Off With The ‘Handcuffs’: How A Noncompete Ban Could Change CRE

The Federal Trade Commission last week announced its decision to ban noncompete clauses, establishing a timeline for phasing out the agreements this fall, after about a year of deliberation. The clauses prevent workers from jumping ship to rival firms, and their elimination ushers in a potential sea change in human relations departments at commercial real estate firms across the country. 

There aren’t any CRE-specific numbers on the prevalence of these agreements, but anyone close to the industry knows they are widespread. According to stats from the Economic Innovation Group, a public policy organization, 32 million Americans, or 1 in 5 workers, are covered by such agreements.

The ban’s benefits would be significant, according to FTC regulators. Business formation would grow 2.7% annually, or more than 8,500 new businesses each year, and increased competitive pressure would push up the average worker’s wage by $524 annually. 

But the practice in CRE, especially in the upper echelons of brokerages, has led many to fear repercussions in terms of competitiveness, trade secrets and early career training for brokers. Bisnow spoke with attorneys, academics, headhunters, brokers and industry figures to understand how a ban might impact the industry. 

How common are noncompete agreements in commercial real estate? 

Fairly common. They’re especially prevalent in certain brokerage positions, development firms and executive roles. Most employees who sign them also sign nondisclosure and nonsolicitation agreements, which protect firms from sharing trade secrets or trying to poach clients. 

“There are several CEOs of REITs that are known for being highly litigious about this type of stuff,” said Kent Elliott, principal at RETS Associates. “They will flex their muscles, they will flex the balance sheet and try and squash anything.” 

There is some geographic diversity. Apart from the FTC ban, the landscape of noncompetes varies across the country. Some states, such as California, have banned them, while other significant centers of real estate activity and dealmaking, including Florida and Texas, allow noncompetes. 

Why do firms and brokerages have noncompete agreements in the first place?

Employers argue that they invest significant resources in talent, not just in trade secrets and operational processes and the like. Firms make it a point to invest in the training for young employees, or building the brand of a broker who leads a certain practice, such as industrial real estate in the Inland Empire. 

“We're training you, we're introducing you to all of our connections, right?” said Adam Leitman Bailey, a New York City-based real estate attorney and the founder of his self-named firm that has handled many noncompete cases. “We're building our brand, we're spending maybe a million dollars marketing you and putting you out there, right? This job can’t be a two or three-year thing.”

Others would counter that these agreements are more about exerting power and control over staff and the labor market. Companies truly worried about losing talent investment could make workers sign some kind of employee training repayment agreement, said Evan Starr, a University of Maryland professor who studies noncompetes. Clawback provisions, which can force brokers to pay back commissions, remain legal and unaffected by the proposed ban.

“These keep people frozen in place,” said Allison Weiss, CEO of CRE Recruiting. “Sometimes that makes you decide that rather than trying to fight your employer, you’re going to leave the industry altogether or go into a different role, or even region, where they can’t enforce it on you.”

What happens when someone gets in trouble for violating such an agreement? 

Typically, violating these agreements can lead to prolonged litigation. Many CRE firms will actually sue not just the former employees who left, but the firm they left to join. But the power of the agreement is that threat of enforcement, or at the least, legal action. It’s fairly easy to show someone has started working for another firm, and it's hard for an employee to pay for a legal fight with a deep-pocketed brokerage. 

“What you see in litigation is sort of the tip of the iceberg,” said Starr. “Most of these things, like 90%, don’t even get close to anything legal. Most of the time, it’s simply a threatening letter or a statement during an exit interview, and that does it.”

Nationally, there are roughly 1,000 such cases around the violation of noncompete agreements, said Starr, with far fewer around NDAs and nonsolicitation. But when they do happen, the negotiations begin.

In most cases, the employer wins. 

“I think the balance sheet prevails,” Elliott said.

Is there any evidence about what happens to an industry when noncompetes disappear? 

There actually are a few recent examples of industry-specific, statewide bans on noncompete agreements. Hawaii banned them for tech workers in 2015, and Washington did the same for employees making over $100K per year in 2019. Workers in the impacted industries saw an immediate bump in wages and job mobility that led to more startups and other positive signs of entrepreneurial activity, according to Kenan Fikri, research director at Economic Innovation Group.

