Real Estate Industry Analysis

The real estate industry comprises of multi-family and single family real estate brokerage. It is mainly controlled by real estate brokers who are licensed personnel who are charged with the role of arranging the sale or purchase of real property or land. A home is a single structure which is constructed and provided for sale and occupied by a single family. Multi-family apartments comprise of structures that are built for occupation by multiple families in the form of duplexes and apartments. Condominiums are also classified as multi-family real estate (Beck, Frank, and Aaron 427). The real estate industry is comprised of companies which are registered as brokerage firms involved in any one or more of the following:

1. Renting real estate for other parties
2. Purchasing real estate for others
3. Selling real estate for others

While the company has generated a lot of criticism after the mortgage crises which happened prior to the great recession, the industry still remains profitable and currently generates revenue to the tune of billions of dollars. In 2013, the US had over 165,000 real estate firms which generates a revenue of $170 billion and about 25,000 firms operating in the commercial brokerage and which generated a revenue of $30 billion last year (Beck, Frank, and Aaron 427).

Industry Background

The real estate industry is rarely stable. It operates in tune with the economy and specific economic indicators like interest rates. There is often a similarity between the trends in the economy and the industry. It rises with economic growth and drops when the economy falls. In 2008 after the collapse of the economic bubble in 2011, the economy collapsed. Both the economy and the real estate industry are still recovering from the collapse. Real estate companies have entered into property management to diversify their incomes and absorb the effects of the difficult economic period.

The real estate industry in the US comprises of three main fields as noted above. Brokers link buyers and sellers in the industry. They also assist in the initial processes of purchase and prospecting. The buyer then provides a certain percentage when their property is purchased. Often, this commission is between 5 and 6 percent (Ro and Gallimore 198). Real estate brokers may also bring together tenants with property owners in the case of leasing. Management firms manage property on behalf of property owners who are not interested in managing the property.  They ensure that the properties are always occupied by tenants, employ staff and pay utilities. As expenses to be met in the real estate or more or less fixed, maintaining high rates of occupancy is paramount to profitability.

This report covers the competitiveness of the industry with special concern with the US with the main focus being today. The majority of real estate companies has been established within the past three years. The report will cover the period between 2008 and 2014. The choice of this period is based on the capacity of the economy, and in this case the recession, to impact the industry.

Intensity of Rivalry – High

In 2008, the US real estate brokers generated a total revenue of 46.6%.  This was a drop of 98.6 from the previous year and a 34.4 % drop compared to the peak of the housing boom when they had generated around $71 billion (Furber 12; Ro and Gallimore 202). The real estate has since taken off since the 2008. As noted earlier, the year 2013 saw to revenues of over $ 200 billion. Compared to the above values, there has been a growth of of over 400 % in the industry (Beck, Frank, and Aaron 428). This growth could however be owed to the great recession which occurred at a time when the economy was flooded with properties (Ro and Gallimore 198). Overall, the high number of properties has seen in low prices of properties throughout the industry. There has therefore been a lot of price based competition.

There has been an increase in the number of real estate agents operating in the industry. Again, this increase in the number of real estate agents could be owed to the global economic recession, which led to the loss of jobs and hence people entering into business (Ro and Gallimore 198). One field that had a massive entry was the real estate industry. The high number of brokerage firms has served to increase the competition in the industry. The industry is highly concentrated. This translates to lack of profitability of an industry in the long run as a result of increased rivalry.

The realty industry has many exit barriers which include the economic, strategic and emotional barriers that hold competitors in the industry despite the industry being nonprofitable. This is one factor that is working against the industry’s profitability. There are limited entry barriers as real estate brokers only require a business license to operate in their industry.

Availability of Substitutes – Medium to High

Property buyers and sellers have recently adopted the use of technology to post their property as well as seek them on internet platforms. This has implied that such persons are able to waive or lower the commission fees that would otherwise be entitled to the industry. Providers of such services include Craigslist and eBay, where a majority of people can buy and sell a multitude of goods and services. Some real agents have, however, opted to take advantage of the substitutes by obtaining properties from such sites, in that case, the seller is only required to pay a 3% minimum fee to the broker. The industry has no switching cost (Ro and Gallimore 198).

Bargaining Power of Suppliers – Medium to High

In the real Estate Industry, there are two main suppliers. First, there are suppliers. These are individuals who are employed by the company to find properties and customers for  them. Real estate agents have little bargaining power (Furber 12). They only require to meet the requirements set out by the state and then obtain further training from the broker. After training, the bargaining power of the agent gradually increases as they are able to gain popularity in the market. The agent then balances the bargaining power in their favor when they get to this point.

A second supplier in the real estate industry is the MLS real estate portal. This is a portal that collects information about properties that are on sale and makes it available to brokerage firms. In return, the broker and the MLS company divide the commission that is paid by the seller (Furber 12). The portal contains a lot a lot of information, including the size of the property, the address, the number of bathrooms, and everything else that is relevant to the home. It also contains up to twelve photographs of the property.

