Introduction

The real estate industry has gone through a host of changes during the past three and a half decades. Franchising first came onto the scene in the 1970s, followed by a push toward 100% agent commission splits in the 1980s and then the dot-com revolution that pushed the Internet to the forefront of our business in the 1990s.

In the first decade of the 21st century, technology continues to shape the way we work. The 2000s also signaled a move toward the true, vertical integration of homeownership-related services into the domain of real estate brokers and sales associates. From a macro perspective, however, perhaps no change has been more significant than the trend toward consolidation and the creation of larger brokerages.

Historically speaking, real estate has always been a fragmented industry with thousands of small, mostly inefficient, privately owned, mom-and-pop companies. Large, publicly held companies are now being drawn to the industry for the same reasons and characteristics that have long attracted individual entrepreneurs to our business – most notably, the low barriers to entry.

Where does the brokerage industry stand with respect to consolidation?

Mergers and acquisitions bring certain economies of scale that could never be accomplished in a small-business setting with one or two offices. When M&A activity is managed under a franchise brand scenario, the acquired companies and sales associates are then exposed to the services and support provided by a brand network. National Real Estate Trust (NRT) and Cendant pioneered this approach in the real estate industry. When NRT acquires companies, those firms gain immediate benefits from a centralized approach to marketing, advertising, education and training as well as other key administrative, back-office support functions such as financial accounting and technology.

There is a preponderance of studies and surveys showing that what today’s consumer wants most is a “one-stop- shopping” experience. And in a service-oriented industry like real estate, it pays to listen to what the consumer wants. The single-best way to assist the more than 52,000 sales associates in the company is to continue to provide and expand a platform of resources and services for them to use in order to grow their businesses and exceed their clients’ expectations. These resources are all made possible by growth – specifically growth in sales volume, transaction sides, revenues and earnings. For NRT and Cendant, mergers and acquisitions have been an instrumental growth vehicle.

Consolidation has also been a key driver of growth for others in the industry. It is well documented that larger brokerages are, on average, more productive and more efficient than smaller firms. It is a good thing too, because the real estate market has been riding a continually rising tide since 1991. As statistics from NAR have shown, and everyone in the business clearly knows, the past three years (2001-2003) have each successively marked the greatest real estate market in history, both in terms of the number of homes sold and total sales volume. It is critical, therefore, that sales associates be as efficient and productive as possible, in order to meet the high demand for their services and skills.

According to the 2003 NAR Membership Profile Study the income of REALTORS® is higher at larger firms, which certainly indicates that growth via consolidation has been good for the industry. In fact, brokers’ incomes are about 11% higher at firms that have 11 or more offices, compared with firms with only one or two offices. Furthermore, the earnings differential for sales agents in the same large and small company categories is even wider. Agent’s at large firms with 11 or more offices earned 21% more than agents at smaller firms.

It’s also fair to say that consolidation has brought a more business-like approach to the industry, which was once heavily populated by part-time moonlighters. Today’s top sales associates are full-time professionals, many of them with dedicated assistants or teams working with clients on their behalf. In the past six years, while the number of NRT sales associates has tripled, total commissions have increased almost seven times. In addition, consolidation has brought a wealth of business expertise into the industry.

Is corporate America interested in the real estate brokerage industry?

Absolutely. When you look at a sampling of the parent companies behind some of the largest real estate brokerage companies in the US you will be convinced that real estate brokerage is big business. Furthermore, the involvement of various highly regarded, publicly traded corporations is helping to raise the bar for all companies in our industry, on measures including everything from corporate governance and financial discipline to human resources management. Here are some examples:

NRT

Cendant Corporation, the world’s largest provider of real estate and travel services. It is one of the trendsetters in vertical consolidation of the brokerage industry and encompasses some of the largest and most recognized franchise brands in the industry with Century 21, Coldwell Banker, Coldwell Banker Commercial and ERA. Including NRT, Cendant real estate brands have a combined worldwide presence of more than 12,600 offices and 255,000 brokers and sales associates. The division also includes: Cendant Mobility, the largest relocation company in the US and the UK; Cendant Mortgage, the sixth-largest retail mortgage originator in the US; and the Cendant Settlement Services Group, a title agency and closing management company.

