In this column I refine the observations of my monthly site visits into tactics and strategies that brokers can use in setting the course of their businesses. I must confess that no such clarity has come from these experiences this month. Perhaps a community dialogue would be in order.
We are seeing seven distinct reactions, among our community members, to the current environment that we know as the American real estate marketplace. The focus of these observations was behaviors of thirteen different brokerage communities, ranging from
All of these markets are experiencing some level of stress and transition. Some are down almost boutique levels of 18 – 20 percent. Others are experiencing major market downturns that are 35 to 40 percent below levels experienced in 2006. The pervasive current of the down market is maneuvering many within brokerage communities into one of seven reactions.
Reaction 1 - Hunker Down: Most brokers started trimming expenses in 2006 and 2007. For some the trimming has evolved into slashing that is reaching well into resources and internal services that some might consider essential. IT, training, web, marketing and communications programs are all now considered fair game. However, a sustainable market is not likely to return until the third or fourth quarter of 2009. Furthermore brokerages may well be operating in this reduced configuration for the next 18 months. When one considers these realities, one wonders whether what appears to be a short term solution will be sufficient to carry a brokerage for a longer period of time.
Reaction 2 – Try to Sell: Some brokerages are opting to leave or attempt to leave the marketplace. Once again a whole new industry behavior pattern has emerged around mergers and acquisitions. As a starting point it is safe to say that acquisitions, as we have come to know them over the past several years, are very rare. Unless the brokerage to be acquired represents a unique property there are, for all intents and purposes, simply no traditional acquisitions taking place.
Reaction 3 – Rollup: A number of the stronger regional players are engaging in acquisition programs called “rollups”. These are offerings in which the regional brokerage acquires the assets of the smaller brokerage (typically single to three office firms with 25 – 100 agents) in exchange for assuming debt and a payment equal to 10 – 15% of 2007 company dollar. These payments are sometimes in cash and sometimes over a 24-month period.
Rollup is a technique used by investors (in this case stronger regional players) where multiple small companies in the same market are acquired and merged. The aim is to reduce costs through economies of scale. Rollups are also created to reduce competition in small risky markets (in this case real estate), where there are often many companies but room for only a few to succeed. Such an investor, faced with an opportunity to invest in two competing companies, may reduce risk by simply investing in both and merging them. As is the case here, rollups are often part of the shakeout and consolidation process during an economic downturn or as new market sectors begin to mature.
Reaction 4 – Merger of Convenience: For firms seeking to terminate operations that do not meet the regional brokerage acquisition profile a more severe option called a “shotgun merger” or “merger of convenience” has evolved. In this scenario the terminating brokerage simple exchanges its assets for the payment of its debts by a brokerage competitor, generally from the same market.
Reaction 5 – Same old, same old: Perhaps most unusual of all down market reactions can be found in the firms that continue to conduct their business in the same fashion as before the down market only with lowered expenses. Despite the overwhelming amount of information and guidance that is available from a wide variety of sources regarding real and effective ways in which to address the challenges of the down market, an impressive number of firms are simply “doing what they have always done”.
A number of interviews were undertaken over the past 60 days in an attempt to better understand this behavior option. No simple answer has been forthcoming. The information gathered would place the culprit for this option somewhere between “macho” and “terror”. No other obvious answer has emerged relative to why a broker would take no action whatsoever to address a radically declining business situation.
Reaction 6 – Go It Alone: None of these markets observed the brokerage community coming together to address either the circumstances or the solutions. Unlike other industries similarly disposed (e.g. the airline industry) the American real estate brokerage appears to find no value whatsoever in using the institutions (e.g. organized real estate at the local, state and national levels) that they have created over the past fifty years to solve this historic situation.
We all understand that the current market is not under our control. It is under the control of an irrational consumer and society. As master strategist Michael Kami so wisely stated, the changes in the consumer’s needs, desires, and demands will tell us where we need to go. We must be curious, observant and analytical. We must seek out the clues of change and translate those clues into opportunities and action.
Reaction 7 – Co-Opetition: Kami’s comment shows us that all of us, working together, must feel the pulse of this change on a daily basis. Most of all we must work together. For the purposes of this moment in history we must not see ourselves in competition, but rather as the stewards of
Whatever happens moving forward we should never question that we have the strength, the wisdom and indeed, the resources to survive this challenge. There are solutions, answers and options available here. This is the moment that we have been living for.
Do not opt for the blindfold. Let’s work together, and see this time in history as an opportunity to take our industry to the next level, for the benefit of our consumers, our market and yes, our legacy.
Reject the blindfold; enlightenment is the way to go.