The MLS has significant bargaining power over the realty companies. It dictates the rules that are to be followed by the organizations that follow it as well as determine the ratio of division of the commission (Ro and Gallimore 198). The real estate firm must also satisfy the requirements below

1. Must be a holder of the real estate broker’s license within the state for which they will require:
   1. Obtaining required training hours and passing national realtor exams
   1. Clearance from the state as one without a criminal record
   1. Completion of a set of courses with the board of realtors who own and maintain the MLS
2. Must be insured
3. Membership fees are paid annually
4. Monthly fees must also be paid
5. Participation in the activities of the local MLS and upholding the principles of the MLS is required

Bargaining Power of Buyers – Low to Medium

Buyers and sellers of single properties are met with a market that is currently saturated and which has more supply than demand. The excess supply has caused the commissions to remain at around 6%. Sometimes the seller gets charged an extra percentage of up to  2% for extra services (Beck, Frank, and Aaron 427). They may get, for example, advertisement space or a promised sale within a limited period. On the other hand, the high supply has empowered buyers and made them capable of bargaining for lower prices. This is evident from the low cost of properties in comparison to the 2007 situation (Furber 12). Buyers searching for properties that are highly valued get a higher bargaining power along with additional services.

The situation is similar among home developers. Home developers, however, have a better bargaining power, especially putting in mind the number of houses they are providing for sale. Property developers, however, both buy and sell (Furber 12). They require real estate to develop their property. They are therefore more capable to gain any way the property market sways. They are also likely to bargain for lower rates or incentives from the brokerage firms. On the other hand, brokers may bargain for higher rates and then promise to put more activity into marketing the developers’ properties.

The federal government relocates over 60,000 employees annually through the US General Services Administration (GSA) (Beck, Frank, and Aaron 427). GSA then obtains the services of brokerage firms. The high number of employees being relocated give GSA an advantage. Corporations transferring their workers also take advantage of their numbers to get better deals in the market. The higher number of employees on transfer the higher bargaining power of the corporation.

Threat of Entry – Low

The realty industry has limited threats of entry. It is also attractive owing to its flexibility of working hours. The company must, however, be knowledgeable of the local area or be willing to explore to succeed in the industry (Ro and Gallimore 198). The majority of realty companies that are doing well in the industry are those that have a long history in the industry. Apparently, new entrants are a relatively low threat to the industry (Furber 12). Established firms have created a selection of services which they offer to their customers. They also have large numbers of agents to work in the industry. These capabilities make them more appealing to home buyers since they are more reliable.

Licensing is an important factor in entering brokers. For them to enter successfully into the industry, they must satisfy the state requirement of a written examination. A broader examination is provided for brokers than agents. These tests examine on the understanding of the industry as well as the laws that govern the industry. Some states also require that persons have experience in real estate as well as some form of training. With such complications, it is possible for some individuals to find joining the industry difficult.

Conclusion

In conclusion, the realty industry is a suitable industry for those companies that are already in the industry. Statistics show that while the industry is relatively easy to enter, it has high barriers of exit and is most favorable for companies that are already in the industry. Companies that have been in the industry for longer possess the crop of employees as well as resources to compete effectively in the industry. The high intensity of the competition in the industry indicates a possibility of lower profits in the market. This is further coupled with a strained market where the supply is higher than the demand. This situation had been in favor of buyers. It has placed buyers in a situation of improved bargaining power. While the industry is relatively easy to enter, competition favors established companies. Suppliers have a relatively high bargaining power. The bargaining power of agents increases as they gain knowledge and experience in the field. The MLS has maintained an advantageous position by placing a set of rules over the organizations which have membership in it.

Works Cited

Beck, Jason, Frank, Scott, and Aaron, Yelowitz. “Concentration And Market Structure In Local Real Estate Markets.” Real Estate Economics 40.3 (2012): 422-460. Business Source Complete. Web. 24 Nov. 2014.

Furber S. Untitled. Estates Gazette [serial online]. September 20, 2014;(1438):07. Available from: Business Source Complete, Ipswich, MA. Accessed November 24, 2014.

Ro, SeungHan, and Paul Gallimore. ‘Real Estate Mutual Funds: Herding, Momentum Trading And Performance’. Real Estate Economics 42.1 (2013): 190-222. Web.

Śmietana, Katarzyna. ‘Diversification Principles Of Real Estate Portfolios’. Real Estate Management and Valuation 22.1 (2014): n. pag. Web.

Tsang, Desmond. ‘Comparing The Quality Of Accruals For Alternative Summary Performance Measures In The Real Estate Investment Trust (REIT) Industry’. SSRN Journal n. pag. Web.