Boutique -vs- Behemoth

When CB Richard Ellis acquired Insignia Financial Group last summer, the heavily publicized deal brought together two of the nation's largest commercial brokerages under one roof. It was billed as a watershed event for CBRE, which already held the title as the nation's biggest real estate services firm.

Though it was a merger of giants — their combined revenues in 2003 were $1.6 billion — the U.S. brokerage industry remains highly fragmented, with no lone firm commanding more than a single-digit share of the national transaction business. While the key metro markets such as New York City and Los Angeles are rife with brokers from the largest firms, the majority of the U.S. sales and leasing commissions are earned by independent players.

“When one considers that no company has more than a few percentage points of the market, consolidation has had minimal impact if any,” concludes David Frosh, president of Irvine, Calif.-based investment sales brokerage Sperry Van Ness, a national firm.

The chance that a handful of large firms will corner the market remains slim. In 2002, for example, independent brokerages accounted for 52% of all leasing and sales deals in the U.S. based on commissions (please see chart, page 20). The five largest brokerages at that time controlled only 11% of the entire $20 billion market, according to real estate technology consultant McLaughlin Ventures.

Founder Mark McLaughlin worked for both Jones Lang LaSalle and LoopNet before launching his own firm in 2001. “To clients, the only real concern is that their broker does the best job leasing their buildings. It may not matter at all that they [the brokerages] have an office in London,” he explains.

These statistics show that many independent, boutique-size firms dominate the transaction side of the brokerage industry. And there's another twist — consolidation among the largest firms often fuels the creation of these mini-brokerages.

Breaking Away from the Pack

It's difficult to pin down how many new brokerages have been created over the past few years. However, CoStar Group claims that new brokerage formation has been a major factor in the growth of its subscriber base.

Anecdotal data also suggests that boutique firms are popping up throughout the nation as entrepreneurial ex-brokers from the largest firms decide to strike out on their own. Unlike the nation's largest firms, these smaller operations tend to focus on niche secondary markets that the bigger firms have not been able to penetrate.

For example, Reza Etedali — formerly one of the highest-grossing brokers at Sperry Van Ness — launched his own boutique firm last December. Etedali worked at the firm for eight years, earning his stripes as one of the firm's most aggressive professionals during his tenure there.

“When I was at Sperry [Van Ness], I felt like a rocket sitting on the tarmac with the engines running. When I resigned, it felt like the latches finally popped off and I took off,” says Etedali, 40, an entrepreneur who loves to take risks. Case in point: he once bungee-jumped from the basket of a hot-air balloon.

The newly launched Reza Investment Group boasts 10 retail investment sales professionals including Etedali himself, who brought his broker team with him from Sperry Van Ness. That's a far cry from the Sperry Van Ness headcount, which now totals 550 employees and is growing by more than 50% each year.

Etedali outsources all of his non-core functions such as human resources, accounting and information technology, which he says enables him to keep overhead costs to a minimum. This year, Etedali is shooting for $1 billion worth of deals, and he claims that he's already worked on deals totaling $250 million year to date. “Before I had my own firm, I didn't have absolute control over my business. Now I do and I've set the bar very high,” he says.

Growing Pains

Does size really matter in brokerage? It certainly poses a risk when top brokers are faced with redundant positions or a vague corporate structure. It also can undermine the entrepreneurial spirit of the business if layers upon layers of management are present, say brokerage sources.

Take investment sales whiz Woody Heller and executive John Combs, both former CBRE employees. Heller left CBRE last year to join Studley, while Combs resigned to start his own property management firm in California. These top brokers would likely not have departed if the merger between CBRE and Insignia had never occurred. They also moved to much smaller shops after leaving CBRE. Combs admits that his position at CBRE was phased out after the merger with Insignia.

This migration of top brokers to smaller firms is hardly unprecedented. Top brokers move throughout this industry, and many of them are shuttling between the biggest firms. It appears that an equal if not larger number are putting up their own shingle, however.

“The big brokerages just don't have offices in smaller markets like Boise, Idaho, and Bend, Ore. There are more markets like these than there are huge markets,” says Frosh of Sperry Van Ness. Frosh says that the corporate motto at Sperry Van Ness is “every city, every state.”

