In Part 1, I looked at the possible aftermath for real estate brokerages in the wake of the current crisis with COVID-19. In this part, let’s think about how organized real estate might be impacted.
Since I laid out the possible scenarios in Part 1, if you need a refresher, please go refer to those sections. Essentially we’re looking at three possibilities: short and painful, medium term driven by unemployment, or long term economic recession/depression.
For brokerage companies, here’s what I wrote in the conclusion of Part 1:
So what does the aftermath look like? Considering the possible scenarios, I think we are looking at an acceleration of the past trends that have taken years and years to develop.
At a minimum, in the best case scenario, changes in consumer psychology gives a boost to iBuyers and agent teams, but the impact of that will take many more years to manifest. The slow decline for traditional brokerages continues.
In the (second to) worst case scenario, we are looking at a bloodbath… but the brokerages that survive through a mix of smart adaptation, capital, systems, processes, and business model stand to benefit enormously when the market turns again, as it always has, as it must, and as it will.
In the middle, where the pandemic is contained, but we have a major economic hit and a surge in unemployment as a result of the steps we needed to take to deal with the virus… we may be looking at a real thinning of the herd, combined with the strengthening of all of the alternative models as well as the supercharging of already super agent teams.
This is, of course, directly relevant to how the pandemic affects MLSs and Associations.
The first point I’d like to make is that most MLSs are not in any immediate danger from COVID-19 or the reaction to the pandemic. They are essentially technology/data companies whose staff can work remotely for extended periods of time.
Second, the MLSs that matter (the top 50 or so out of 550-600), should have enough reserves saved up to last a good while even if they start losing subscribers. And none of them should start losing subscribers for several months.
The biggest impact in the near-term will be needing to cope with changes to processes during these extraordinary times. Some rules may need to be waived or relaxed, and the MLS leadership will need to figure out how to help their Subscribers and Participants deal with homeowners who don’t want buyer tours, or insane people who want open houses in a time of pandemic, or whatever odd situation arises.
So let’s go through the scenarios. Since I laid out the details of each scenario in Part 1, it might help to refer to that post for some of the details. I don’t see the need to add thousands of words to this post.
Scenario 1: Short and Painful
The only impact from scenario 1 on the MLS that I could see is a small decline in activity. It isn’t as if market makers can pick up the slack overnight due to changes in buyer and seller psychology, when they’re already pushing the envelope on how many homes they can buy and sell. More listings might come on with 3D tours, limited showings, fewer open houses, etc. for a while, but most sellers are going to need to use an agent and that agent is going to need to put the house into the MLS.
Those MLSs that do not have lockboxes or showing services (e.g., ShowingTime, etc.) may need to change their rules, as the local business custom of the listing agent meeting the buyer and buyer agent at the property may not survive the new social distancing regimes. But that’s a relatively minor thing.
Over the longer term, even with a short-and-painful lockdown, the agent teams and iBuyers will accelerate their growth at the expense of traditional brokerages and agents, but that’s going to take years to play out. All that COVID-19 did, under scenario 1, is to accelerate the timeline before the shift becomes obvious. So maybe 3 years, instead of 5 years — something like that.
Scenario 2: Shock Leads to Unemployment, Unemployment Leads to Longer Recession
Under Scenario 2, the MLS could start to feel some real pain. Depressed buyer demand over a time horizon measured in years rather than in weeks is going to drive people out of the business. Combine that with the ascendancy of institutions (agent teams and iBuyers), and we could see a decline in membership numbers that approaches the Bubble years: ~30% or so.
Most MLSs are led by executives and leadership teams that lived through the Bubble years; they will know to cut staff, cut expenses, and batten down the hatches faster this time around. So I expect things to be smoother.
Having said that, there is one consequence of Scenario 2 that I do see playing out for MLSs. Here’s what I wrote in Part 1:
Take everything I wrote about the short term, then amplify it by an order of magnitude or two. Because now it won’t just be the smaller brokerages without capital that start to go out of business, but larger ones who can go 6 months while losing money, but not a year. Even if they were to lay off a bunch of staff (managers, brokers, admin staff, etc.), they still have to deal with occupancy costs: leases, maintenance, utilities, etc.
