We projected 2017 would be a “good, but not great year” for merger and acquisition (M&A) activity in the real estate space, and what unfolded was quite significant, including the biggest brokerage acquisition in decades, an ongoing fight for California market share and a busy stint for large regional independent firms.
HomeServices of America makes largest brokerage acquisition in 40 years
In September, HomeServices of America made waves with its purchase of mid-Atlantic giant Long & Foster, the nation’s largest private residential real estate company boasting $29 billion in sales volume.
President of Real Trends Steve Murray, who was working behind the scenes on the Long & Foster deal as he often does with brokerage M&A, explained that “it was the largest acquisition in history going back 40 years and the multiple, to the best of our knowledge, was the highest ever paid.”
At the beginning of the year HomeServices of America also also bought Houlihan Lawrence, the firm serving the northern suburbs of NYC since 1888 that booked $6.7 billion in sales volume in 2016.
Together these purchases position HomeServices of America as the country’s leading homeownership services provider and the largest residential real estate brokerage, with expected sales volume of $123 billion for 2017, according to the company.
Ron Peltier, chairman and CEO of HomeServices of America, told Inman the Long & Foster deal was “a classic example of timing and opportunity.” It helped that Peltier had known co-founder Wes Foster for 35 years, and HomeServices of America was the company Foster called when he wanted to sell.
California competition heats up
On the West Coast, meanwhile, large independent brokerages Pacific Union International (based in San Francisco) and NYC’s Douglas Elliman were busy buying up quality firms in a fierce bid to claim more market share in California.
Pacific Union most recently took a majority stake in L.A. luxury boutique Gibson International this month after merging with L.A. luxury firm Partners Trust in August and East San Francisco Bay brokerage Empire Realty in October. The San Francisco company was still digesting its merger from late 2016 with high-end SoCal firm the John Aaroe Group. All four of these companies, which together will book a total sales volume of $14 billion-plus in 2017, will rebrand as Pacific Union International in January 2018. Pacific Union CEO Mark McLaughlin says to expect more activity in 2018.
At the same time New York big hitter Douglas Elliman worked to build up its presence in the Golden State this year. In August, it scooped up Teles Properties, an L.A. brokerage with $3.4 billion sales volume in 2016. Douglas Elliman, which had $27.4 billion sales volume in 2016, made no secret of its plans to target San Francisco, where president Scott Durkin said the company might buy or set up an operation afresh. If they went the acquisition route, it would have to be one of the top brokerages in the area, he said.
“You have to seek out people with the same core values, that have created a similar philosophy and where you both speak the same language,” Durkin said.
Big regional independents stay busy
Other large regional independents such as Howard Hanna and Windermere continued to acquire in their areas of interest as well.
Pittsburgh-based Howard Hanna built up its presence in Michigan and New York this year with two brokerage acquisitions of note — Cranbrook Realtors in Detroit and Community Real Estate Group in Victor, New York.
Seattle-based Windermere acquired eight new offices in 2017 through M&A, among them Windermere Proudfit Realty in Henderson, Nevada; Windermere C & H Properties on the Big Island, Hawaii; and Windermere Realty Trust in Portland, Oregon.
As for the fast-growing 100 percent commission brokerages, some became more acquisitive in 2017 and are likely to be continue making inroads in 2018.
Frisco, Texas-based JP & Associates Realty founder JP Piccinini opted to go into the lucrative Austin market via acquisition, snapping up Private Label Realty in October. With PLR’s $650 million in sales volume in 2016, the deal will take the combined firms to more than $2 billion sales volume in 2017.
Matt Widdows, HomeSmart International’s owner and founder, was encouraged by the company’s Cherry Creek Properties purchase in Colorado in late May, which took the company to 2,100 agents in the state, the largest by agent count.
“It helped us validate that HomeSmart’s emphasis on operational excellence in recent years has paid off for us in being able to manage this type of rapid scale,” said Widdows, who has more M&A planned for 2018.