The biggest brokerages are at a disadvantage because they are forced to cut costs, Frosh says. He cites their thin margins as one reason a higher portion of brokers' commissions go to the house rather than the broker.

“We go after people at the big companies and tell them that their splits are going to support their firm's huge infrastructure,” says Frosh. Despite his own firm's rapid expansion, Frosh believes that the “bigger is better” model will fall by the wayside over time.

The Case for Size

Mitchell Rudin, CBRE's president of U.S. brokerage, believes the smaller firms are running scared. He predicts that the smaller competitors will find it difficult to provide an array of services comparable to CBRE's vast resources.

The brokerage can offer clients loan servicing through L.J. Melody and market forecasts through subsidiary Torto Wheaton Research, among other services. As a result, says Rudin, the most talented brokers will flock to the larger firms.

“It gets harder and harder for the smaller brokerage models to persist given the depth of resources that we can bring to each locale,” says Rudin. He disagrees with the claim that being huge prevents his firm from being nimble.

“The diversity of resources that Corporate America needs just can't be handled by these smaller firms. In fact, it's difficult to find any firm that isn't expanding,” says Rudin, who confidently adds that the CBRE motto is “you can't shrink to greatness.”

A cornerstone of the CBRE model, says Rudin, is control of the top 25 markets in the U.S. Since the merger, he says that the firm has made progress toward that end. “This is the geographic coverage that we want, and we are aggressively growing our staff in these markets,” he says.

But Do Clients Care?

One trend that is fueling consolidation among the largest brokerages is globalization. As U.S. businesses move offshore, some are seeking a one-source service provider who can help them solve real estate problems throughout the world.

Still, not all of the multi-national firms have set up exclusive relationships with one firm. General Electric, for example, works with both CBRE and Cushman & Wakefield on assignments.

An outsourcing survey by Ernst & Young in the fall of 2002 concluded that a full 60% of U.S. companies use multiple real estate service providers. In many cases, the study found, this is done so that various service providers can be assigned to different geographic areas. The survey results suggest that most companies see the benefits of using local or regional brokerage expertise to service their real estate needs throughout the nation.

The study also shows that corporations have ramped up their outsourcing of real estate services over the past decade. In fact, more than 1 billion sq. ft. of space was managed and operated by third-party providers as of fall 2002, reports Ernst & Young. With so much business on the horizon as firms continue to outsource their real estate needs, the largest brokerages are increasingly selling a full-service platform to clients.

“It's very tough for a small, local firm to service clients with global business. The bigger clients need more resources from their brokerage,” says Thomas Bogle, a partner with Ernst & Young's real estate advisory services.

While Bogle believes that the biggest brokerages do in fact hold an edge over smaller competitors, he admits that consolidation at the top isn't about to eliminate the independents. Says Bogle: “One firm swallows up another, and there's still plenty of competition out there.”

Along those lines, clients gravitate toward the brokerage model that best serves their needs. Since there are many types of clients, there will by extension be many types of brokerages seeking to service them.

“Corporate America likes to work with a national name because there's a perception of safety in the big-name brokerages,” says Kevin Crowley, COO of Iowa Realty Commercial and president-elect of the Society of Industrial and Office Realtors (SIOR).

Crowley says that brokers from the largest firms frequently set out on their own to create many of the boutique firms. For this reason, “the independent broker will always be a factor in this marketplace,” he says.

The SIOR membership reflects such a view. Out of the organization's 2,400 members, only 975 work for the five largest firms or an affiliate of one of those firms. Thus, 60% of all SIOR members work in independent or regional firms.

“Consolidation at the top definitely creates opportunities for brokers,” he says. He adds that some clients will always demand a brokerage with national reach, though it is ultimately the client's confidence in that brokerage that matters most.

A Battle Royale

Of course, the brokerages' perceived confidence in their own platform is equally as vital. After CB Richard Ellis bought Insignia/ESG last year, for example, a wave of post-merger print advertising touted the arrival of a firm “exponentially” better than the one before. The advertising campaign stressed scale and breadth, along with the firm's tenacious new squad in New York City.

Not long after this campaign began, principal competitor Cushman & Wakefield launched its own series of print ads. It chose a markedly different tack: the ads state that Cushman & Wakefield has stayed the course as a private firm for 87 years. The ads even mention the “confusion” surrounding certain unnamed mergers.