“The empirical evidence is growing each year, and it's pointing really in a single direction,” Fikri said. “Unsurprisingly, when you remove labor market restrictions, economic activity kind of flourishes and grows.”  

How would a ban impact commercial real estate? 

Not surprisingly, workers and bosses have varied reactions. Allen Matkin principal Grant Alexander, a labor attorney, believes it’ll be a “wild west” scenario in the job and hiring market and that firms will be much more controlling over client lists, proprietary data and trade secrets. He’s not sure exactly how it’ll play out, but he predicts brokerages and firms will be slow to change until there’s a significant case of proprietary information being taken. Then there will be a crackdown.

Others see a more positive impact of what Weiss calls “getting rid of the handcuffs.” Eliminating these clauses would push companies to compete more in terms of salary and company culture, and make them worry more about the carrot than the stick when it comes to attracting and retaining employees. 

“I believe that the incentive that you should be giving people not to leave is the value that you're providing, period,” said Dan Lewkowicz, senior director of Encore Real Estate Investment Services in Michigan, who is strongly in favor of banning these agreements. “And instead of forcing people to stay in places that they clearly don't want to stay, make it impossible for them to leave.”

“A typical investor or clients won’t see any real difference other than seeing more frequent movement of their broker,” he added. 

Will brokers start jumping ship all the time if noncompetes are eliminated?

Lewkowicz believes there will definitely be an uptick in brokers leaving their firms and even founding new companies. There are plenty of unhappy brokers who might see an opportunity. But again, he believes overall it’ll push brokerages to provide additional value to their employees. 

“Anytime anything is done that encourages those who finally want to leave means we’ll see new firms pop up,” he said. “The spirit of evolution isn’t a bad thing. There will be short-term pain, but it’ll be good for the overall industry.”

How would such a ban impact training and early career staff? 

One of the fears companies mitigate with noncompetes is the idea that younger staff will pick up data, deal info and clients, get trained and then decamp for another gig. There is academic research that suggests that the presence of noncompetes in an industry does lead to more investment in individual training, according to Starr. Companies feel more comfortable spending on young talent if they’re certain they’ll stay and contribute, and it seems fair to say they may be less generous in CRE if noncompetes go away. 

But Starr added that while such agreements offer training benefits for individuals, his research shows they harm the industry overall. He’s found that the presence of noncompetes is directly correlated with overall lower innovation in the industry, and less dynamic job markets and information sharing harm collaboration to a degree.

Lewkowicz, who has been in the industry for two decades and has been hiring junior brokers for four years, doesn’t have them sign noncompetes. He hopes they can stick around for a certain time period, either 15 deals or $850K in gross commission, but he won’t stop someone who wants to go and hasn’t had trouble finding, retaining and growing talent at his firm. 

“I definitely understand why senior agents would be less comfortable investing time and effort into juniors if there’s no noncompetes,” he said. “It’ll be frustrating to some senior agents, but that’s because they were used to the status quo.” 

What are the chances the ban actually goes into effect?

According to the FTC and federal rulemaking procedure, the rule will go into effect 120 days after publication in the Federal Register.  But it’s already been the subject of lawsuits, so most observers expect the courts will weigh in on this issue. At stake, according to Starr and others, is whether or not the FTC as a federal agency has overstepped its bounds in making this ruling.

The legal issue at the heart of the question, the major question doctrine, or whether it’s a question the agency in question is directly empowered to answer, has been at the center of recent Supreme Court cases, and the current conservative majority has expressed a desire to very narrowly define administrative power. 

Firms have already been gaming this out, according to Weiss, who says she is often asked by executives about strategy around the potential ban. She says the real question is how this gets enforced and what kinds of penalties will be levied. 

However, if the courts do invalidate the FTC action, there could be change at the state level. New York State nearly passed such a rule in 2023, with Gov. Kathy Hochul vetoing the measure, so there is a possibility that expanded state-level action accomplishes much of what the FTC seeks to do.