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Opportunity grows in slowing real estate market

Big brokerages may benefit as smaller companies sink or sell

Monday, January 02, 2006

By Glenn Roberts Jr.
Inman News

Bob Moles, Intero Real Estate Services

Big real estate companies may look to get bigger in 2006, while powerful demographic trends should buoy the real estate market despite softening, say executives at some major real estate brokerage companies.

"I think we're going to have a good real estate market -- on the heels of a great real estate market," said Bob Moles, chairman of Intero Real Estate Services, a brokerage company based in Cupertino, Calif. Rising interest rates will affect the real estate market, he said, though baby boomers, immigration, women-run households and the second-home market should continue to drive the strength of real estate in the coming year.

Demographic trends in California and the Western United States "will bode extremely well for real estate," he said. Even so, it will be hard to match the market's booming performance of the past several years, he said. "It's tough to always have a better year than the last year. We will anticipate a slight softening, primarily related to higher interest rates."

The prevailing forecast among industry economists, too, has been a gradually slowing market in 2006 that is still strong by historical standards, with the caveat that some local real estate markets may be particularly over-heated and are due for a more substantial correction.

GMAC Real Estate, a national real estate brokerage company with 22,000 sales associates in 1,300 franchised and company-owned offices in the United States and Canada, sees opportunity for expansion as the softening market drives out some competitors.

"There's going to be a lot of companies that go out of business in the next year or two or three," said Lane Barnett, CEO for the company's Real Estate Franchise Business Unit. During a booming market, there are fewer opportunities to grow franchises, Barnett said, so a slowing market can be a good thing for franchise expansion.

Mid-size companies may find themselves at a particular loss as the market shifts, he said. "For a large franchise company like us, that's an opportunity." The company and its offices will continue to look for acquisitions and other expansion in 2006, he said. "It has started already. We're concluding a record year for growth," with a "very strong pipeline in 2006." Barnett said Florida has been a particularly fast-growing market for GMAC Real Estate, and the company's presence in that state grew from 35 offices in 2002 to more than 100 offices this year.

Lane Barnett, GMAC Real Estate

Like Moles, Barnett said he is very encouraged by demographic trends and he expects that the second-home market will continue to be robust in 2006. He said he expects second-home sales to continue to thrive in parts of Florida, South Carolina, and Arizona. "I think those markets are going to be very, very strong for a lot of time. There is lots of opportunity." Wealthy baby boomers are driving this trend, he said, as they look to buy homes in popular retirement areas or return to their hometowns from other parts of the country.

The overall housing market and economy should continue to be strong in 2006, Barnett said, even as interest rates continue to creep up. But some overheated markets will certainly cool, he said. "We fully expect there is going to be regional softness. Markets that have had the wind behind their backs (will) normalize. We think that's healthy, really." Markets in Arizona, Nevada, California and Boston, which have been bolstered by "tremendous run-ups in price," may be particularly susceptible to this slowing, he said.

As this softening occurs, it's important for real estate companies to diversify their service offerings and to concentrate on training and customer service, he said, adding that there may be an unsustainably high number of real estate agents who flooded the industry during the prolonged boom.

Real Living, an Ohio-based company with about 5,000 sales associates and 110 offices, is forecasting "huge growth" in its real estate network for the coming year. "It will be a great time for companies to partner with a larger firm," Real Living officials said in a statement.

J. Lennox Scott, chairman and CEO at John L. Scott Real Estate, a 130-office brokerage company based in Washington state, said the national real estate market will likely slow slightly in 2006, but will still be strong by historical standards.

"Continued job growth, improved consumer confidence, and population growth will help to counter higher rates, resulting in a successful market overall," Scott said, even as interest rates are forecast to rise to 6.6 percent in 2006. "In the Seattle area, the mortgage service cost-to-income ratio is in balance, which also indicates that our local market will continue to be strong."

There is no "real estate bubble" in store for the industry in 2006, said Brent Bonine, executive director of sales and marketing for Buffini & Co., a coaching company for real estate professionals. "However, we do see a 'real estate agent bubble.' The increase in licensed agents has outpaced the number of units sold for the past few years," he said.

A rapid pace in real estate sales and price-appreciation that has sustained agents during the real estate boom, Bonine said, but that equation is changing. "As the pace of deals slows and prices settle to normal, agents with low production will be squeezed out of the market," he said.

There is a graying population of real estate agents who are looking to reduce their workload or retire, and Bonine said he expects a stream of experienced and low-producing agents to leave the business as the market settles down. In this fallout is an opportunity, he added.

"Real estate agents who can articulate their value to their clients and who serve their clients will see an increase in market share as the consumer begins to demand more from their agents," he said, and perhaps real estate commission rates will reverse the slide of the past several years. "Commission pressures will ease as consumers recognize the difference between a professional who is equipped to serve them and an inexperienced agent who cannot move their property."