HomeServices of America

This company is an affiliate of Berkshire Hathaway, one of the 50 largest publicly traded companies in the US. Berkshire Hathaway’s chairman is legendary investor Warren Buffet, a champion of the long-term, buy-and-hold strategy. The HomeServices consolidation model has maintained the 16 or so different brands (320 offices and 16,000 sales associates) it has acquired. Most of these brands are well-established local and independent brands, although the company does also own and operate different franchise brands such as GMAC and Prudential in different markets. HomeServices has rolled up the second-largest number of real estate brokerage firms across the nation as part of a larger entity. In addition, Berkshire Hathaway has recently acquired several companies specializing in manufactured housing. The overwhelmingly positive message for our industry is that Warren Buffet thinks real estate is a good long-term investment.

GMAC Real Estate

GMAC Real Estate was formed in 1998 as a division of GMAC Home Services, itself a division of General Motors (GM). GM acquired Better Homes & Garden Real Estate from the Meredith Corp. and today operates 1,300 franchised and company-owned real estate offices and has 20,000 sales associates. Also included in the group are a global relocation services company and the nation’s sixth largest mortgage company.

Prudential Real Estate

Prudential Real Estate Affiliates is a unit of Prudential Financial Services, a company that in turn is a subsidiary of The Prudential Insurance Company of America, the nation’s second largest life insurance company. Prudential Real Estate Network has 1,500 real estate offices and 43,000 agents. The group also operates a large relocation service.

Is consolidation a successful strategy for the real estate industry?

The consolidation of real estate brokerage firms – through either merger or acquisition – has indeed been a successful strategy for many operators in our business. This includes large companies as well as small independents that have either bought out or merged with former competitors to create a new alliance.

What are the hallmarks of a successful merger or acquisition?

For the past six years, NRT has acquired more than 260 companies – from large to small – and has certainly learned a lot during that time. The company has always looked beyond the numbers and focused on the human element. That is because at the end of the day, when the contracts are signed and two (or more) companies must now co-exist and share resources and strategy in the same marketplace, there must be sufficient intellectual capital in place to make the plan work. In times of change like a merger or acquisition, it is imperative that the focus is on the people in the organization. In a business like real estate, where the earners are independent contractors, acquirers must earn trust from the very first moment and demonstrate value to those sales associates each day forward.

No one trying to grow a business through mergers and acquisitions can afford to underestimate the importance of finding like-minded businessmen and women to be new partners. An organization like NRT would not have been able to be as successful as it is without the great individual leadership that it has place at the local, regional and national levels, from the branch offices on up. The company purposely seeks to acquire and merge with companies that already have demonstrated great leadership, values and people. NRT has been extremely fortunate that the companies that have been acquired over the years had talented leadership teams in place – which, quite frankly, was the whole point of the acquisition.

In real estate today, there are several models for consolidation. NRT typically acquires companies and immediately aligns them with one of Cendant’s franchise brands. This affords the local companies the benefits of national advertising and global brand awareness. They also gain access to national sales programs, marketing technology and referral networks. Strong local leadership manages operations and continues to build on the success they achieved independently. The third key to our ongoing success, which is due both to the company’s financial resources and the Cendant brand networks, is to provide the tools, technology and educational training to make the companies even more competitive and market the sales professionals as full-service consultants.

By contrast, the HomeServices model features an umbrella organization whose acquired firms continue to operate as affiliated, yet autonomous units. HomeServices companies such as Edina Realty, Reece & Nichols, Realty South and Iowa Realty maintain their individual company names and market identities while leveraging their association with their parent company. The branding focus of HomeServices is evident in its marketing tagline, “A Berkshire Hathaway Affiliate.”

The third-most prevalent model for consolidation occurs mainly at the local or regional level. This happens when competitors either acquire one another or merge as equals in order to add some size and scale to their organization, the benefits of which are to provide greater services and support to their sales associates while at the same time managing costs. This is small business leadership at its best – seeing an opening, seizing an opportunity and acting on initiative.

What is the NRT formula for growth?

Let’s face it, whether an organization grows via acquisitions or organically by recruiting and expansion is not the issue – the only real growth that matters is intelligent growth. If you have a one-office company and you think you should expand to two offices in the same town because that’s what your nearest competitor has just done, you may want to consider all your options in a more strategic framework. For example, maybe your competitor now boasts two plush new office locations, but is only staffed to cover 50% of the available desks. Perhaps you are at 90% capacity with the desks in your office so maybe you should be considering a single new office space to accommodate your existing associates as well as the increased number of associates you need to compete with your two-office competitor. This would keep your overhead costs down, but a larger new space would still send the right message to your sales associates and your clients.

This simple example is just one limb on a large decision tree, but if you carry out this strategic thought process to answer every question facing your business, then you will be well on your way to achieving intelligent growth.

