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Real estate leaders across the brokerage and technology world are bracing for a period of mass consolidation in the months ahead, as some brokers and entrepreneurs look to make an exit from an industry with changing rules and smaller margins.
The contracting market will place pressure on struggling startup entrepreneurs to sell or take a down round in funding, while a wave of broker-owners may take this down market as an opportunity to nail down a succession plan, according to brokerage executives, proptech entrepreneurs and investors.
One of those consolidators, the regional independent brokerage network Howard Hanna Real Estate Services, is bracing for a big 18 months ahead for mergers and acquisitions in real estate — what the company’s president calls “the year of consolidation.”
Howard “Hoby” Hanna III
It’s spurred by a combination of factors, Hoby Hanna told Intel. Real estate companies are cheaper to acquire, for one thing. And companies with a long time horizon are eyeing a bigger piece of the pie when the next boom in home demand arrives, driven by demographics, Hanna told Intel.
“I think there are a lot of folks that have the ability to consolidate, that kept their powder dry for the last six months,” Hanna said. “And I do think valuations might come back into line, where they might have been a little bit high in 2021.”
But even though there’s a general desire to scoop up promising brokerages and proptech companies, today’s high-interest environment — and startup owners reluctant to sell at a lower valuation — might provide significant pushback against that consolidation trend, according to an Intel review of market data.
A great time to acquire — if you have the money
A rise in mergers and acquisitions has become an increasingly popular prediction among real estate circles. But if this wave does come about, it will be against the current of the market and preference of real estate startup owners and brokers reluctant to sell at today’s lower valuations.
Chris Heller | OJO
“The proptech landscape was extremely fragmented, just because of the sheer numbers of companies,” OJO Chief Real Estate Officer Chris Heller said a few weeks ago at the Disconnect real estate conference. “We’ll also see this moving from a landscape of fragmentation to a lot more consolidation.”
Indeed, after plummeting in the first few months of the pandemic, the number of mergers and acquisitions in the U.S. and Canada rose in 2021 to levels 16 percent higher than they were in 2019, according to data from the Institute for Mergers, Acquisitions, & Alliances.
Then the Federal Reserve stepped in.
A spike in interest rates the Fed initiated to slow inflation coincided with an immediate reduction in consolidation activity throughout North America.
Chart by Daniel Houston
It’s against that same higher-rate backdrop that those looking to scoop up real estate companies will need to stage their consolidation efforts.
The high price of capital means the main candidates to buy are primarily cashflow-positive businesses with the capital on hand to make big purchases.
There are fewer of those businesses around today than this time last year, especially in real estate.
An Intel analysis of National Association of Realtors data suggests the potential pool of transaction revenue from existing-home sales was down 24 percent year over year in February. That’s due to a dramatic yearlong reduction in home sales but also a more recent eight-month decline in the average price of those homes.
Chart by Daniel Houston
That means there’s less recurring revenue to go around for brokerages and tech startups that assist with the real estate transaction.
But while this may reduce the number of real estate companies in a position to scoop up competitors, it may also put pressure on more business owners to sell for the right price.
But what that price ought to be is increasingly contested.
Proptech lifeline or lowball offer?
It’s been a dizzying couple of years for real estate company values, and some industry players say it has created a psychological barrier for companies to sell.
Chart by Daniel Houston
In the chart above, publicly traded brokerages, listing portals and iBuyers doubled or even, in some cases, briefly quadrupled their share prices from the beginning of 2020.
But those gains, which came as it became clear that real estate companies were benefiting from a low-rate-induced boom in housing demand, were temporary.
Brokerages and listing portals have seen their valuations crash back below their late-2019 levels.
And some more specialized proptech firms — such as iBuyers Opendoor and Offerpad — have taken even harder hits, losing the vast majority of their value as the market correction landed an outsized blow in certain subsets of home transaction.
Despite a general reluctance to sell at today’s low prices, Heller said the current climate will force many tech entrepreneurs to give in to the consolidation trend.
“A lot of companies just won’t have a choice: They have to find that safe harbor to pull into to make it through the storm,” Heller said.
Jon Hong | Fifth Wall
Proptech founders who remember the sky-high valuations of yesteryear are reluctant to take out new funding at a lower valuation, even when it’s in their best interest, Fifth Wall Ventures Partner Jon Hong said at Disconnect.
And a number of brokers looking to exit the game but can afford to wait a few years are waiting out the market to get a better price, Hanna told Intel.
Why some brokers are selling
Few people in the industry have a closer vantage point of what goes through the mind of a selling broker today than Hanna.
His regional powerhouse has been one of the most active in acquiring independent brokerages in recent years. In many conversations with broker-owners, he has seen a common trend among those looking to sell: They’re not getting any younger, and it’s time to make a succession plan.
Some of the deals in the pipeline over the coming months will be the result of six months or more of due diligence, spurred by a broker-owner that was in the thick of the market correction.
“I just think there are a lot of brokerage firms that are saying, ‘Do I really want to go through another downturn, another correction, at an age where I am,’ [with] businesses that are sellable to other acquirers,” Hanna said.
Other broker-owners may feel the pull to leave the industry for other reasons. The ongoing depression of commissions is squeezing margins, for example. And others might look at the ongoing lawsuits that threaten to upend how agents make money and want to get out ahead of them, Hanna said.
“I do think there are some headwinds for people,” Hanna said, “and it’s just, do those owners have the energy and appetite to fight through those headwinds?”
Who are tomorrow’s brokerage consolidators?
But some of the biggest players in real estate today — the publicly traded brokerages — aren’t the ones that will take the lead, Hanna said.
That’s because these companies, in service of their investors, are driven to maintain healthy balance sheets during a down market where revenues are lower and capital is scarcer, Hanna said.
“They can consolidate, but you also have to be profitable at the end of the day,” Hanna said. “At least, that’s my belief. I do think there are some very strong consolidators and some companies that haven’t been consolidators that have the balance sheets to step up.”
Instead of the traditional big players, he sees the next consolidation wave being led by large regional brokerages with strong balance sheets, plenty of available cash and the itch to take advantage of a down market and lower valuations.
Private equity could also be a wild card, he said. The brokerage network @properties and its brand Christie’s International Real Estate have been growing in recent years, backed by Quad-C Management, a private equity firm. Hanna suspects more such firms could get involved in real estate in the coming months.
And then there’s the “800-pound gorilla,” in Hanna’s words: Berkshire Hathaway is already in the real estate business and sits on enough capital that it could, in theory, be a powerful consolidating force if it wants to.
In other words, despite down revenues and high-interest rates, there are plenty of players with the resources and incentive to gobble up competitors during the down market. The question is if — or when — they will use the coming months as an opportunity to strike.
Hanna believes many will.
“I look at this as a great opportunity to take advantage of it and come out in 2024 and beyond, and really [grow],” Hanna said. “Because I think we’re going to see a strong housing growth market, I think, for the next 10 years.”
Correction: A previous version of this story included a chart that grouped Keller Williams alongside several publicly traded brokerages. Keller Williams is not publicly traded. The chart mistakenly included Kennedy-Wilson Holdings, a real estate investment company. The image has been corrected.
