 million—which represents the bulk of the city’s transactions—there were 3,067 deals in 2016, 2,652 in 2017 and 1,090 in 2018 as of mid-June. In terms of dollars, excluding June, the number of citywide investment sales totals $16.5 billion this year. For all of 2017, the number of trades totaled $31.2 billion.

“We are in a correction that began in 2016, following a record year. What we are seeing is major pricing resistance and little capitulation on behalf of sellers,” said Ronald Cohen, the chief sales officer at the mid-sized investment sales brokerage firm Besen & Associates. “This is the primary driver behind fewer transactions, made more acute now in a rising interest-rate environment.”

And with investment sales being depressed, some real estate pros said that mid-sized firms with a focus on New York City could face a similar fate as Eastern Consolidated.

“The market is absolutely stressed now,” one broker said on condition of anonymity. “[The Eastern situation is] a sign of that. Companies that focus on this [middle] market…I’m sure those companies are struggling [although] no one would tell you that.”

Meanwhile, there have been a number of other dramatic moves at similarly sized firms this year, including the recent announcement that RKF is being sold to Newmark Group, and MHP Real Estate Services selling off a large chunk of itself to Banyan Street Capital.

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THE BIG SQUEEZE: Due to a host of issues Daun Paris and Peter Hauspurg, the co-founders of Eastern Consolidated, announced that they will be closing up shop at the end of July.

“I really feel like the whole industry is being disrupted with the smaller companies closing and some of the midsize companies being acquired by larger ones,” said James Famularo, a senior director and principal at Eastern Consolidated on the retail side until this Monday. He pointed to Amazon (AMZN) as a factor. As consumers shop online, fewer retailers are taking spaces, which in turn make New York City buildings less valuable and building owners then less inclined to sell them. “That’s a huge part of this,” Famularo said. “The other part is minimum wage going up…so it’s scaring restaurant owners” who are opting out of the business.

While only Eastern Consolidated executives—not RKF or MHP top-dogs—pointed to market conditions as an impetus for their decision, the firm shakeups come at a tenuous time in the real estate market.

“The market hasn’t found its equilibrium yet,” one broker said. “The transactions you’re seeing are on a high-end scale. The $1 million to $30 million market is really stagnant right now, and that’s what keeps brokerages like Eastern Consolidated going. The income is slow and not steady. You can’t forecast the future.” This broker expects the market to “hit the bottom” in “maybe a year or two.”

One of Eastern Consolidated’s issues is that it’s top-heavy with a lot of senior and young agents with few in the middle. One broker with knowledge of Eastern Consolidated’s business said that 80 percent of the income there comes from 20 percent of the brokers. And the majority (a couple of sources said close to 60 percent) of its 100 sales agents and brokers generated zero income in the last 18 months. (The firm also has 40 salaried staffers.)

There is only so long an agent or broker doing no business can remain at a company as the cost per desk can range from $65,000 to $200,000 depending on the platform. One source said that each desk at Eastern Consolidated is expected to earn a minimum gross of $250,000 before the firm-agent split.

At the 26-person GFI Realty Services (22 on the sales team and four support staff), which does investment sales, commercial real estate financing and retail leasing in the New York metro area, the desk fee is about $75,000, said Michael Weiser, the president of the brokerage. Assuming a 50-50 split (which is not always the case) between the agent and the firm, each salesperson needs to bring in $150,000 in credited gross revenue just to break even, he noted.

At Eastern Consolidated, another source said, “the expenses, the amount of staff and amount of rent and services is close to $700,000 a month. It’s a huge nut to carry every month.”

Eastern had “too many people and not enough business,” one source put it.

“Based on what I read and heard that the volume was down—obviously the whole market was down, us included in 2017—they are a big firm with big overhead,” Weiser speculated. “I guess there comes a point in time when you can’t make it. Some would say you need scale to do volume. I think Eastern was caught in the middle of being large and not having the volume relative to their costs.”

He noted that while he would never want to see a 30-plus-year-old company go out of business, the silver lining is that “Eastern’s closing will provide opportunity for hirings.”

Despite overhead and other costs, Eastern Consolidated has maintained a spot at the top of the brokerage heap, bringing in $622.4 million via 47 sales in 2017, according to statistics from The Real Deal, although that was down 60 percent from the prior year. One of CO’s sources said that the figures in 2018 are even grimmer.

“The key to surviving in these times is being nimble,” Weiser said. “Fixed costs will make or break you.”

To that end, GFI’s brokerage business, which is focused on New York City, has been shedding the weaker agents—about six—in the last six to nine months, Weiser said. That brought the sales team to 22. At a market high in 2014 or 2015, the number was closer to 40.

As for how other companies have handled this moment of crisis for the mid-sized firms, in May, Newmark (NMRK) Group announced it would be acquiring RKF for an undisclosed price, with the deal slated to close this year.

Robert Futterman, the eponymous head of the firm, was named the chairman of Newmark’s retail leasing division, which will be called Newmark RKF. In a press release Futterman noted that his firm’s motivation is to grow nationally, and Newmark conveyed that it wants to add to its talent pool. All of the retail brokers at both firms will be folded into Newmark RKF.

