Editor’s introduction: Kool-Aid stands may be the only industry more fragmented than real estate. At one time, it was garage sales, but E-Bay changed that.
The fragmented real estate industry seems to be consolidating. But is it really? And is it good for the consumer? This four-part series looks at the trend of consolidation, who wins, who loses, and who is driving it. (See Part 2: Brand names move into technology space; Part 3: Smaller lenders see opportunity in mergers; and Part 4: Brokerages combine while market explodes.)
The argument for fragmentation is that it serves an industry that provides a uniquely local service and that competition creates appropriate local pricing and more localized and customized services. The case against it is service standards suffer, regulatory oversight is impossible and prices remain high.
Fragmentation has not gone unnoticed. It is an economic condition that attracts investors who think they may have the smarts to consolidate the industry, drive efficiencies through cost cuts and earn higher margins on the same gross revenues. So it follows that profit potential and fragmentation would lead to industry consolidation.
Can real estate realistically hold onto to its Mom-and-Pop culture for much longer?
More than a quarter of all Realtors in the United States are affiliated with Cendant Corp.‘s real estate brokerage franchises or brokerages owned by Cendant subsidiary NRT Inc. The Cendant franchise brokerages, which include Century 21, Coldwell Banker, Coldwell Banker Commercial and ERA brands, have a formidable force of about 200,000 sales associates and 12,000 offices.
NRT, with corporate-owned brands including The Sunshine Group, The Corcoran Group, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s, employs about 55,000 sales associates in 950 offices. Acquisitions have been at the core of NRT’s rapid rise to industry prominence and dominance since its creation in 1997, and the company has bought more than 250 real estate brokerages in its short history.
NRT is not alone in consolidating the industry, though. Other players, big and small, are expanding operations through mergers and acquisitions. According to Presidio Merchant Partners, which provides investment banking and financial advisory services to real estate brokers, the 10 largest real estate companies in 2002 represented about 37 percent of the entire industry’s sales, and the top 500 brokers represented about 83 percent of total industry sales. Also, a majority of the top 25 firms in 1990 have since been acquired.
Get used to it. This consolidation trend is not going away, say industry experts, and the purpose and function of these moves will continue to shape the industry.
Is consolidation good or bad for the real estate industry? Take a survey.
Ed Krafchow, president of Prudential California, Nevada and Texas Realty, said that in the past decade the industry has transformed from roughly 30 percent brand-oriented and 70 percent independent brokers to roughly 70 percent brand-oriented and 30 percent independent brokers. Consolidation in the current market is a component of survival, he said.
“At our organization we believe we have to do some form of consolidation in order not to be consolidated ourselves,” he said.
Expansion should be metered by adherence to core values, he said.
“Traditionally we’ve had these real estate tribes and villages. We are moving from tribes and villages to something else. I don’t want to lose that sense of family, of connectivity. When this starts turning into a corporate business then I’m leaving,” he said. Growth, he added, can create a sense of “distance between people–that is a dangerous element to this consolidation process.”
While real estate industry mergers and acquisitions can be similar in some ways to those in other industries, a key difference is that people–the real estate agents–are the primary assets in any brokerage consolidation, he said.
Consolidation has in some ways “blurred the line” in brokerage identity, he also said, franchises and corporate-owned brokerages may share a brand name but have radically different styles. In Krafchow’s case, his company is both a franchisor and a franchisee.
“Yes, I am a brand, but I am fiercely independent.” Brand-affiliation is a useful tool for consumer recognition and geographic expansion, he said.
The next phase in the consolidation revolution is inter-industry consolidation, he said, with the integration of real estate, title and mortgage companies and services.
Krafchow said he believes change is on the way for real estate powerhouse Cendant.
“It’s going to have to shift and change in relation to its own business model.” What form that change will take remains to be seen, he said.
Cendant and NRT officials had no comment for this story about consolidation in the real estate industry.
