Point/Counterpoint with P. Wesley Foster Jr. and Paul Wasserstein

Is consolidation of real estate companies good for the industry?

February 1, 1996

POINT: Industry Consolidation a Natural Evolution

BY P. WESLEY FOSTER JR.

As we approach the 21st century, many REALTORS® and their affiliated companies are asking the same question: How can I remain profitable while continuing to grow my business? I believe the answer depends in large part on industry consolidation.

The economic phenomenon of the merger can be found in virtually every industry, from computer software manufacturers to clothing retailers. It's the inevitable shakeout of the 1990s as consumers become more savvy about their purchasing choices and more protective of their pocketbooks. The contributions of big players in the marketplace also have led consumers to expect a heightened level of service. The costs of technological innovations alone can cause small and midsize companies to fall below the profit line.

This is not to say that the small specialty company with a specific niche in the market won't survive. Upscale property boutiques, third-party vendors, and property management companies with loyal clientele will continue to have a viable niche well into the next decade.

However, the combination of a stagnant market and rising overhead is making it increasingly difficult for middle-tier companies to survive. The latest industry figures released at the NATIONAL ASSOCIATION OF REALTORS® annual convention bear this out. Profits for midsize companies are declining steadily as salespeople demand more gross revenue as well as more technological, secretarial, training, and company support. For instance, in 1991 a typical U.S. residential real estate company reported 6.7 percent in earnings before taxes. In 1994 that number had fallen to 2.6 percent, a huge decline in profits in just three years, according to the 1995 NAR report Real Estate Brokerage: Income, Expenses, Profits.

More and more, owners of midsize companies are finding that joining forces with larger competitors affords them an opportunity to gain much-needed exposure, enhance profitability, and provide the kind of support services that only a large company can provide. Consolidation also benefits other players, including the purchasing company, which can increase its market penetration; salespeople, who can rely on the strength and market reputation of a large company; and consumers, who can access a variety of services and have their transactions backed by a company on a solid financial footing.

In the end, I believe consolidation will result in a more professional sales force and a stronger, more competitive real estate industry.

P. Wesley Foster Jr. is president and founder of Long & Foster Real Estate Inc., Fairfax, Va., which has 122 sales offices and almost 6,000 sales associates throughout the mid-Atlantic region.

...COUNTERPOINT: One-Person Shops, Smaller Companies Closer to Consumers

BY PAUL WASSERSTEIN, CRS®

Big is better? Quite frankly, I'm not so sure. The megabrokers will certainly produce large volumes of sales and stuff their personal pocketbooks, but let's look at this from the consumer's viewpoint.

The small individual brokers provide the personalized service many customers cherish. The old saying "People don't care how much you know until they know how much you care" can be achieved only through one-on-one listening to the needs of the client or customer. The need for individual caring is not met if one has to talk to a multitude of assistants and rarely to the principal handling the transaction. Furthermore, the more people in the act, the more chance of miscommunication, oversight, and incompetency.

As we see in so many areas of business, there's a need for the one-person shop. For instance, in the grocery industry there are megasupermarkets. But in this area (Denver) there are still specialty food stores that provide the full product line of groceries with a staff that is trained and eager to give health and product counseling at a cost to consumers greatly in excess of what they would pay at megasupermarkets. Yet, people flock to the specialty stores.

Even in terms of service to the boards of REALTORS®, there's no right answer. The one-person shops tend to produce people who are individually involved in their business and therefore individually involved in their board. In general, they won't do the same volume of business as the megas, and therefore they may have more time for board activity. There'll always be a significant position in the industry for the one-person shop and the smaller real estate company.

Another key factor is that the smaller real estate companies have the synergy, cohesiveness, support, and training that are hard to provide in the highly competitive each-person-for-himself atmosphere where salespeople are required to do 100+ transactions each.

Yes, there are advantages and disadvantages to both concepts. The larger companies can do volume and cut margins, but in the process they lose personal contact and professionalism. Neither concept is totally good or totally bad. Having a choice is healthy both for the consumer and for the real estate industry.

Paul Wasserstein, CRS®, is broker-owner of Wasserstein & Co.--Metro Brokers, Denver, a one-person office that's part of an association of independents called Metro Brokers.

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