Brokers Feel the Squeeze : Small Commercial Real Estate Companies Lose Out to Big Ones as Market Shrinks

By MICHAEL FLAGG

March 22, 1991 12 AM PT

TIMES STAFF WRITER

IRVINE —

It’s a jungle out there, say commercial real estate brokers. And it’s getting worse.

Hardly anybody’s buying buildings anymore, certainly none of the big office towers around the county with “For Sale” tags on them.

Fewer tenants have been looking for office space and warehouses and factories. All this, of course, means fewer commissions for brokers, whose ranks swelled during the building boom of the 1980s.

Even during the boom times, Orange County was a crowded, competitive brokerage market. Now that there is less business to go around, some smaller firms may face a shakeout.

For these companies, the future doesn’t hold much hope: Construction of new offices and factories is falling from the peak it hit in the 1980s; some experts say it may never again reach the old levels.

In light of these changes, a few local brokerages have been acquired; others are branching out into new businesses and still more are said to be considering such ventures.

Consider these facts:

* One out-of-state brokerage has already pulled out of the county: New York-based Julien J. Studley Inc.

* Others have considered selling part or all of themselves, like Arizona-based Iliff Thorn & Co., which has an office in Irvine. Now Iliff Thorn says it’s considering buying another brokerage instead. Newport Beach’s AIP Commercial was acquired just this week by a bigger brokerage, Sacramento’s Bishop Hawk. In an unusual deal, another local brokerage, Costa Mesa’s Frost Trinen, was acquired by Security Pacific Bank.

* Others are expanding into new businesses, such as Seeley Co., a Los Angeles broker that created a property management concern with Wolff Co., an Irvine developer.

* Even the two biggest brokerages in Orange County--Grubb & Ellis Co. of San Francisco and Coldwell Banker of Los Angeles--have their problems. While their branches in Orange County are among both companies’ most profitable, problems elsewhere in these companies are eating up profits.

The local Grubb and Coldwell branches are profitable because Orange County remains one of the nation’s stronger suburban real estate markets. Even in the 1980s, when developers built millions of square feet of office and industrial buildings, the tenants showed up like clockwork every year to fill nearly all that space.

But even this flood of companies into the county couldn’t fill all the new buildings, and now the flood has begun to slow. Vacancies are already in the low 20% range--relatively high for a West Coast market--and rents have stopped rising.

Problems such as these aren’t something brokerages like to talk about, since not only their clients but their own brokers may get worried and walk out the door. But brokers say privately that several local brokerages may not be doing very well.

During the 1980s, local brokerages added hundreds of new employees and, some brokers admit, let operating costs get out of hand. Those high costs didn’t matter as much when business was good. But now that the pickings are slim, brokerages are looking for ways to cut costs in a business where profit margins were never very wide.

“A lot of companies were living the good life in the 1980s,” says William R. Beck, a vice president and manager of Daum Commercial Industrial Real Estate’s Irvine office. “They added brokers, got palatial offices and fancier marketing brochures, and that drove profit margins down.

“Now I’d suspect some of those companies are no longer profitable because the margins are so thin.”

Daum, a Los Angeles firm that’s one of the oldest brokerage companies in Southern California, recently closed an unprofitable office in La Jolla.

There are an estimated 1,000 commercial real estate brokers in Orange County. That’s “probably 30% too many,” says Scott Perley, a vice president and manager of the Irvine office of the Cushman & Wakefield brokerage.

Some of the less successful brokers, in fact, have already left the business. And many brokerages have stopped training new people. It’s too expensive, and the companies just don’t need them.

“Almost every company has had attrition,” says Tom Gibson, vice president and manager of Iliff Thorn & Co.’s Irvine office. “I think there’ll be fewer brokerage companies in the future.”

Iliff Thorn has already combined two Orange County offices into one and upped the company’s share of its brokers’ commissions, or “split,” once one of the most generous in the local real estate business.

The biggest firms, like Coldwell and Grubb, have a lot of overhead costs but say they have an advantage in tough times like these because nervous customers tend to seek out “brand names” more.

And as deals get scarcer, top brokers at the bigger firms stoop to pick up ever-smaller deals, squeezing out the smaller firms and the less-experienced brokers who once handled many of those deals.

“It’s very hard to compete on bigger deals when you’re only a one-horse show,” says an executive at a larger brokerage. “Building owners feel confident with bigness, and that’s what the large firms sell.

“An owner wants to know how many other offices you’ve got working on (leasing or selling) his building.”

And even the biggies don’t have it easy. Business is down nationwide, and although Grubb & Ellis’ Newport Beach office led the entire company in revenue and profits last year, the publicly held San Francisco company lost nearly $30 million last year on unproductive offices elsewhere.

Coldwell Banker, based in Los Angeles and like Grubb & Ellis one of the nation’s largest commercial brokers, is also troubled.

While the Newport Beach and Anaheim branches consistently rank among its top 10 offices in revenue, the entire company lost $50 million in the first nine months of last year, the latest figures available. Coldwell says much of that amount was actually paper losses which came from gradually writing down the difference between what employees paid for the company when they bought it from Sears two years ago and the actual value of Coldwell’s assets.

So what happens now? Some brokerages have already expanded into other real estate businesses, at least one of them by setting up an entirely new company. The 6-month-old Seeley/Woolf Property Management Co. in Irvine is “one of the few companies I know that’s hiring people,” President Thomas U. Wall says.

Seeley had managed property before but developed a corporate version of a split personality as it tried to run that business and its brokerage operation. The new company concentrates solely on managing property and, Wall says, has already doubled the property under its management.

Less successful brokers will continue to find another line of work. Some of them, say brokers, may even go to work for big property owners such as pension funds or the federal Resolution Trust Corp., taking a salary instead of a commission to market buildings to tenants. That, of course, would take still more business from the traditional brokerage companies.

Other brokers doubt that scenario. They say it’s likely that fewer companies will have in-house real estate departments in the future and so will have to contract with outsiders such as brokerage firms for even more services.

But there is one thing everyone agrees on: There’ll be fewer companies and fewer brokers.

“I think Orange County will be a lot more like downtown Los Angeles,” says John Bodenburg, president of the Newport Beach office of brokers Lee & Associates. “There’ll be fewer brokers, but they’ll be more senior people and they’ll have longstanding relationships with tenants and developers.

“There won’t be much room for young people.”

METROPOLITAN VACANCY RATES

Area / Vacancy rate (%)

1. Stamford, Conn.: 29.0

2. Palm Beach County, Fla.: 29.0

3. Phoenix: 28.3

4. Ventura County: 27.1

5. Oklahoma City: 27.1

6. Dallas: 26.7

7. Austin, Tex.: 25.0

8. Tucson: 24.3

9. Hartford, Conn.: 24.2