Officials at Coldwell Banker United, Realtors, an independently owned company, this month announced the acquisition of Coldwell Banker Stepp Tuttle Realty of South Carolina. Wallace D. Perry, president of Coldwell Banker United, said a shared philosophy and approach to real estate are vital to a successful joining of brokerages. Coldwell Banker United now has 2,000 sales associates and 50 offices in Texas, North Carolina and South Carolina.
Mergers within the industry can improve customer service, Perry said, as larger companies are able to expand the range of services they provide to consumers.
“It gives the opportunity for more staff and specialized staff,” he said. And “you simply have to be as large as you can to lower the cost of operations. It is very difficult to make a small office profitable,” he said.
Unlike mergers and acquisitions in other industries, real estate consolidations tend to preserve jobs rather than eliminate them, he said, because “real estate agents are the major assets in a real estate acquisition.”
Perry said market conditions are a major driver for consolidation activity.
“In the short term, there are probably going to be more of them,” he said. “Larger companies are pursuing them very aggressively, just like we are.”
Gino Blefari, CEO of Intero Real Estate Services and a former NRT executive, said small profit margins and aging brokers seeking an exit strategy are major contributors to industry consolidations.
“It is a thinly margined business, and typically revenue is 4-8 percent,” he said.
And there will likely be a continuing trend of consolidations, he said, as there is always a supply of new start-up brokerages. Blefari said there is room for more mergers of like-branded independent brokerages in the coming years.
John Bearden, CEO of GMAC Home Services, said consolidation can be good or bad, depending on the underlying motives.
“If the motivation is simply to acquire market share for purely and solely economic reasons then the repercussions will be in one direction,” he said. But consolidation can be “a very, very positive factor for our profession,” he said, when the mission is to preserve core services and values.
“If the whole focus or motivation is simply about buying market share, there could be consequences for the local firm. This is an industry that needs to find a way to build trust and confidence with our consuming public,” he said. “We don’t ever aspire to be as big as Cendant. We don’t need to be.” GMAC’s real estate company-owned business unit includes 100 offices and 3,500 real estate professionals, while the real estate franchise unit has 1,300 offices and about 22,000 sales associates.
Harley Rouda Jr., CEO and managing partner of Real Living, one of the largest real estate firms in the nation, expects the current wave of industry consolidation will be the first of several such waves.
“In the next wave you’re going to see additional players get into the market or existing players stepping up acquisitions. In the third wave you will start seeing the major consolidators . . . merging with each other.” In the short term, regional consolidation is likely to increase, he said.
Independent brokers will likely need to grow in size, geographic reach and services to stay afloat in the industry, he said.
“An independent broker, to stay profitable, is going to have to continue to grow. Niche players will have a role regardless in certain markets, especially the high-end markets in certain parts of the country,” he said.
And there will always be many choices for consumers, he said. “The bottom line is: Real estate is not going to become a monopoly or an oligopoly,” in which a few companies hold all of the power. Consolidation can be negative if a company does not maintain an agent-friendly philosophy, Rouda said, or becomes too bureaucratic.
John Reinhardt, president and CEO of Fillmore Real Estate, the largest privately owned and operated residential and commercial real estate company in New York City, said the beauty of independents is their ability to change course “on a dime” and keep up with the fast-evolving industry. Reinhardt has no worries about the future of consolidations or the solvency of his brokerage. The company, founded in 1966 by Reinhardt’s father, now has 500 agents and 21 locations.
“We’re experiencing unbelievable times,” he said. “Every year we’re better than ever. We know the neighborhood. We know the community.”
Fillmore is a real estate staple in Brooklyn, where the housing market is booming. Reinhardt said he has been approached to sell the business but has always rejected the offers.
“We’re staying independent and we see the value in that,” he declared.
Real estate, he said, is inherently a relationships-based business. Consolidations, in his opinion, can put brokerages out of touch with the communities they serve and affect productivity.
“Brooklyn has its own personality. We’re so embedded with the community; our personalities are so embedded. We are people-oriented and that’s the perfect business to be in,” he said.
Ed Krafchow and Harley Rouda will speak next month at Real Estate Connect, presented in San Francisco July 28-30.
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