Tech space M&A slow down
The real estate tech M&A space has had a busier second half of the year after a somewhat sluggish start. In October, Thomas H Lee Partners closed its deal to take a $1 billion plus majority stake in Ten-X, the online real estate marketplace that includes auction.com, Ten-X Homes and Ten-X Commercial, a sign of the appetite for real estate tech in the wake of Redfin’s successful IPO in July.
M&A activity on the technology side slowed quite a bit this year, however, said Ryan Abbe, managing director at investment banking and asset management firm JMP Securities. The market saw strategic buys from Fidelity National Financial following its 2016 purchase of Commissions, Inc. with the acquisition in July of Real Geeks, a provider of a CRM and marketing system for agents. Fidelity then went on in October to buy a majority stake in digital transaction management services provider SkySlope.
In October Lone Wolf Real Estate Technologies stepped in to buy Instanet Solutions, known for its digital signature tool, TransactionDesk; Authentisign; and BrokerDashboard, among other related products.
One well-known tech company rumored to be on the market is SmartZip, the predictive analytics marketing platform for agents, which laid off around 50 employees in November.
When Inman reached out to SmartZip for comment on this, SmartZip CFO Scott Baumgartner said: “We’re not on the shopping block right now — we’re always looking for additional growth capital [whether it be from investors or strategic opportunities] but we’re not up for sale.”
A number of real estate tech deals failed to materialize in 2017 because the companies with Realtor-targeted tech faced high customer churn problems, said Abbe. If individual Realtors are having a bad year, their tech spend drops. “Real estate has got churn numbers like no other industry,” he said.
Standard gross churn in residential real estate tech is 10-15 percent, while bad churn is 20-30 percent. For investors from other industries or private equity groups, this can come as a shock.
“I’m aware of no fewer than 10 deals that stalled out in Realtor tech — either they were too small or there were issues to do with customer churn,” said Abbe.
Abbe expects to see more consolidation in the real estate tech in 2018, with Lone Wolf and real estate software platform BoomTown likely to be active buyers.
M&A forecast for 2018
As the economic outlook looks rosy for 2018, according to Inman’s panel of eight experts, so is more M&A activity likely in the New Year.
One of the brokerages to watch will be white-hot tech-driven brokerage Compass, which attracted an eye-popping $450 million investment from Japanese firm, SoftBank, this month, touted as the largest real estate tech investment in U.S. history.
This, along with a previous $100 million funding round in November, may well lead to some M&A activity by the New York-based company next year.
In October Compass CEO Robert Reffkin shared the company’s ambitious goal to grab 20 percent of the market share in the 20 largest U.S. cities by 2020. Compass Chief Revenue Officer Rob Lehman later told Inman that to reach this goal, and given the company’s massive cash infusion, brokerage acquisition may be in the cards. Abbe said he knows a number of brokerages who have told him they would consider selling to Compass.
Murray was less sure: “I know the top four or five firms in every one of these markets and most of them he [Reffkin] can’t buy because they are either under franchise or are with Berkshire Hathaway,” he said.
Coming off a hot year, meanwhile, HomeServices of America’s Peltier said the company will be focusing its activity on premier markets in the U.S. with high population density and transaction activity, putting markets in the Northeast and Florida, Texas and California, at the top of his list. “There are several very interesting opportunities ahead,” Peltier said.
Howard Hanna president, Hobie Hanna, also indicated he will continue to keep acquiring in 2018.
“The market has picked up, and we’ll announce at least four deals in the first quarter of 2018. All four are presently under letters of intent,” he said.
As for what else might happen in 2018 in M&A, Murray points out the industry is seeing a change in leadership at some of the large national companies for the first time in 20 years. And a number of them are not coming from real estate; Richard Smith’s replacement at Realogy, new CEO Ryan Schneider, for instance, brings a data-driven approach from his leadership at Capital One.
These industry outsiders may behave differently from their predecessors, making M&A activity less predictable, Murray said.