Slump prompts huge exodus of commercial agents.

Those who remain battle for a piece of shrinking pie

Darren Smith had good reason to believe he was starting a lucrative career as a commercial property broker when he joined the San Gabriel Valley office of CB Commercial Real Estate Group Inc. in 1989, as did Mario Haug when he joined the company's downtown office in 1990.

Both expected to endure the commercial brokerage industry's customary long hours at low pay for several years. But after that, they'd be on a fast track to success and six-figure incomes.

Smith is now selling yachts, a task that might sound tougher than real estate in a slumping economy. But he said he has sold two already since quitting his brokerage job in December.

Meanwhile, Haug is selling title insurance, a switch he made for greater security and the prospect of salary plus commission, rather than straight commission.

Smith and Haug aren't isolated cases. They are among scores of commercial brokers and sales agents in Southern California who have bailed out of the industry as a result of the continuing slump in the Southland's real estate market.

Veteran brokers say the downsizing is continuing, and may even be accelerating, because the business today and that of a few years ago are as different as night and day.

According to Sam Foster, vice president and senior sales manager at the San Gabriel Valley office of CB Commercial, an aspiring broker's career path in the 1980s would typically go like this: The employee would come in as a trainee, called a "runner" in broker parlance, and would work long hours for low wages -- about $15,000 a year -- to learn the business.

After a year or so of this, the worker had a good chance of earning $50,000 a year. And many who were relatively new in the business quickly shot up to six-figure incomes.

Today, however, "the big upside isn't there for the new people," Foster said.

Even with the downsizing that has already occurred, brokers and sales agents are competing for smaller shares of a shrinking pie. Even some top producers have seen their incomes halved by the economy's slide.

The implications of these changes, many believe, are that the brokerage industry still faces considerable downsizing and consolidating as Southern California's economic slump continues.

Jim Center, a senior marketing consultant with the San Gabriel Valley office of Grubb & Ellis Co., thinks there is much more downsizing to come and that it may well be accelerating.

But Center said determining precisely how many brokers and sales agents have left the business is difficult because no single source tracks their numbers. In addition, he said, downsizing brokerages "are reluctant to tell you what's happening because they think it makes them look bad."

The California Department of Real Estate does keep statistics on both the number of licensed brokers and sales agents. Brokers must pass a more rigorous exam than agents. Hence, brokers and agents operate under different licenses. Sales agents must be employed by a broker; they cannot operate independently. Brokers, on the other hand, can work for themselves or for other state-licensed brokers or corporations.

Ascertaining the exact number of commercial brokers and agents who have left the field is further complicated by the fact that the state does not maintain separate figures on residential and commercial real estate licenses.

In addition, California real estate licenses are good for four years, meaning licenses are often in effect long after the brokers or sales people have left the business.

The state's figures show the number of licensed brokers statewide rose steadily from 92,988 in 1990 to 98,629 in 1993, while the total number of brokers and sales people combined peaked at 374,224 in 1992 and dipped to 373,914 this year.

A tally of Los Angeles County's commercials brokers tells a different story, however. The number of commercial brokers at the top 25 brokerages in the Los Angeles Business Journal's Book of Lists rose from 1,478 in the 1988 book to a peak of 1,617 brokers in 1990. But that number has fallen steadily since then and stood at 1,324 brokers in the 1993 book.

The work force at L.A. County's largest commercial brokerage, CB Commercial, peaked at 385 brokers in 1990 and by 1993 had declined to 290 brokers, according to the lists.

Even the figures from the largest brokerages don't tell the full story because some of these firms have hired senior-level people to replace younger or less-productive brokers and sales people.

As a result, the largest brokerages are holding their own or only shrinking slightly, while several smaller shops are going under, industry veterans said.

John Knott, an associate director at Cushman & Wakefield of California Inc., reports that firm has 114 brokers in Southern California and 799 nationally.

That total is down 20 percent, both nationally and in Southern California, from the firm's peak year of 1990. But production per worker is higher now because those who have left the company were generally the less-experienced, less-productive brokers and agents, Knott said.

Phil Royster, pacific southwest regional president of Grubb & Ellis, said that firm has 425 brokers in Southern California and Arizona, down from a peak of 460 in 1990. Royster concurred with Knott's assertion that veteran brokers from small firms that went belly up are now being picked up by larger national brokerage firms.

