Real Estate Brokerage and Management
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Industry Overview
The US real estate management industry includes 220,000 companies generating about $160 billion in annual revenue. Of these, 60,000 are local real estate brokers, another 50,000 are involved in non-owner property management and appraisals, and the other 110,000 are owner/managers of residential and nonresidential properties, such as apartments, office and retail buildings, shopping malls, theaters, industrial space, assisted living facilities, and retirement communities. Only the largest real estate companies, such as Equity Office Properties; Coldwell Banker; and Simon Property Group, have revenues exceeding $1 billion; most companies have annual revenues less than $10 million.
The range size of companies in this very fragmented industry is enormous. A large apartment owner such as AIMCO manages over 300,000 apartments, while most companies are small and own or manage a single building. Even the largest property owners hold only a small fraction of the total US market, which includes 34 million apartments; 700,000 office buildings; 1.3 million retail buildings; and 2.5 million other commercial buildings. The average size of retail and office properties has not changed significantly in 20 years: 10,000 square feet for retail buildings and 15,000 square feet for office buildings.
Competitive Landscape
The profitability of real estate management companies (which mainly have fixed costs) depends on demand for the properties they're associated with or the volume of transactions they handle, both of which are usually higher during periods of strong economic growth and can be negatively affected by a recession or by too much new construction. Large companies have only modest economies of scale and benefit mainly from better name recognition than smaller competitors.
Products, Operations & Technology
Real estate management companies provide services and are labor-intensive operations. Their daily activities typically involve gathering information, coordinating activities with other service providers, maintaining contact with customers, preparing documents, and conducting financial transactions.
Most real estate companies specialize in a segment of the industry, reflecting the different management requirements of each segment. Managing shopping malls, for example, is very different from managing office buildings. Many real estate companies engage in related activities that grow out of their particular area of expertise. A large residential real estate broker may also provide mortgage loans, homeowners insurance, and relocation services. A commercial broker may provide commercial financing, investment services, real estate research, and appraisals. Apartment and office building owners may also buy, sell, develop, and renovate properties, build new ones, and manage property for others. Assisted-living community operators may also operate nursing homes and provide other health-related services.
Residential real estate brokers bring buyers and sellers of individual properties together, assist them in setting a price and arrange for appraisals, inspections, and other services. Most transactions include two brokers: one assisting the buyer and one the seller. The seller's broker charges the seller a brokerage fee, usually 6 percent of the sales price (for expensive properties the fee may be lower), that is split with the buyer's broker. Since the buyer's broker is paid by the seller, the buyer's broker has a conflict of interest, and some buyers prefer to hire a broker not paid on commission.
Commercial real estate brokers facilitate both the lease and sale of commercial properties, and frequently also provide ancillary advisory and appraisal services. Brokerage fees are often negotiated (rather than being based on a standard formula) but can be as high as one-third of the first year's rent.
Property management companies are involved with marketing (ensuring that the property is as fully occupied as possible); financing (determining and negotiating lease length and amount); and building operations (hiring and supervising local staff, and providing utilities, maintenance, and other building services). Most owners of real estate actively manage their own properties, but a large number of passive owners hire a property manager to operate their buildings. Individual investors own most small apartment properties in the US (90 percent). Vacancy and lease rates are major concerns for property owners and managers. Because most property expense items are fixed, revenue losses from vacant space go straight to the bottom line. For an apartment owner, a 5 percent change in the vacancy rate can produce a 20 percent change in return on equity.
Real estate investment trusts (REITs) are a type of real estate company organized to comply with certain IRS guidelines that provide favorable taxation if 90 percent of profits are passed to shareholders as dividends. Publicly traded REITs (the real estate equivalent of mutual funds), which typically specialize in office buildings, apartments, or retail properties, have become a popular vehicle for real estate investing.