realonomics

The stakes are getting higher and higher and higher. What we have called The Democratization of Real Estate is going to create the demand for amalgomation. This will change the ante for those at the high stakes poker table known as real estate company ownership and ultimately the cost of continuance for Broker/Owners. The industry is an aquarium with limited resources. The ecosystem cannot sustain the sheer numbers required for everyone’s survival.

Several years ago, REALonomics noticed the brand collage on the face of the Home Services website. Titan-like groupings of large entities are going to have to emerge in order to meet the high stakes cost of operating in the Consumer-Centric Era, our Third Economic Wave.

Put in basic terms: the big are going to get bigger. Large fish, as usual are going to gobble-up the small plankton in real estate’s vast ocean but they will do so without having to merge or acquire. Plankton is any drifting organism that inhabits corners of the watery markets of this industry; including core services such as title and mortgage.

Want to sell your real estate company? Forget it. Don’t sell, no one’s buying…or, I should say, “no one in his/her right mind is buying real estate companies.” Instead Broker/Owners should group, combine, forge, align or otherwise re-map how they collectivize. Never have Broker/Owners been in a weaker position. The owner’s asset value plummeted in late 2005, the end of the last “Power Cycle.”

REALonomics views real estate markets in seven year cycles we call “Power Cycles”. The next Power Cycle will peak in about 2012. Each Power Cycle contains a set of operating “circumstances” made up primarily of

1. Emergence & adoption of new technologies and operating methodologies;
2. Diminishing inventories and price adjustment shifts;
3. Consumer demand (pent-up) with investor opportunity;
4. Favorable finance conditions where ROI is suitable and predictable

Big Fish Swimming in Multi-Branded Schools

The biggest brands of tomorrow will be multi-branded coalitions. This is the logical result of an industry whose customer is decidedly unfaithful to brands and in order to re-margin the industry requires multiple brands owned by a single entity operating in open markets. The Home Services model.

Those of us who actually own or have owned real estate companies clearly understand that brand value in the market place peaks quickly and then rapidly plummets. The fabric of daily market activity has almost nothing to do with brand and everything to do with the management of a company, its service culture and the quality of its sales force (a.k.a. “agents”).

The brand opens the consumer door, slightly and never permanently. After the door has been opened it’s about the owner, his/her culture and management and the professionalism, skill, knowledge and ethics of the sales force.

Big fish know this, that’s why they multi-brand in single markets. Franchisors know this, but pretend not to in order to control markets. Small fish know this, intuitively, but cannot execute multi-brand constructs due to resource deficiencies…it’s the money, as always.

Big fish redefine the ecosystem within the aquarium. This is smart and necessary for economic survival. Big bucks realty is the principle of Darwin’s natural selection and the survival of the “most fit” among us as we swim our way through the murky waters of the aquarium.

The Power Cycle Analysis - Shifting into High Gear

Our Power Cycle phenomenon is real. The industry is wrestling with coherent technologies that will change its modus operandi. We are currently in a consumer trough where our clientele have diminished in number and where they continue to reject most of our style and service models, craving for more transparency and less hype. Inventories are at all time highs, price points have muted absorption. Investors have retreated and the mortgage markets are in a lock-down mode. These factors are nearly always the conditions of a Power Cycle in decline.

On average, it takes 18-36 months for the cycle to re-ignite and this can only occur when all of the ingredients are present to create the Power Cycle ascension. The Power Cycle is typically sparked by the introduction of new technology AND industry innovation.

The first Power Cycle in this graph was the adoption of the Internet as the primary means for marketing real property to consumers. The next Power Cycle will most likely be fueled by the renovation of the current MLS system with all of its anti-consumer controls in favor of open market transparent models. There are many factors not included in the Power Cycle graph in order to simplify its presentation.

The industry is developing into what REALonomics believes will be a “Big Bucks” model where some participants in the crowded aquarium will be absorbed. This includes entities in the franchise, technology, Internet, brokerage, mortgage and title industry.

It will take more money to operate in the new ecosystem. Margins will be thinner and correct modeling will become paramount to survival. Most importantly, however, is the fact that sustained ROI and long term asset development will come from new found money sources, not necessarily the old traditional money.

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