In Northern New Jersey’s quaint town of Madison, Realogy runs its global real estate operation in a nondescript suburban business park. Located at 175 Park Ave, the 15-acre facility offers its employees ample outdoor parking with VIP underground spaces for its executives.
Employees and guests, who enter through a spacious and pristine lobby, are greeted by a mural of the “core values” for some of the most powerful brands in real estate. Another banner touts Realogy for being recognized as one of the “World’s Most Ethical Companies®” by the Ethisphere Institute.
Like a corporate fairy tale, nothing seems amiss, even the perfectly groomed landscaping that surrounds this real estate services epicenter. But as we recently reported, change is brewing at Realogy, which sits on top of an industry that may be meeting its (disruption) maker.
As their margins slip lower and lower, brokers are being hit from all sides by one threat after another that cannot be ignored by Realogy, which depends on the economic health of its broker-owners. In good times, the business model is golden; Realogy gets a healthy sliver from every transaction, off the top of every sale. Sweet.
But recently, the formula may be tarnished, as big changes hit the entire industry. Unique market conditions are in part to blame — Realogy is in the home listing business, and listings are at their lowest level in 20 years.
Then there’s its Austin, Texas, nemesis, Keller Williams (KW), which is growing as fast as a viral video on YouTube with a culture that is less buttoned up than Realogy — its founder Gary Keller is an amateur rock ‘n’ roll musician in the Gary Keller Band with KW co-CEO Chris Heller on the drums.
The raucous but disciplined firm is guided by a strong agent culture made up of team members who can participate in future earnings by recruiting other agents. Conceivably, KW could fizzle as fast it suddently raced to the top, but that is unlikely as the firm gobbles up market share.
Once known for its anemic producing agents, KW is growing its top producer network, which along with some other well-funded startup competitors like Compass is showing up as a Debbie Downer on the Realogy earnings calls.
Shrinking its hefty debt load from the days it was acquired by high-flying private equity firm Apollo, Realogy is a well-managed, shrewd and canny company that should never be underestimated.
Plus, its margins are impressive on a low-cost structure and the company has a well-oiled relocation network. Who can argue with a $4.11 billion market cap? For now, Gary Keller can only dream of such a valuation.
Not standing still
Further proof of Realogy’s smarts are the succession steps the Realogy board is taking to bring in the next generation of executives. In the coming years, the company will likely step out more urgently to face new business threats and may even redefine itsef without killing the golden goose.
The time is right as the entire industry must reckon with a gaggle of perils.
Suddenly, a new generation of 100 percent commission models have entered the real estate arena. Plus, independent teams have begun to grow market share, as have indie brokers, expansion teams, marketplaces like Opendoor and virtual brokerages that use the latest technology but need less office space than traditional brokers (and in some cases, none at all).
These emerging brands can avoid paying franchise fees and scale back their office rental costs to fund online lead acquisition and invest more in technology and marketing.
When real estate indie giant Douglas Elliman chose to leave the Prudential franchise network several years ago, CEO Dottie Herman says that the franchise fee savings were plowed into supporting her local brand.
Unlike other industries such as music, travel and transportation, disruption has come in dribs and drabs in the real estate sector, but many experts say change is crawling up the back of broker owners. Agents may be safe, but their brokers are like tourists on a crowded Barcelona Metro train with their wallets hanging out.
Lessons may be found in the retail industry, which is also being battered by technology threats, in this case the boom in e-commerce — many retailers are being “Amazoned.”
In recent months, they are fighting back by closing hordes of stores and investing in their own e-commerce business. It is a foundational departure from its very roots, but necessary for survival.
Confronting similar threats, many smart real estate brokers are shrinking their office space and diversifying their activities. As their core business margins shrink, some of the most successful real estate broker-owners are getting into new business lines. Many are Realogy brands.
Ohio-based Howard Hanna Real Estate Services owns its own mortgage company; New Jersey-based Weichert Real Estate operates its own relocation company and Chicago-based @properties and Seattle firm Windermere invested in technology services that it peddles to others.
The Norton Agency in Gainesville, Georgia, owns dozens of operating companies, including a property casualty insurance company, a commercial developer and a real estate investment portfolio management firm. The owner Frank Norton is also an artist, who occasionally sells a painting or two.
North Carolina real estate broker Josh Tucker owns a staging company and a landscaping business and will soon open a concierge service for his real estate clients. “We capitalize on the clients we have,” he says.
San Francisco indie broker Pacific Union helped engineer Fidelity’s acquisition of software company Commissions Inc. The title company owns Pacific Union.
And one of the nation’s largest real estate companies is allegedly trying to purchase an online property marketplace.
Making moves, but are they bold enough?
The industry’s biggest challenge is figuring out where to go with its technology. Zillow now owns the consumer, so fighting for leads is too pricy for most brokers.
While agile expansion teams are figuring out the guerrilla lead game, many brokers are not suited for this Internet rumble.
To get ahead of the technology curve, Realogy, like all major franchises, cuts deals with the portals to secure exclusive placement and lower advertising rates for its brokers. It also invested in a new technology platform when it acquired Zip Realty.
It’s making some moves in the indie brokerage arena with the acquisition of at least one boutique agency: Climb in San Francisco. Other acquisitions are expected.
But does Realogy need to make a bigger play, something more daring?
For example, its ties to Wall Street give it unique access to capital to at least experiment with a version of Opendoor where it could help brokers finance home purchases and give sellers a more certain option when selling a house — a killer combo of old and new school.
More than a decade ago, the music industry faced radical dislocation because of the pirating of music and online streaming. In economic shock, the big labels tinkered, sued and basically stood still as the music world changed around them.
It took 10 years to come out of the cocoon, and this year the music industry’s revenue is growing again. But it is with a new business model — monthly music subscriptions — that is not as lucrative as the bygone days when it controlled everything we danced and listened to. Still, many music studios survive and are even thriving again.
Home listing data can be compared to music IP. Due to a series of regulatory actions and court cases over the last decade, listing data is no longer the sovereign domain of the brokerage industry.
All kinds of companies can now freely access it, publish it and monetize it.
Search for a home on Google, and you will likely find the listing on the top links pointing to Zillow or Redfin. Finding the listing agent can be tricky and the brokerage might as well be on a goose hunting web site, often nowhere to be found by home buyers on the powerful search engine.
It is this turn of events that prompted brokers to come together to start Upstream and get a better grip on controlling its valuable listing data.
This effort could be compared to many of the failed efforts by music companies to control its music IP. But it could also be akin to the music labels’ more recent and pragmatic efforts to at least monetize the IP by begrudgingly cutting deals with the streaming services, so it could survive.
Upstream will either be a hapless reaction to unfolding events or a heroic move to redefine the industry into the future.
The real estate industry has plenty of choices — maybe too many.
The challenge is making the right ones, as brokers face this new Y in the road. In one direction lies opportunity.
The other, a train wreck.