* From Inman News Features
Real estate has always been a very local mom-and-pop business. That is cute, but it is also a cesspool for inefficiencies, some B-school theorists might argue. It is also a scrappy industry that until recently has resisted corporate giants’ efforts to marshal substantial market share.
There has been no shortage of big companies that saw fragmentation as an opportunity. Sears, Merrill Lynch, General Motors and Prudential thought they could either cross-sell their core products to happy homeowners or leverage their customer base to buy homes from their newly branded realty arms.
Exit Sears and Merrill Lynch, while GM and Prudential scramble to grow market share.
Companies like Microsoft, EDS and IBM thought they could use their MBA brains and their technology to figure out this alleged “simple-minded” industry. They soon figured out that a million lines of code is far easier to discern than how 900,000 agents with 100,000 brokers operating under 50 different and arcane regulatory schemes sell the American Dream to five million cranky home buyers every year.
A horde of hungry venture capitalists learned the same lesson — a billion dollars later — in the 1990s.
Enter Henry Silverman and his Cendant juggernaut.
In the span of only six years, the hospitality giant — it is the world’s largest hotel franchisor, the world’s largest vacation ownership organization, and the world’s second largest general-use car rental agency — has become not only the largest franchise in real estate history, but now also the largest brokerage ever created in the world.
The NRT unit, just acquired in whole by the New Jersey-based powerhouse, has double-digit national market share and its holdings include Coldwell Banker, Century 21 and ERA.
Cendant has also quickly gained market share in mortgages, relocation and timeshares.
Unlike other failed corporate forays into real estate, Cendant’s effort is not an experiment.
Under way and right before the industry’s eyes is an unheard of consolidation play with very big stakes for a business that rarely changes in any big or meaningful way. And this consolidation is occurring just as real estate growth is on the cusp of propelling itself into another level of expansion as part of the U.S. economy. The biggest driver of real estate for the last 30 years — the boomer generation — is embarking on another home-buying binge. The generation that loves real estate has never been more prosperous and ready and able to gobble up more land, resorts, condos and big houses. Cendant sits at the apex of this phase of another boomer pig-out.
How has Cendant succeeded?
The nation landed on the moon with brains, passion and money. The New Jersey-based real estate giant seems to have all three and is opportunistic as well. The company entered the business in the middle 1990s just as year after year of record home sales were set in motion. Silverman is a crafty financial dealmaker, who rarely trips up on his own schemes — his merger with CUC being an exception. That deal flopped when it was discovered that the Connecticut-based direct marketing firm was cooking its books. Credit also must go to the stoic and gentlemanly Cendant CEO Richard Smith, who has executed on Silverman’s vision with a quiet but forceful acumen and has brought in a raft of top-notch marketing, Wall Street and real estate executives.
Unlike other companies that had dreams of consolidating the real estate industry, Cendant is a rather lean operation without corporate silos or too much bureaucratic second-guessing and with a culture of smart entrepreneurs. The next shoe to drop in this business story could be some dramatic changes in how real estate is sold in the United States. Smith supposedly is a fan of giving brokers more control over the wieldy business; therefore, scenarios might include such radical moves as turning commissioned salespeople into employees.
The commissioned sales model was invented because historically brokers were not capitalized to weather the down cycles in real estate. With this model, there’s no payroll when times get tough.
Cendant is capitalized to weather those cycles, and the boomer boom over the next two decades could help make navigating the downturns less treacherous.
The impact of consolidation on other industries is a mixed bag. Efficiencies can and should occur and pricing can either be more competitive or less so, depending on whether other major players enter the industry and existing strong ones live up to their potential.
RE/MAX cannot be ignored. Dave Liniger, like Silverman, epitomizes real estate triumph. The second largest brokerage, Iowa-based HomeServices.com is a well capitalized and Warren Buffet-connected contender that seems ready to dare Cendant. Another up and comer, though much smaller, is Texas-based Keller Williams. And Prudential and GM are still in the game, but have seemed reluctant to make the big moves Cendant has made.
Cendant has already brought innovation to the industry and more is certain to come. And expect some other big surprises from this fast-moving East Coast firm; Silverman’s real estate sculpture is just starting to take shape.