The same principle holds true for large companies. It also applies to internal decisions on such everyday issues as technology infrastructure. Intelligent growth comes in many shapes and sizes. It remains up to the individual broker or owner to determine how best to allocate his or her resources against the needs of the organization in a manner that will ultimately allow the company to grow and flourish.

What's your prediction on the future of consolidation?

I am often asked whether the consolidation in our industry has reached its limit. Regarding the NRT and its acquisitions, one is frequently confronted with the question “How big is too big?” The answers to those two questions are “no” and “there are no limits.”

Today, despite the prominence of a number of sizeable real estate brokerage owners, the real estate industry remains greatly fragmented and ripe for consolidation. In this case, it’s important to understand that consolidation will occur both via merger and acquisition as well as through a greater percentage of firms and agents affiliating with franchise brands.

According to the 2003 NAR Membership Profile Study, 14% of REALTORS® reported that they worked for a firm that had either been bought or merged during the previous 18 months. For 85% of these REALTORS®, their compensation as a result of the merger either stayed the same or increased.

Let’s look at the opportunities for further consolidation in our industry. Consider that according to the REALTrends Top 500 Report only 33 real estate firms of the top 500 companies in the US recorded 10,000 or more transaction sides (based on year-end 2002 figures). Further, only 41 companies had more than $2 billion in closed sales volume and only 118 surpassed the $1 billion mark. In an industry that according to ARELLO has 144,000 active real estate brokerages nationwide, these numbers clearly indicate that there is room for a great deal more consolidation in the future.

According to the latest NAR statistics, the percentage of broker/owners affiliated with franchise organizations has grown from 17% in 1978 to 30% in 2003. Likewise, the total percentage of sales agents affiliated with a franchise system has increased from 25% to 32% of a much larger pool when you consider that NAR now has nearly one million members.

Currently, NAR has done a remarkable job of lobbying to keep banks out of the real estate business. All one needs to do is look at the trail of mergers and acquisitions in the banking industry over the past several decades to understand that we would undoubtedly experience a new and larger wave of consolidation in real estate if and when the day ever comes when Congress changes this legislation.

Banks are not the only possible entrants into the brokerage business; there are many other potential new arrivals. We have already discussed the presence of Cendant, Berkshire Hathaway, General Motors and Prudential in the real estate sector. Over the years, our industry has also included large companies as diverse as Sears and Met Life, so it is not unreasonable to believe that we will see other such companies attempt to enter the brokerage business in the foreseeable future.

Closing Comments

For all large companies looking to get larger, the question comes back to the issue of intelligent growth. NRT is constantly talking to brokers in various new and existing markets. If conversations progress to the point where both sides are interested in a serious discussion of the numbers it will take to make a deal happen, then the company evaluates each potential acquisition on its own merits and in the context of the organization as a whole. Will this make the local company stronger? Will the addition of this new firm add value to NRT’s referral network? Is there a cultural fit?

Lastly, the beauty of real estate is that it is inherently a local business. Any company can expand and consolidate its presence in multiple markets so long as it has strong local leadership in place. Real estate is not a business for absentee ownership. Mergers and acquisitions are hard work, especially at the local level. It’s a lot like golf, where each shot requires an inordinate number of calculations and calibrations. No matter how many times you play the same course, you will never quite play it the same way twice because chances are you learned something new on the last round that will change your current approach. Though there are many similarities in the overall process and game plan for acquisitions, no two mergers ever follow the identical path. Regardless of size, as long as real estate brokerages feel a strategic need for growth, consolidation will continue unabated in our industry.

ACKNOWLEDGEMENT

This is an extract from the new book “Real Estate confronts the Future” by two of nation’s two leading futurists, Stefan Swanepoel and Tom Dooley. This book details the trends affecting the real estate brokerage industry and includes interviews by 20 of the industry’s thought leaders including people such as Terry McDermott, Dave Liniger, Bob Moles, Bob Becker, Gary Keller, Lennox Scott, Stewart Morris, Pam O’Connor, Dr. David Lereah, Jack Peckham, Marty Reuter and Dr. John Tuccillo. In this article, an extract from the book, Ron Peltier, Chief Executive Officer of HomeServices of America, Inc. In 2003 Peltier was named number one on REALTOR® Magazine’s 25 most influential people in real estate. In 2002 he was recognized by Ernst & Young as the “Master Entrepreneur of the Year.” The book is published by Thomson South-Western (January 2004) and can be purchased online at www.RealSure.com