A group of businesspeople have a discussion around a conference table.

Preparing for the next wave of brokerage M&As 

As real estate companies recover from the market downturn, many firms "will have to either be an active buyer or seller" in the next few years.

August 27, 2023
4 minutes

Key points:

  • M&A activity fell during the first half of the year in response to economic headwinds.
  • But that could soon change as real estate companies consider ways to improve profitability.
  • Acquisitions based on specific services or benefits, rather than market share alone, likely to drive new M&A activity.

The next three years will be pivotal for real estate businesses as mergers and acquisitions activity trends back up, says M&A expert George Slusser.

Overall, M&A activity in real estate during the first half of 2023 has declined by about 62% compared to this time last year, primarily due to lower transaction volumes from large brokerages, according to data from global accounting firm Price Waterhouse Coopers. Industry experts like Slusser, who leads the Mergers and Acquisition division at WAV Group, point to several factors like economic headwinds and a flattened real estate landscape as reasons for this shift.

But Slusser said he expects the second half of 2023 to tell a different tale about real estate M&A, especially as the stock market continues to recover after falling in 2022.

"A majority of companies over the next three years will have to either be an active buyer or seller," Slusser told Real Estate News in an interview. "It's just going to be really hard to be in the middle."

Brokerages rethinking their approach to M&A

Mergers and acquisitions have always been a part of the real estate business. Historically, companies with similar cultures sought to align to improve profitability, said Prem Luthra, who leads M&A services for real estate consultancy T3 Sixty. (Note: Real Estate News and T3 Sixty share a founder, Stefan Swanepoel.)

Today, however, declining transaction volumes have led many brokerages to change the way they think about M&A, said Luthra. Instead of simply trying to increase their market share, Luthra said companies are looking to acquire "healthy businesses" that can turn a profit. And that activity is happening despite potential differences in company culture, Luthra added.

"Real estate companies are hurting right now, but they still know that cash is king," Luthra told Real Estate News. "So, they're not going to jeopardize their balance sheet in favor of simply expanding their market."

Acquisition no longer just a numbers game

To Slusser, this shift represents a nearly complete departure from 2020-2022 when large, publicly traded brokerages were scooping up as many brokerages as they could. For example, RE/MAX acquired mortgage lending startup Wemlo and sub-franchisor RE/MAX Integra's North American business during that time. Before rebranding to Anywhere, Realogy also acquired New York firm Warburg Realty and partnered with luxury brokerage Sotheby's International Realty.

Now, Slusser said brokerages are focused on acquiring companies that provide more specific benefits. For instance, Slusser said some brokerages are looking to acquire home services companies to offer their clients a more complete service package. Other brokerages might consider folding in unprofitable brokerages in key regional markets to bolster their agent roster and commission base instead of relying on hiring alone.

"It's just economies of scale throwing more capital at a fixed expense base," said Slusser. "In this case, two wrongs do make a right if a brokerage can successfully retain their agents and make them happy and productive."

Lack of capital has tempered M&A activity

WAV Group Managing Partner Victor Lund, who recently co-authored a book about real estate M&A with Slusser titled Acquiring More Profits, added that there are still several obstacles for brokerages to overcome. One of the main challenges is access to capital, which has only heightened since the Federal Reserve began raising interest rates in 2022 to combat inflation.

Lund added that "cash is still king" since few brokerages are willing to finance M&A on a line of credit or equity. That means that businesses who have been diligently hording cash could find themselves in a favorable position when the economy begins to turn around.

One way for companies to decrease the amount of cash they need to bring to a deal is to extend earnouts over a three-year period, Lund said. Earnouts refer to payments made to the seller of a business after certain metrics are met.

"Putting cash down is obviously a risk," Slusser said. "So, the less cash you can put down initially, the better to minimize your risk in a situation where the deal falls through or agents walk out."

Firms must remember their core asset: Agents

One way to judge the success of a merger is to see how agents respond, Lund added. He expects to see continued consolidation going forward, which will make it more imperative for brokerages to shore-up their book of business.

"Agents vote with their feet," Lund said. "If a business owner cuts too quickly, they can diminish the value that their company provides its agents. Then, it becomes almost impossible to hold a commission base."

Get the latest real estate news delivered to your inbox.