The sales volume market share of the nation’s 20 largest real estate holding companies -- which counts the production of both company-owned and franchised offices -- jumped 6.83 percent from 2017 to 2019 to 52.79 percent, according to the enterprise section of the 2020 Real Estate Almanac.
This big-getting-bigger trend is not a new phenomenon. The concentration of production among the nation’s largest brokerage companies reflects a decades-long march to larger real estate companies with more market share, fueled by a maturing industry, shrinking brokerage economics that require scale for meaningful profits and the need for bigger technology and marketing spends to keep up with a broader tech evolution.
The trend kicked into high gear in the 1970s and 1980s when Century 21, RE/MAX and ERA Real Estate helped spread the real estate franchise model nationwide. In the 1990s, the nation’s current largest real estate holding companies emerged with the formation of Realogy’s precursor (HFS and later Cendant) and HomeServices of America (a Berkshire Hathaway subsidiary).
This march to larger companies puts pressure on medium-sized firms to either acquire, sell or grow organically; the latter is very hard to do in the hypercompetitive local real estate brokerage market, so many must seriously consider acquisitions.
Brokerages have increasingly operated on razor-thin margins, based on increasing splits with their agents and shrinking commission rates. See 2020 Swanepoel Trends Chapter, “The Diminishing Financial Viability of Traditional Real Estate Brokerages”, for more insight into the financial pressures facing traditional brokerages.
With the rise of technology, the scale has become an increasingly important component to reducing operational costs. For example, advances in broker back-office transaction processing greatly streamlines and automates contract process and review. The systems can easily, and cheaply, handle greater volume; while, if relying on humans, this process is comparatively expensive. This makes it increasingly difficult to compete as a small-to-medium-sized brokerage (those with annual sales volumes below approximately $100 million) as the big get bigger.
Then with the start of Stage 9 of the real estate industry’s evolution, which began approximately in 2012 -- characterized by outsized amounts of investment money pouring into real estate -- companies got even larger, epitomized by the rapid rise of Compass, which has shot to the nation’s third-largest brokerage in just eight years on the back of huge acquisitions made possible by its over $1 billion in venture capital funding.
Large brokerage acquisitions in the past six years
|Year||Acquisition (annual production of acquired company at time of acquisition)|
|2014||Howard Hanna acquires William E. Wood ($1.5B)|
|2015||Realogy acquires Coldwell Banker United ($5.8B)|
|2015||Howard Hanna acquires Nothnagle Realtors ($1.4B)|
|2016||Howard Hanna acquires Realty USA ($1.1B)|
|2017||HomeSmart acquires Cherry Creek Properties ($2B)|
|2017||Douglas Elliman acquires Los Angeles-based Teles Properties ($3.4B)|
|2017||Pacific Union Real Estate acquires Southern California-based Partners Trust ($2.5B)|
|2017||HomeServices of America acquires Long & Foster Real Estate ($29B), then the nation’s third largest brokerage by annual sales volume, and acquires Houlihan Lawrence ($6.7B), the nation’s 10th largest brokerage in 2017 by annual sales.|
|2018||Compass acquires Pacific Union International ($14.1B)|
|2019||Howard Hanna acquires Allen Tate Realtors, then the nation’s 25th largest brokerage ($5.7B)|
|2019||Compass acquires Alain Pinel Realtors, then the nation’s 10th largest brokerage by annual sales ($12.1B)|
Source: T3 Sixty
To shed some light on this trend, we dive inside the 2019 merger of two medium-sized brokerages in the San Francisco East Bay.
How two medium-sized brokerages responded
Founded in Berkeley, California, in 1976, the independent brokerage Red Oak Realty has by 2020 grown into one of the largest independent brokerages in East San Francisco Bay Area with 167 agents who did approximately $1.3 billion in 2019 sales. The East Bay includes the cluster of cities just east across the San Francisco Bay from San Francisco including Oakland, Berkeley and a handful of smaller adjacent cities.
Red Oak Realty homepage. Credit: Red Oak Realty
Red Oak Realty, owned by Vanessa Bergmark who bought the from its original owners in 2010 and serves as CEO, has chosen to focus its efforts on dominating its home market rather than expand to others.
When Compass acquired Bay Area powerhouses Pacific Union International in 2018 and Alain Pinel Realtors shortly after in 2019, the Bay Area all of a sudden had a new dominant brokerage by market share. From July 2018 to June 30, 2019, Compass, thanks to the acquisitions and aggressive recruiting of top agents, represented buyers and sellers on 10 percent of the transactions in Alameda County, the heart of the East Bay.
While Red Oak Realty has cultivated a strong brand, established a refined technology-backed process and had shown steady growth in recent years, Bergmark recognized the value that getting larger offered, especially as Compass created a significantly large local player.
In August 2019, Red Oak Realty acquired locally-owned independent brokerage Marvin Gardens Real Estate, whose 60 agents did just under $500 million on 500 transaction sides in 2018. Red Oak Realty’s 103 agents did over $837 million in sales in 2018.
“We realized we needed help,” says Marion Henon, who co-owned Marvin Gardens with her husband Todd Hodson since taking it over in 1989 when the company had 12 agents and did $1.2 million in annual sales. When they sold the company to Red Oak in August 2019, Marvin Gardens had grown to 60 full-time agents with eight full-time support staff.
Henon and Hodson, both near 60 years old, say that if they were a decade younger, they may have decided to pivot. But Red Oak Realty, a fellow locally owned East Bay independent brokerage with a similar culture, presented a good option to grow and compete.
The former Marvin Gardens owners recognized the need for a refined operational infrastructure. They described their Marvin Gardens system as a quality, hand-crafted operation that depended a lot on humans to drive many of the steps. Staff became burdened by increasing demands for after-hours, short-notice marketing and agent requests. And without the systems to do this easily, it required more of their time, which stressed already limited resources.
The Marvin Gardens acquisition brought Red Oak’s office count from two to five and gave it more scale to invest resources to refine its systems, and better support top agents, Bergmark says. For example, the company hired a full-time videographer to enhance the brokerage’s brand and provide a marketing service to agents. By absorbing Marvin Garden’s eight support staff, Red Oak has 21 support staff for its 160 agents, maintaining an eight to one agent-to-staff ratio.
Red Oak Realty is now the largest brokerage overall (by annual sales volume and transaction sides) in Berkeley and a handful of other East Bay cities. Growing larger gave Red Oak Realty a more competitive message to both agents and consumers, Bergmark says.
Takeaway As brokerage margins continue to squeeze and bigger brokerages continue to suck up market share, expect more medium-sized brokerages and even large brokerages to either acquire themselves into larger firms or sell and join regional or national powerhouses.