And they have to do this while more and more transactions (at lower price points) are being done by fewer and fewer agents: the super agent teams get even more super as competition fades away.
The thing to understand here is that the MLS is built on a foundation of brokerage Participants. The ascendant agent teams are not brokerages, technically speaking. They are not Participants.
Even more obviously, the various market makers may be brokerages for legal reasons, and Participants to gain access to the MLS (e.g., Opendoor) but they are not brokerages in the traditional sense.
Neither have any say in how the MLS is governed. Neither have a particular love of the MLS as it is today.
Now, add on the fact that these institutions are among the best in the industry at adopting and deploying cutting edge technology. Having spoken to many an agent team leader, and the leadership of some of the market makers, the MLS has been a consistent thorn in their sides from a technology perspective.
If Scenario 2 plays out as I think, we may be looking at something far more significant than the 30% decline during the Bubble. We might be looking at closer to 50-60% decline, and not just of agents, but of brokerage Participants. Even more important is that some of these institutions could end up with an enormous share of the listings.
Something I didn’t think about in Part 1 is that if buyer demand is suppressed for years, then renting is the order of the day instead of owning. That opens the door once again to Wall Street landlords coming back into the market in a big way. Said institutional landlords would much rather work with a top agent team for all of their acquisition, disposition, and even property management needs.
Most MLSs are not setup all that well to handle rentals, even as it becomes a more important and bigger piece of the housing puzzle.
Taking all that into account, I could easily see these new powers in real estate flexing their muscles to do something about the MLS. Maybe that’s by trying to work from within, by trying to get board seats or increased voting power, or maybe that’s by trying to find a better solution for their data needs outside of the creaky and aging MLS infrastructure. It might be by forcing their local MLSs to merge, finally bringing about mass consolidation in the Bismarckian way instead of the current Care Bears way.
The general takeaway should be the eternal economic law: He that hath, gets. And the eternal law of human nature: power abhors a vacuum.
Scenario 3: (Next to) Worst Case Outcome
Under Scenario 3, everything that happens in Scenario 2 just gets amplified further for the MLS. Faster loss of membership and Participants, even greater concentration of market share and power in the hands of the fewer and fewer companies that survive to take advantage of the changed market (lower housing prices, more transactions), etc.
The one main difference, I think, will be that under Scenario 3, only the strongest of the MLSs will actually survive. Out of the 550 or so MLSs in North America, that might be only the top 100. Even those with reserves will find it more and more meaningless and more and more difficult to keep their doors open for the sake of 20 agents that remain in the MLS afterwards.
One natural consequence — and one that exists in Scenario 2, but with a longer time horizon — is that MLS technology vendors may disappear. Why?
Today, the MLS technology vendors can spread the cost out across hundreds of MLSs, most of whom are too small and too poor to have their own technology. If we see mass consolidation, and only the strongest of the MLSs survive the purge, then the TAM of the vendors shrinks dramatically. And these larger, stronger, richer MLSs have the money to build their own technology stack in order to address the demands of the new powers in real estate: teams and institutions.
The REALTOR Association
Interestingly, I don’t have a whole lot for the REALTOR Associations. Most are mere retail storefronts for MLS services that also do some education, some dispute resolution, and some lobbying work.
A short-and-painful shock should really do very little to change the REALTOR Association, except perhaps on the MLS side of the house (and we’ve already discussed that side). Fewer parties? No big awards banquets or installation dinners?
Since most of the government actions are on the state and federal levels, it isn’t clear how much local advocacy will matter in this crisis. NAR and the state Associations are busy as hell trying to help the authorities figure out what to do with minimum impact on housing, but the locals?
But a short and painful disruption, followed by psychological changes in consumers, and a new normal won’t affect REALTOR Associations much at all.
On the other hand…
With the other two scenarios, the outcome is the same for the REALTOR Association.