On the timing, Futterman said the deal wasn’t market related.

He told CO last week: “For 20 years I built this company and expanded this brand nationally and globally and to continue to do that I need the right resources.” He said he couldn’t compare his business to Eastern Consolidated as they are “apples and oranges.” RKF has only eight agents out of 100 in New York City doing retail-related investment sales; the rest do retail leasing.

One broker at another firm, who requested anonymity, speculated that RKF’s sale was not one of necessity. “That was a sale of desire,” he said. “It has been profitable as a standalone. This is Robert and his partners making a calculated decision. And I think it makes perfect sense to align themselves with [Newmark]. Do I think it’s market driven? I’m sure it was a factor but [regardless], I think he would have survived.”

Manhattan-based developer and brokerage MHP announced in April that it sold 60 percent of the company—and 60 percent of its expenses—to Miami-based real estate investment and management firm Banyan Street Capital. The deal provides MHP with a “long-term strategic capital partner” and will not face down raising general partner funds, David Sturner, the president and CEO of the firm, said in a press release at the time.

His father, Norman Sturner, the co-founder and chairman of MHP, told CO last week that his mid-sized firm is in a different class than Eastern Consolidated in large part because MHP is an owner and only trades one to two buildings a year. And its two-dozen sales agents all focus on office and retail leasing; they are not in investment sales, David Sturner noted.

“Peter Hauspurg was fighting [CBRE’s] Darcy Stacom and Eastdil [for business],” Norman Sturner said. “We don’t do that. We slide under the radar. We don’t do billion-dollar buildings and we do stuff that’s off-market.”

Around the same time as the Banyan deal, MHP downsized to 13,500 square feet from 21,000 and let go of around 10 brokers. David Sturner called these events fortuitous.

Regardless of the reasons, the investment sales business in New York City has been slowing, with the number of transactions dropping, and “continuing to drop,” said investment sales broker Robert Knakal, who himself sold Massey Knakal Realty Services, a middle-market firm, to Cushman & Wakefield (CWK) at the end of 2014. But not everybody is closing or selling.

One middle-market firm, Marcus & Millichap (MMI), with a New York City presence (140 investment sales agents in the Manhattan office) is benefitting from having a national platform. The company has 84 offices across the country focusing on investment sales and refinancing of all asset classes.

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MIDDLE MARKET MATTERS: David Sturner, left, and Norman Sturner, sold 60 percent of their firm to Banyan Street Capital.

John Krueger, the regional manager for Marcus & Millichap, said that while it is a middle-market firm with its average price point nationally at $1 million to $10 million, its selling point is that it’s a national player because if someone sold a property in New York City, Marcus & Millichap could help them buy a building elsewhere, like via a 1031 exchange.

“People that bought 20 or 30 years ago are no longer interested in the New York multifamily market anymore,” Krueger noted. “We can help people with that 1031 and diversify and protect the wealth they gained in that market.”

Timothy King, a founder and managing partner at outer-borough-focused middle-market real estate firm CPEX Real Estate, said that things are looking up at his 25-agent firm (plus six full-time staff) in large part because of the middle-market as well as what he calls “local” properties below $20 million that are user-owned.

“We can go toe to toe with institutional guys on bigger stuff, but the bulk of our business is much more local and much more family-oriented,” King said. “We’re in a good spot in that regard.”

As a result, his firm is “on track to see an increase in transaction volume and commission income” after a decline in previous years. The firm did 96 deals, including advisory, office and retail leasing and sales in 2017. As of June 25, the firm had closed 46 such deals.

“Those firms that have an established niche will continue to thrive,” King continued. “The key to survival is keeping a close eye on expenses. Eastern didn’t go out of business due to a lack of business. They were a powerhouse firm, but apparently operating expenses outpaced income.” 

Similarly, Victor Sozio, one of the founding members of Ariel Property Advisors, said his middle-market brokerage firm (which covers all major commercial asset types throughout the New York metropolitan area) is on pace for a “relatively modest increase this year.”

Derek Bestreich, the president of the two-and-a-half-year-old Bestreich Realty Group, which covers Brooklyn multifamily and mixed-use and development sites, had an upbeat assessment of the market: “The investment real estate market—it is hard to paint it with a wide brush. It’s extremely inefficient. There are thousands of owners of properties in this space. I think different companies can have different results and I think different brokers can have different results.”

Knakal said that on a relative basis the investment sales figures aren’t good, but on an actual basis they’re not bad.

“While the volume of investment sales has been dropping for four years in a row, the fact of the matter is right now we’re only on pace to be slightly lower than the average year,” he said.

One broker had a bit of a more pessimistic view of the market:

“We are in a period of adjustment. Rising rates are going to further depress prices and the sales volume is going down for the rest of the year. Brokerage is a very Darwinian business. Only the strong will survive.”

Update: This story has been edited to reflect that the dollar volume of investment sales provided by Ariel Property Advisors represents deals by all firms, not just Ariel.