To someone like Michael Colacino, who works for independent tenant rep firm Studley, this heavyweight bout is wonderful. “We think of them as Mothra vs. Godzilla. These two companies can only define their presentation in terms of their one competitor,” says Colacino, president of Manhattan-based Studley.

Colacino believes that these costly campaigns are distractions from both firms' core focus, which he says is servicing clients. He poses a question: “How can you respond to what clients want — and it's changing every day — when you are engaged in this battle royale with one other company?”

Unlike the largest firms, Colacino says Studley is growing its line of services in-house rather than buying new companies in the manner of the largest brokerages. He says the firm has no intention of buying a competitor anytime soon, given this strategy.

Colacino believes that the argument about big vs. small is ludicrous. “When you need to go to the hospital for brain surgery, you don't call around and ask various hospitals how many brain surgeons they have, and go with the one that has the most. You want the one that is the best.”

With scale in mind, the largest brokerages will likely continue to eye one another as possible acquisitions. And brokers such as Etedali will continue to spin off with their teams of brokers to form smaller firms.

“There's so much internal politics at these larger firms. With that much red tape and bureaucracy, there's less of an entrepreneurial spirit there,” says Etedali. “In those companies you always have to look behind your back, and that is a distraction from the business.”


A trio of the largest U.S. brokerages have all grown through acquisitions.

1997 CBRE buys corporate facilities manager Koll Real Estate for $145 million.
2003 CBRE buys Insignia Financial Group for $431 million.
1998 LaSalle Partners acquires COMPASS Management & Leasing Inc., the fourth-largest property management firm in the U.S. at the time.
1999 Jones Lang LaSalle is formed by the merger of LaSalle Partners and Jones Lang Wootton.
1998 Cushman & Wakefield buys U.K. real estate brokerage Healey & Baker.
2001 Cushman & Wakefield buys West Coast-based Cushman Realty.
Sources: CB Richard Ellis, Cushman & Wakefield, Jones Lang LaSalle, published reports

The Great Equalizer

Technology arms underdog brokerages with a powerful weapon against the big guns.

Entrepreneurial spirit drives top brokers to found their own boutique firms, but in many cases technology enables them to compete with the bigger guns. This wasn't always the case: 20 years ago, only the largest brokerages invested in expensive property databases.

No longer, thanks to real estate data firms like CoStar Group and LoopNet. Now the smallest firms can buy third-party property data through the Internet at a fraction of what it would cost to generate that data internally.

“One of the great secrets in the commercial real estate industry is that it's even more fragmented than anyone imagines,” says Andrew Florance, founder of Bethesda, Md.-based CoStar.

CoStar tracks roughly 400,000 different entities that are active in the U.S. commercial real estate industry, many of them within the brokerage sphere. And despite talk of consolidation, that number is rising.

Take Reza Etedali, who just launched his own 10-person retail investment sales firm last December. While his competitors are asleep, Etedali logs onto LoopNet from his home computer.

“This is one of the greatest tools we use. We can expose our properties to 450,000 brokers and principals, and just five years ago this was unthinkable,” says Etedali, who primarily represents sellers. LoopNet boasts more than 230,000 commercial lease and sale listings. The same technology enables him to send out e-mail blasts to thousands of investors from his house.

Still, larger firms also are exploiting technology in an effort to give their brokers the best data. Marcus & Millichap, a national investment sales firm, has plowed millions into a Web-based system with data on approximately 750,000 properties.

A Marcus & Millichap brokerage team, for example, recently drew up a comprehensive marketing proposal for a 148-unit industrial warehouse property in less than three hours, thanks to its investment in a software program called Impact. The software enabled the brokers to include extensive maps and pictures of the property in the proposal. Without Impact this would have taken the brokers days to complete.

“The whole network is wireless, and this has become the gateway that our brokers use to get all of the information they need. It's impressive,” says Rick Peltz, senior vice president and chief intelligence officer at Marcus & Millichap.

Of course, few brokers would argue that technology is solely responsible for their success. Knowing how to close a deal is what separates the top producers from the pack. “The reality is that you just need to be very good at what you do,” says Michael Dow, president and CEO of real estate advisory firm CRESA Partners. “And I don't believe that the best-in-class brokers go to the largest firms.”
Parke Chapman

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