Real Estate Franchise Industry in 2012 at a Glance
The real estate industry has been under scrutiny in recent years with the mortgage crisis and other current events, but it is still a large field which generates billions or dollars in revenue. There were 165,000 companies operating in the residential brokerage and management field last year, which generated $170 billion in revenue, and there were 25,000 companies operating in the commercial brokerage and management field, generating an annual revenue of $30 billion.
Real Estate Industry Background
Real estate tends to be a particularly cyclical industry, going up and down based on trends in the economy at large such as the fluctuation in interest rates. The story of real estate often mirrors the general story of the American economy. Real estate soared in the post-World War II 1950s, sank in the 1970s, rose again in the early 1980s until the depression at the end of that decade, and was prosperous again at the end of the 1990s. Because of low interest rates in the mid-2000s, residential real estate was booming even when the economy was slow until the mortgage crisis hit and the bubble collapsed. After that point it sank and as of 2011 has yet to truly recover. Brokerage firms have taken on property management divisions in order to diversify their revenue streams and combat poor economic climates.
The real estate industry consists of three primary fields: brokerages, leasing, and management. Brokers bring together buyers and sellers of property, assist in the price negotiations and arrange the steps between a buyer first taking interest in a property and closing, including appraisals and inspections. Generally, the seller pays a commission, dependent on the sale price (usually 5 or 6 percent), and this is split between a broker working for the buyer and the broker working for the seller. Real estate brokers must be licensed in the state in which they work. Leasing brings together property owners with tenants, sometimes owning that property themselves, or subleasing property they have leased from someone else. Management companies are responsible for making sure their buildings are filled with tenants, deciding what to charge these tenants, making sure the buildings run properly, paying utilities, hiring staff and other maintenance for owners who do not want to manage buildings themselves. Since most property expenses are fixed, maintaining low vacancy rates is critical to management companies. In particular, property management has been a fast growing field and should continue in its expansion, as commercial and residential properties that were overbuilt during the real estate boom will continue to need management until they are sold.
The old adage, “Location, location, location,” is cliché but true — location is centrally important to determining the marketplace and the value for real estate. Factors controlling the quality of a location include public transportation access, the quality of the roads and schools, income levels and stability and success of the local economy. Some popular real estate franchises are the Century 21 Real Estate franchise and the Coldwell Banker Real Estate franchise.
Current State of the Real Estate Industry in 2012
In 2010, there were 517,800 brokers working in the United States, 59 percent of whom were self-employed. The industry is divided into residential and commercial real estate services, although some brokerages and management companies engage in both. The residential real estate industry is quite fragmented. The fifty largest companies make up less than thirty percent of the industry’s total revenue. Of the three primary areas, brokerage services compose 45 percent of the industry’s total revenue, leasing residential units makes up 35 percent and property management makes up fifteen percent.
Since the collapse of the housing bubble, residential real estate revenue is still in the pits and unemployment has remained high. Some predict that when jobs come back en masse, residential real estate success will follow. The commercial industry is highly fragmented as well. The fifty largest companies make up one third of total revenue. The commercial segment of the industry has faired slightly better than the residential segment since the recession. While it has not yet reaching the peaks of 2006 before the fall, analysts predict that the market bottomed out in 2010 and expect it to rebound somewhat in 2011.
Real Estate Industry Future
Potential obstacles for the industry include factors beyond the control of the business owner, such as downturns in the local or national economy, as well as changing neighborhood demographics where agencies are located. Also out of the owner’s control is the building of properties, and what properties in the area are available. For management companies, indoor air quality liability has become a serious legal issue in recent years. Removal of mold growth in particular has been increasingly necessary for property owners and managers.
The use of technology will continue to transform the field in the years ahead, enabling home buyers to research both properties and the areas in which they are located, including looking at pictures and finding out about the neighborhood’s schools, crime rates and other statistics. Marketing over the internet with pictures of properties and virtual tours will be important for brokers. More than ninety percent of people use the internet before purchasing real estate. United States population growth will also be an important driving factor in the growth of the industry at large. The workforce is expected to to grow fourteen percent between 2008 and 2018. The internet arguably may eliminate the need for brokers altogether in the future. Banks also represent a potential competitor. Recently they have been freed by rule changes to enter the commercial real estate field in a limited way, and it is possible to see future rule changes allowing them to enter the residential field. The biggest growth areas are expected to be in the southern half ot the country, particularly in the southwest. A recent survey revealed the hottest buyer’s market to be Albuquerque, New Mexico.
Even in spite of the poor economic conditions and the state of the industry, analysts are confident in the future growth in the industry. Brokers commissions are expected to grow at a compounded rate of fourteen percent annually from 2010 to 2015. The output of United States real estate businesses is expected to grow at an annually compounded rate of six percent between 2010 and 2015.
Andrew Weber is an Analyst for FranchiseHelp.com and is a graduate of New York University and New York University School of Law.