What’s Next for Real Estate?

There is a saying that goes “when the tide rolls back, you can see who is swimming naked”. When the market is strong, it covers a lot of weaknesses. With interest rates moving up, inflation on the rise, and the economy heading towards a possible recession, we’ll find out soon how solid the foundation of the real estate market has been, and more importantly, which companies and agents have built a strong, recession-proof business. Change always brings opportunity for the smart and opportunistic among us, and in my opinion, the following business types are positioned best for success in the coming years.

The Niche Superstars
The companies that are known as the best at something, will win big in the coming years. When there is less business to go around, the customer becomes more powerful, and people want to work with the best. If you are known as the best luxury agent or the best buyer’s agent, you’re going to have more business than you can handle in the coming years because customers will seek you out.

Diversified Business Models
Offices with multiple channels of business will do well in slower, more competitive markets. I tell my broker/owner friends that they should add relocation services and property management to their businesses as soon as possible. When the last recession hit, companies that had a track record of working with corporate clients were well-positioned for the REO onslaught that hit the market. While other brokers were closing down, they were expanding their operations and making more money than ever. Brokers who have escrow, title, and/or mortgage services are also better positioned to navigate through more treacherous waters. Geographic diversity also helps. Companies that are tied to only one local economy are more vulnerable than companies that are in multiple markets and can deploy more capital to offices where the market is stronger.

Capital and The Barbell Effect
Companies that managed their money well, and who have solid capital reserves will be able to withstand shifts in the market. The barbell effect also suggests that very small companies with low overhead will be nimble enough to survive a slower market, and very large companies with strong balance sheets will also do well, but everyone else in between will have a tough time. Intelligently-led companies in the middle will need to sprint to one side of the barbell or the other. In other words, get small and lean as quickly as possible or get big fast, if not organically, then by acquisitions.

The fundamentals of real estate are too strong for a crash like we saw in 2007. Homeowners have more equity than ever, and the mortgage market is much more disciplined than it was back then. However, affordability is at an all-time low and the market is due for a correction. The real estate market will undoubtedly be tougher, especially for the mortgage industry, but a surge of innovation is also around the corner. The companies that best understand digitization and the changes in our demographics will be the winners. I believe that the next Zillow, Rocket Mortgage, and eXp are in their early stages right now, which means some of the biggest fortunes ever made in our industry are not behind us, but rather are just around the corner.