I see no outcome under which the REALTOR Association continues to control the MLS. The new powers that be in real estate will be super agent teams and institutions. None of them truly love the Association, even if some of the team leaders love talking about their involvement, their RPAC contributions, and so on. And if they do today for whatever reason, they won’t in the aftermath of scenarios 2 and 3. Why?
Because the REALTOR Association is fundamentally about leveling the playing field. All of the advertising and messaging from NAR, for example, pretends that all REALTORS are the same top notch experts in properties, local markets, and in helping buyers and sellers. Every single one of us reading this right now knows that is not the case.
Super teams and institutions, on the other hand, will be about competitive advantage, especially as they gain greater and greater market share and with it, greater and greater competitive advantage.
The vaunted Code of Ethics today requires very little that state real estate laws do not already require of a licensee. The difference is inside baseball stuff, like not badmouthing other agents. If you’re the dominant market leader, you have every incentive to badmouth other agents in exactly the same way that Verizon badmouths AT&T and T-Mobile badmouths both of them: it’s normal competition to point out how the other guy sucks.
That doesn’t happen today because business is still spread wide and thin amongst hundreds of thousands of agents (about half of the 1.4 million REALTORS do zero transactions in a given year). After scenario 2 and 3, that won’t be the case. Business will be concentrated in the hands of a few thousand, or maybe few tens of thousands, of super teams.
Will those institutionalized agent teams care greatly about having the REALTOR brand? If they collectively have 50-60-70% of the listings in a market, it isn’t as if the MLS can kick them out even if they leave the world of REALTOR. And agent teams are fully capable of talking to one another and entering into bilateral cooperation and compensation agreements. Why would they want to keep paying an addition $600-$1000 a year per agent to a nonprofit REALTOR Association?
If being a REALTOR produces an ROI, those teams will join. If it does not, they will leave.
Unless there are some dramatic changes made to the REALTOR Association and soon, it will be very, very difficult to establish a ROI from membership for these new institutional players.
Lobbying and policy work will remain important to them, of course, but they can just write checks to RPAC if that’s what they wanted to support, without paying for membership in the three levels of Associations… unless the REALTORS turn down money from non-members….
The only thing that prevented this from happening in the past few decades is the fact that the REALTOR Association owns and controls access to the local MLS. And as long as business remains diffused along the very long tail of real estate brokerage, that meant enormous power.
That all changes if and when the business gets concentrated, and I think the impact of COVID-19 under the latter two scenarios is the dramatic acceleration of the trend towards concentration of business. And one of the top priorities of these new power will be to wrest control over the MLS away from REALTOR Associations.
So with all that said, what if anything could we conclude? Maybe “conclude” is too strong a word, given that this is all pure speculation. Surmise might be a better word.
The trend towards institutionalization leads to a natural disassembly of the industry infrastructure built on large numbers of agents doing very few deals. The long tail benefited and benefits the MLS and the Association both, and the MLS and the Association are largely responsible for the long tail.
With COVID-19, all three scenarios accelerate that process. But the short-but-painful scenario merely accelerates it slightly, and should leave both the MLS and the Association relatively unscathed.
The other two scenarios do not. Those lead to a much faster concentration of power in the hands of the few stronger, more technological, and nimbler companies whether they are called agent teams, brokerages, or iBuyers. Those institutions have a built-in incentive to remove roadblocks to competition, such as the MLS as it is governed today, and the REALOR Association as it exists today.
I strongly believe that neither the MLS nor the Association in the winter of 2019 are ready for such a change. And with the crisis at hand, I doubt that either would have the time or the energy to think about making changes for what comes after. They’re too busy putting out fires right now, today.
Having said that, it might make sense for Association and MLS leadership to spend some time during any enforced quarantines to do some strategic and contingency planning. Keep a close eye on the data as to concentration of power, and start thinking about changes needed to incorporate the new powers that be into the infrastructure of the industry. Adapt or die applies to organized real estate as much as it does to the animal kingdom.