Affiliation Trends: Corporate Upsizing

Add corporate subsidiaries to the franchises vs. independents debate

December 1, 2001

When Weichert, REALTORS®, the country’s third largest real estate company, launched its franchising operation this summer, it was seen by some in the industry as the latest sign of renewed interest in the franchise concept.

The rollout came on the heels of several other strong regional companies taking the franchise route, either by affiliating with an established name or launching their own franchise division.

Among them: Prudential Gardner, REALTORS® (formerly Gertrude Gardner, REALTORS®), in New Orleans, which started flying the Prudential banner in January 2001, and Crye-Leike, the mid-South powerhouse from Memphis, Tenn., which began franchising offices in selected Southern states about 18 months ago.

What’s more, many of the largest national franchises have been posting big-growth gains. RE/MAX last year added 550 offices to its system, bringing its worldwide total to almost 4,030. And all three of the Cendant franchises—Century 21, Coldwell Banker, and ERA—charted double-digit growth in the last year. Combined, they now total more than 12,000 company-owned and franchised offices.

But the flurry of activity isn’t adding to franchisors’ overall presence in the industry. As of last year, roughly a third of brokers and 40 percent of sales associates were affiliated with a franchise, virtually unchanged from 1999 and down from 1996, NAR survey data shows. In 1996, 37 percent of brokers and 43 percent of sales associates were affiliated with a franchise.

What is growing is the absorption of real estate offices by national or regional corporations, a trend driven largely by the mergers and acquisitions of the big national franchises and a few large independent companies.

What’s behind the corporate buying binge? A drive for market share, say industry executives.

“This trend is clearly about size, volume, control, and cash flow, not customer service or best practices,” Richard DeWolfe, chairman and CEO of The DeWolfe Cos., Lexington, Mass., has written.

Franchise executives say corporate acquisitions are highly attractive to independent brokers looking to grow their business in an increasingly mobile, brand-centric marketplace. “For real estate companies to be profitable today, you have to have scale,” says Earl Lee, president of Prudential Real Estate Affiliates. “Thirty years ago, the cost of entry into this business was much lower. Today you have to have a lot of technology and provide a range of services to be competitive, and those things are not inexpensive.”

Brand recognition is also important to an increasingly mobile population that wants to work with the same company, no matter the destination city, says Lee.

Absorption by corporate entities is an acquisitions game. That’s considerably different from franchise affiliation, industry executives say, because affiliation relies on the name brand to attract brokers willing to dip into their own pockets.

“A lot of the large companies that sold to franchises in the past few years didn’t do so because they wanted to be a franchise,” says Pam O’Connor, executive director of RELO. “They could have franchised themselves if they wanted to. They sold because NRT has been out there paying big bucks for companies. RE/MAX has been, too. If you put enough money on the table [in your effort to boost market share], anybody will sell.”

RELO is a national relocation referral network whose members are mainly, but not exclusively, independents.

As of this year, 11 percent of practitioners worked for a subsidiary of a national or regional corporation, up from 9 percent in 1999, NAR data shows. NAR didn’t track those figures before 1999.

By far the biggest player in corporate acquisitions is NRT, Parsippany, N.J., which buys, owns, and operates real estate offices for the three Cendant brands—Century 21, Coldwell Banker, and ERA. The company, launched in the late 1990s, most recently acquired St. Louis giant Gundaker, REALTORS®, and now has more than 32,000 sales associates in hundreds of offices nationwide.

RE/MAX International of Greenwood Village, Colo., is also pursuing a corporate acquisitions strategy. The company launched a subsidiary last year to purchase the 16-office Equity Group, the largest independent real estate brokerage in Portland, Ore., and more such purchases are in the works. RE/MAX is in acquisition talks with several large brokerages around the country, says Daryl Jasperson, RE/MAX president.

Jasperson told REALTORS® Magazine in early September that the company is looking at corporate acquisitions as a potential next phase. Up until now RE/MAX has focused almost exclusively on growing its franchise base through affiliations.

Corporate acquisitions aren’t on Prudential’s horizon, but the company, through a corporate financing arm, plays a role in helping its new and existing affiliates grow through their own acquisitions, says Lee.

With corporate acquisitions and financing on an upward trajectory, it seems likely that an increasing share of brokerage activity will be done under a franchise banner.

Subsidiaries expand

The percentage of practitioners working for corporate subsidiaries has increased in the past few years, whereas the percentage of independent practitioners and those affiliated with franchised companies has declined.

(Percentage distribution of practitioners 1999 and 2001)

  1999 2001 % change
Corporate subsidiary 9 11 +22.2
Independent 52 50 -3.8
Franchised company 38 37 -2.6

Source: NAR Research, 1999 and 2001 NAR member profiles. Columns don’t add up to 100 percent because of rounding.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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