Implications of Expanding Free Agency for Brokers, Real Estate Service Companies

By Robert Bagguley
Founding Partner at Top Tier Representation and Bespoke Real Estate Advisors

Consolidation in the real estate industry has brought about a fundamental shift in the negotiating power of the individual broker and brokerage teams. Today, we commonly read about top brokers or their teams moving from Company A to Company B, or even returning after a short hiatus to Company A from Company B.

I see this becoming standard practice, rather than an exception or trend. Recent consolidation, through either merger activity or recruitment of talent, has been less a competitive solution than a pre-IPO strategy.

It is equally becoming a necessity, post-merger, to satisfy the investor need to demonstrate aggressive revenue growth at acceptable EBITDA and margins of profitability that in recent history have appeared difficult to achieve based upon “same store sales” year after year.

Statistics for the publicly-traded real estate service companies, in general, show domestic deceleration in margins without a robust acquisition or recruitment strategy. In the San Francisco Bay Area alone, 10 venerable firms, all of which existed just over 10 years ago, have been absorbed by their various major competitors, resulting in fewer options to achieve impact merger and acquisitions, both in the Bay Area and nationally.

All these factors have increased today’s value proposition for high-production brokers and their teams. I believe the new industry normal will mature into a sports-analogous free market agency environment, with all companies bidding heavily for this talent every three to five years to acquire and, even more relevant, to retain their top talent.

On the one hand, broker teams are currently disadvantaged by the fact that there has been no established process that allows them insight into their true individual value. On the other hand, companies have been disadvantaged in their bid for top talent because it is impossible for companies to know the optimal time for each of these brokers or teams to make a move.

M&A analysts will need to carefully underwrite future service industry valuations, for what is essentially the acquisition of personal service agreements of a target company’s top producers.

Failure to retain the future services of those same producers as their current contracts of employment becomes tradable in the free agency marketplace could see that talent depart to join a competitor, leaving infrastructure and related expense associated with the prior merger behind.

It will be ever more important to have a clear focus when assessing existing talent, not taking for granted that top producers are incumbent and can be treated differently, as that will be a flawed and old school approach. Talent will be recognized, valued, and in high demand. Just as with any successful sports franchise, recognize and reward, renew and retain, before those agents explore the new marketplace value for their talent.

For comments, questions or concerns, please contact Dennis Kaiser