Editor’s note: The fragmented real estate industry seems to be consolidating. But is it really? And is it good for the consumer?

Editor’s note: 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 1: NRT: The mega consolidator; Part 2: Brand names move into technology space; and Part 3: Smaller lenders see opportunity in mergers.)

Real estate veteran Robert E. Helms has sold Prudential Carolinas Realty not once, but twice since the brokerage was founded three decades ago. The CEO first sold the brokerage to Merrill Lynch in 1986. He bought it back in 1991 after Prudential acquired the Merrill Lynch real estate operations, then sold it again two months ago.

The new owner is HomeServices of America, an Edina, Minn.-headquartered company that has a combined total of 17,000 sales agents, who last year closed more than 185,000 transaction sides in 18 states.

“They have a fantastic business model for today,” Helms said.

Prudential Carolinas Realty was but one of HomeServices’ many acquisitions in recent years. The company, a unit of billionaire Warren Buffet’s Berkshire Hathaway corporation, is on a mission to acquire local well-known realty brands to develop a national presence. Other recent additions included Central California-based Prudential Hunter Realty and South Florida-based Esslinger-Wooten-Maxwell Realtors, which combined totaled 16 offices and 905 sales associates.

The HomeServices name may be unknown to the public, but the company is the second-largest realty brokerage in the country. First on the list is Cendant Corp.’s equally anonymous NRT, which has 950 offices and 55,000 sales associates. NRT operates in 30 metropolitan markets, and most of its offices are affiliated with Cendant’s own Coldwell Banker franchise system. HomeServices operates in 18 states: Alabama, Arizona, California, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, Nebraska, North Carolina, North Dakota, South Carolina, South Dakota and Wisconsin. The company has retained local-market brand names and isn’t in the franchise business, although some of its individual units are affiliated with franchise chains.

Is consolidation good or bad for the real estate industry? Take a survey.

The HomeServices story is one big and important sign of consolidation in the real estate industry.

The growth of some brokerage companies into regional and national entities has been a natural–and almost predictable–result of the economic realities of the modern-day real estate brokerage business. Successful sales associates have commanded a larger share of the commission dollar. Technology has added new categories of expenses to the financial statement. Consumers have expressed their preference for one-stop shops that offer mortgage, title, insurance and other real estate services, as well as brokerage operations. Those factors are among those that have combined to lower broker’s net revenues, raise their costs and squeeze their profit margins.

“Consolidation has been and will continue to be a major trend in the residential real estate industry,” said Jenny Pruitt, CEO of Atlanta-based Jenny Pruitt & Associates, a local-branded HomeServices-owned realty company that has 385 sales associates in five offices.

Prudential Carolinas Realty closed 11,225 transaction sides worth $2.3 billion last year, according to a corporate statement, and today has 750 sales associates. Helms wants to build the company to 1,000 salespeople within three years through recruitment and acquisitions and with the assistance of HomeServices.

“They have additional resources to bring to the table. They can provide resources and tools to the consumer and the agents that I can’t, even as big as we are,” he said.

Helms’ view echoes that of HomeServices CEO Ron Peltier, who has positioned the corporation’s individual units to provide a full range of realty-related services. Title, mortgage, escrow and homeowner insurance businesses are at the core of HomeServices operations, he said earlier this year during an Inman News audio conference.

Yet neither NRT’s huge size nor HomeServices’ appetite for acquisitions should create the false impression that real estate is a shrinking economic sector. The National Association of Realtors last week predicted home sales will set another record this year, and the association itself now has a record 1 million members.

Consolidation of existing companies and growth of the industry through the addition of more salespeople can occur simultaneously, Helms suggested. And small firms certainly aren’t extinct.

“Numbers tend to indicate (real estate) is still a mom-and-pop-type business. There are an awful lot of small offices operating,” noted Jack Harris, a research economist with Texas A&M University’s Real Estate Center.

Consolidation and growth result both from a pressing need to create economies of scale and turn them into the sophisticated listings-rich Web sites and one-stop shops of services that home buyers and sellers want.

“Technology is one reason why you don’t see many small companies. There will always be some niche companies, but as a generalist brokerage, a full-service company, you need to have the volume to be profitable. Technology is a cost factor on the (profit-and-loss statement) and you have to have the volume to justify it. Technology is a wonderful improvement, but it’s also expensive. The consumer wants the technology, so you are going to have to give them the technology,” Helms said.

Brokerage company mergers have been win-win arrangements, Pruitt said. Companies that have acquired others have been able to expand their market presence much faster than they would have been able to do through recruitment alone, while companies that have been acquired have been able to invest substantially more capital in their own growth and long-term success, she said.

The jury is out on whether consolidation has had or will have a beneficial or detrimental effect on home buyers and sellers. Pruitt said she hasn’t noticed that consolidation has had impact on them, and Harris said so far it’s been largely “irrelevant” from their perspective.

The pros and cons of consolidation for consumers present “a dilemma of economics,” Harris explained. Larger companies can offer more services and achieve economies of scale that generate costs savings that can be passed along to customers. But there is a risk–albeit a tiny one–that consolidation ultimately could result in a monopoly and consequently higher prices.

Helms said consolidation benefits consumers because it enables brokers to provide more services in one place.

“(Consumers) have said in focus groups that they like doing business with a real estate company that can provide full service. All the services, not just one,” he said.

Either way, these experts agree that consolidation is likely to continue. Indeed, academics who’ve studied the real estate sectors are “a little puzzled,” Harris said, as to why there hasn’t already been even more consolidation among brokerages to capture the available economies of scale.

Peltier, Pruitt and Helms all anticipate that HomeServices and its local-market units will consummate more acquisitions.

“As long as the real estate market continues to be the shining star of the American economy, consolidation will be a great vehicle for successful companies to grow even larger and more successful,” Pruitt said.

***

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