Dynamic Forces Alter Rules of the Game

Over the last several years, the real estate services industry has witnessed the proclaimed deaths of local/regional firms, the disintermediation of the broker's role and, most recently, a reprise of mergers and acquisitions.

Typically, the prognosticators of each phase have been neither wholly right nor wrong. Each change in our business has had some basis in reality, although each has occurred in ways that none of us foresaw.

Today, the most compelling conundrum in our business is the trend toward service provider consolidation matched by the steady removal of “barriers to entry” within the brokerage field. Thanks to the evolution of Web-based research and market information sources, efficient communication tools, and ancillary services from outside providers, many barriers to growing a real estate services firm have eroded.

As I travel around the globe, I am impressed with the number of firms being created as well as existing firms that are altering their service offerings. These companies are creating entrepreneurial environments for persons who decide they can better serve clients in a smaller firm than in a large corporate environment.

Conversely, the consolidation trend among international, national and regional firms is fitful. The push for more complete, efficient and profitable business entities is a boon to customers and, hopefully, the firms themselves.

Clearly, there is no “right” model. The beauty of our industry is that there is a plethora of clients to match many service platforms. There are, however, some broad themes that are becoming apparent.

Evolution Is Inevitable

The core business in most firms historically has been transaction-driven, with over half of the gross brokerage revenue deposited almost directly into the hands of our agents. The problem is that the opportunity to create a return seldom rises above the senior leadership teams. By the time the agents, support staff, senior management (whether that be local proprietors or the international corporation's corporate leadership), and other overhead costs are absorbed, there is little left for outside ownership or stockholders.

In its current state, our industry is not designed to reward anyone further up the food chain. This paradigm will continue to define the success of our industry participants until the compensation and financial models are altered.

Indeed, I believe we will see a growing number of firms and agents begin to challenge the traditional compensation models as a result of these evolving business platforms. The evolution of firms targeted at serving select segments or categories of clients will drive us all to be more efficient.

Rethink Rationalization

There is growing evidence that industry-based consolidation strategies are most successful when teamed with increasing barriers to entry. This results in increased revenue opportunities to offset the costs of consolidation and limits the ability of competitors to react.

One of the great contemporary consolidators is Wayne Huizenga (financier and owner of the Miami Dolphins) as evidenced by his work at both Waste Management and Blockbuster Inc. In both cases, the steadily increasing barriers to entry and modernization in the waste removal and video rental industries provided fertile ground for the consolidation strategies used by Huizenga.

Although we hear much about the benefits of consolidation or expansion, much about our industry flies in the face of such business strategies. Still, I believe the consolidation trend will continue for the near term, resulting in greater opportunity for a shrinking number of large companies. However, the opportunity is balanced by daunting financial, cultural and organizational challenges. Only the very talented companies will thrive.

At the other end of the spectrum, the consolidation process will open a range of opportunities for entrepreneurial firms to secure clients. However, these trends combined with increasing productivity will reduce the number of brokers necessary to serve the client base.

Ultimately, there is no one-size-fits-all model. So, what's the difference between the firms and individuals who succeed versus those who fail? Simply stated — it's clarity. The strength that comes from knowing who you are, where you want to go and how that will be accomplished can't be overstated. There is enough business to make many firms and individuals successful, but the key is finding the path that fits.

Ross Ford is president of TCN Worldwide. He can be reached at [email protected].

TAGS: News
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