Royster said the makeup of Grubb & Ellis' brokerage corps is markedly different today than it was when brokerages took on large numbers of new trainees. He said the company is hiring senior brokers from smaller companies that have gone out of business, like the three who were recently hired from now-disbanded Knight Frank Faulkner Baillieu.

"We now have the ability to get experienced brokers from smaller firms because, the longer the market stays down, the more likely it is that the smaller firms aren't able to hang on," Royster said.

Most of those who have left the business altogether are "the younger and less-experienced brokers who came into the industry when people were successful primarily because of the market," he added.

The movement of brokers and agents to larger firms is a reverse of what happened in the 1980s, Royster pointed out. Back then, brokers and agents left the large houses to form their own firms or join small companies. They were shifting then because smaller firms typically pay significantly higher commissions than larger brokerages. Many smaller firms allow their brokers and agents to pocket up to 75 percent of the commissions, while brokers and agents at larger firms typically only pocket 50 to 60 percent. Smaller firms can afford to be more generous with their commissions because they have lower overhead due to the fact they don't provide research reports and other costly services to clients, like the large national brokerages do.

According to Royster, the brokerage industry restructuring parallels the restructuring that went on in the real estate development industry.

"Just as we overdeveloped, we overbrokered," he said.

The dwindling ranks of brokers and agents are now being reflected in declining memberships at local industry trade organizations.

But dwindling number of trade-group members can be misleading, asserted Joe Faulkner, a senior vice president at CB Commercial and president of the L.A. Chapter of the Society of Industrial and Office Realtors.

Faulkner said many of those who haven't renewed memberships to industry organizations may simply be trying to save the membership fees, which range from about $200 to $1,500 a year.

"We won't have a final tally for another month or two on how many of our (SIOR) members renewed this year, but last year we only lost 10 members out of 115," Faulkner said. SIOR's resilience may be due to that fact that its membership consists primarily of more experienced brokers. Memberships at broader-based brokerage and development trade groups are likely down much more, Faulkner said.

"Some of the brokerage firms or the industry associations won't tell you how many people are getting out of the business because they think it signifies some kind of a failure. But I don't think it signifies failure at all," Faulkner said. "It just signifies that there isn't enough business to feed all the various categories of brokers who are in the business."

Faulkner explained that brokers and agents generally fall into one of three categories: rookies, mid-level people (eight to 10 years' experience) and veterans.

"When a large brokerage firm doesn't reduce its work force in the face of volume that's 30 percent less than it was historically, all it does is create a situation in which the same number of people are competing for a smaller amount of business," Faulkner added. Such a situation is bound to produce a shakeout, as it would in any industry, he reasoned.

Drexel Chapman, a vice president at The Seeley Co. and president of the American Industrial Real Estate Association, agreed that the brokerage shakeout is continuing. "I don't think it's bottomed out, but I don't think it is escalating," Chapman said.

Membership in the American Industrial Real Estate Association -- which includes industrial and office brokers and sales agents from Los Angeles, Orange, Riverside, San Bernardino and Ventura counties -- has also been on the decline lately.

The group's current roster of 1,245 members represents a 17 percent drop from its 1991 peak of 1,505 members, Chapman reported.

Senior brokers, however, "are still making a good living," Chapman added, although "everything is relative."

"A broker who made $250,000 (in the late 1980s) may only be making $100,000 or $150,000 now. But they're still making six-figure incomes," he said. "Those who have been in the business longer and have established relationships are doing well compared with a lot of the $80,000-a-year aerospace engineers who have been laid off."

While veterans can indeed still make a "good" living, they must now put in longer hours and face more competition, industry sources agreed.

"Ten years ago I might compete with from one to three brokers at most trying to get a listing," said Chapman. "But today I'm competing with seven to 10. We are still feeling the effect of all the people who got into the business when real estate got hot."

According to Center, it's easy to understand why so many joined the business. "In 1985, where else could people go right out of college and make $50,000 to $100,000 in their first year without a law degree or an MBA?" he said.

Smith, the yacht salesman, reflects the sentiments of many who got into the industry when it looked hot, but now have left.

"I didn't see much going on for the next two or three years, and I didn't feel like beating my head against a wall," he said. "Most of my peers quit long before I did."

But Smith said leaving was a tough decision because he liked the business, not just for the money that successful brokers make, but also because he derived personal satisfaction and a sense of accomplishment from it.

"I stuck it out as long as I did because I wanted to do it for a living," he said. "Would I go back into the business if the market turned around? That's a wait-and-see question."