Coast to Coast: The Big Shrink

A few years ago when the Washington, D.C.--area company Mount Vernon Realty was acquired by Weichert, REALTORS®, of Morris Plains, N.J., some of the sales associates and employees felt relieved.

"We had been rescued and by a strong company at that," says Susan Hale, a former associate broker with Mount Vernon and currently an associate broker with Weichert in Annandale, Va.

Even so, the switch was hard. "You lose your momentum for a while," Hale says. "It definitely has an impact on your business."

More and more residential real estate professionals face similar transitions in the years ahead. An increase in merger and acquisition activity that began about a decade ago is expected to continue at the same rate, or faster, in the future. The trend is driven by higher overhead costs, narrower profit margins, and an oversupply of realty services, say experts.

Four major recent acquisitions and mergers:

• Last December, Burnet Realty, a large independent company headquartered in Edina, Minn., announced that it had acquired The Prudential Preferred Properties of Chicago.
• The same month, four Hawaiian real estate companies announced a merger, creating a new entity, Coldwell Banker Pacific Properties, with 11 offices and 350 sales associates. The merging companies: Dolman Associates, Conley Dew Ltd., Bradley Properties Ltd., and Coldwell Banker McCormack Real Estate.
• Last November, Weichert, REALTORS®, headquartered in Morris Plains, N.J., and one of the nation's largest independent realty companies, purchased Town & Country Properties Inc., based in Fairfax, Va. The acquired company had 15 offices and 365 salespeople.
• Late last summer, two large California companies headquartered in Beverly Hills, Prudential California Realty and Jon Douglas Co., merged. The new entity, The Prudential--Jon Douglas Co., has an estimated 4,000 sales associates in 70 offices.

Positioning Is Critical

"The industry is consolidating, and although that's painful for the brokerage companies and salespeople involved, I think it's very healthy for the industry because we have an oversupply of both companies and residential real estate salespeople," says Laurie Moore-Moore, coeditor of REALTrends, an industry newsletter based in Dallas.

Total residential real estate transactions for 1994 divided by the number of companies worked out to about 89 transactions per company, Moore-Moore says.

"That's not enough to be in business," she observes. "And obviously there isn't an even distribution of business."

Oversupply creates a profitability squeeze, and companies respond by seeking economies of scale, often through acquisitions and mergers, Moore-Moore says. To survive, a company either has to be large enough to provide all things to all people or have a strong demographic or geographic niche, she says.

"It's not so much a function of size as a function of positioning in the marketplace," Moore-Moore says. "You can be a small broker but still be a metro leader in your market."

In many markets, size is a factor, and midsize companies are vulnerable. "Profit margins have diminished, which means you need volume," says Charles Dahlheimer, president of North American Consulting Group in St. Louis.

Midsize companies have a harder time keeping up with growing technology and advertising costs, he adds.

When the current president of Century 21 International stepped into his position, he said he wouldn't be averse to acquiring other franchise networks for market share, Dahlheimer says.

"Even at that level, they're recognizing that the future is going to be in dominant market share. More often than not, mergers and acquisitions within the real estate industry provide market share."

A Smooth Transition

Some slipping midsize companies face the inevitable better than others. In southern New Jersey in 1985, Paul Reinke Realty watched a couple of large national companies come into the market and analyzed the expected market share for each company, explains Jack Waters, vice president of Weichert, REALTORS®, Pennsylvania division, and former general manager of Reinke Realty.

"It looked as if there would be a squeeze," he recalls. Analysis showed that midsize companies like theirs, with six offices and 120 people, "would probably take the biggest hit."

Reinke chose to sell his company to Weichert rather than to another large company, Merrill Lynch, and orchestrated a smooth acquisition, Waters says. Ten years later, half of the 120 former Reinke people are still with Weichert, he adds.

The financial condition of Mount Vernon Realty in 1991 forced a decision about a sale, remembers Bruce Green, then general manager of Mount Vernon and now regional vice president of Weichert, REALTORS®, in the Washington, D.C., area.

But it wasn't a hurried decision, he adds. "We had the luxury of knowing what we wanted to achieve. We had the opportunity to talk to several major companies."

When Time Is Short

Many mergers and acquisitions are not leisurely.

"Most of them take place at the last minute," observes Peter Rucci, executive vice president for Weichert of Maryland. "Owners hold out until they can't hold out any longer. They hope they can pull it off."

Rucci was with Shannon and Luchs in 1993 when it was acquired by Weichert, and with Weichert when it made two other acquisitions, Prudential Preferred Properties in Bethesda, Md., and Town & Country Properties Inc.

"Once it's announced, all the fear starts setting in," he says. "You need to take action right away. You have managers who are wondering about their jobs. You have salespeople wondering what changes are going to be made."

Offices must sometimes be closed, and managers, sales associates, and support staff let go, Rucci says. "The people probably most at risk are the support personnel."

Sales associates have more flexibility, Rucci says. "They can find some place to hang their license, one way or another."

That's more true of top-selling salespeople, notes Tom Dooley, president of TWD & Associates in Arlington Heights, Ill., consultants to the real estate profession.

"If you're a good sales associate, it's the best of times, because it's like being a free agent athlete---you can pretty much set your own terms," Dooley says. Even though companies are cutting costs, there's always the George Steinbrenner equivalent who'll negotiate a big salary with a big player, he says.

But mediocre salespeople won't fare as well, Dooley adds. "The number of salespeople is going to decline dramatically. The ne'er-do-wells will be in some other occupation."

"The good news is that the people who remain in the business are going to be committed and qualified and focused on delivering outstanding service," Moore-Moore says. "That means good news for the consumer, and as the number of salespeople shrinks, it means more transactions per sales associate."