Real Estate Challenges

Updated: September 5, 2013
Industry Intelligence from First Research, a division of Hoover's (a D&B company)

Residential Real Estate Brokerage & Management Critical Issues

Homeownership Rates - Historically low interest rates have been enough to persuade many people to buy a home. However, homeownership rates fell for the eighth straight year in 2012, according to Harvard's Joint Center for Housing Studies. Tight credit and rising home prices continue to make it difficult for many people to buy a home. Meanwhile, renter households are growing and multifamily construction is expanding.

Limited Market Flexibility - Unlike many types of investments, which allow investors to buy and sell assets as market shifts occur, residential real estate brokerage and management companies may be "stuck" when the value of assets falls in a weak economy. Further, companies operating as REITs are constrained in their ability to buy and sell assets by financial regulations. Companies' lack of liquid assets may impede their ability to adjust during difficult economic times.

Competition from Technological Tools - The MLS business model, in which buyers and sellers must transact with agents, is under pressure as more customers want to access listings themselves. Real estate brokers face greater competition from Internet listing services such as Zillow, Trulia, and Yahoo! Homes. Recent innovations have also enabled users to search listings through Google maps on both desktop and mobile applications. Although MLS listings are vigorously protected by Realtor associations and lobbies, Internet-based services might eventually eliminate the need for traditional brokers.

Residential Real Estate Brokerage & Management Other Business Issues

Rental Conversions - In challenging times, difficulties in selling single-family homes tend to cause some of those properties to be placed on the rental market, where they compete with existing rental properties for tenants. More than 1 million single family homes shifted to rentals between 2007 and 2009, twice the number between 2005 and 2007, according to Harvard's Joint Center for Housing Studies.

Limited Market Flexibility - Unlike many types of investments, which allow investors to buy and sell assets as market shifts occur, residential real estate brokerage and management companies may be "stuck" when the value of assets falls in a weak economy. Further, companies operating as REITs are constrained in their ability to buy and sell assets by financial regulations. Companies' lack of liquid assets may impede their ability to adjust during difficult economic times.

Competition from Technological Tools - The MLS business model, in which buyers and sellers must transact with agents, is under pressure as more customers want to access listings themselves. Real estate brokers face greater competition from Internet listing services such as Zillow, Trulia, and Yahoo! Homes. Recent innovations have also enabled users to search listings through Google maps on both desktop and mobile applications. Although MLS listings are vigorously protected by Realtor associations and lobbies, Internet-based services might eventually eliminate the need for traditional brokers.

Indoor Air Quality Liability - Liability for poor indoor air quality (IAQ) in buildings, primarily mold growth, has become a serious issue for property owners and managers. Many insurance companies have successfully lobbied state insurance boards to eliminate mold coverage in their policies. Some in the industry have been the subject of lawsuits from tenants who claim harm resulting from poor IAQ. The increase in mold litigation has prompted insurers to boost premiums, and caused many companies to commit additional resources to remove mold from properties. Companies are also liable for mold cleanup and remediation upon acquisition of properties.

Commercial Real Estate Brokerage & Management Critical Issues

Demand for Services Cyclical - Demand for commercial real estate services can vary sharply from year to year. The volume of brokered transactions and the amount of space under management can fall more than 10 percent per year. Demand for commercial real estate is closely tied to the economy. Global interconnectedness has sped up the ability for markets to change both positively and negatively. Companies face the challenge of anticipating and adapting to the changes quickly.

Demand Depends on Local Conditions - Lease and vacancy rates and rents can vary in different markets. Office space may lease for $20 per square foot in Omaha and $120 in New York. Local vacancy rates can double or triple in a year, depending on the strength of the local economy.

Commercial Real Estate Brokerage & Management Other Business Issues

Brokerage Depends on Key Employees - Commercial brokerage depends on the contacts and efforts of individual brokers. Top brokers largely work independently and often take clients with them if they join a different company. Brokerage management consists mainly of recruiting new brokers and keeping top brokers happy.

Few Economies of Scale - Despite the growth of some very large companies catering to customers with national holdings, the industry remains fragmented because of its local nature. Small local brokers can know a market as well as larger competitors. Property management is often mainly a matter of contracting and supervising local service providers, with few costs that can be spread over a larger operation.

Dependence on Large Customers - A large portion of a broker or property manager's business may come from a small number of large customers. Brokers or managers of office space, in particular, may provide service to owners of multiple properties. The growth of REITs has accelerated the concentration of commercial property ownership.

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