Are We Witnessing a Black Swan in Real Estate?
On Black Swans
Not unlike the famous Rumsfeld ‘unknown unknowns’, black swan events, as made famous by Philosopher/Trader Nicholas Nassim Taleb, are those events that are so unforeseen, they’ve been thought impossible prior to their arrival.
One could argue the advent of online portals are black swan events, as the ushering in or new technology and consumer-friendly search was a vast departure from the real estate practices of old, but technology developments are just that: innovations along a timeline of progress.
We could, however, be entering a period characterized by potential black swans in the real estate industry, starting with the banding together of NYC brokerages to effectively create a mini-MLS and the concentration of power held by Compass. Let’s tackle these separately and handicap the potential and scale them on 1-To-BS (Black Swan or Bull Sh*t).
The NYC Buyer Graph: A new initiative pioneered by RealScout, the NYC Buyer Graph is the collective membership of (thus far) seven NYC brokerages to pool together listings and data via the tech company’s platform and reciprocate anonymized buying behavior (i.e. what buyers are looking for, how they’re buying, etc.). What could a unique, broker collaboration do for the industry?
Compass: What else needs to be said? The company is aggressively targeting 20% market share in twenty markets by 20/20. With that combination of size and power, what blindsiding game-changers could be in store for the industry?
Black Swan or BS?
How likely are these initiatives to lead to Black Swan events?
We recently discussed the longer term viability of Compass, and came away underwhelmed relative to what the company is touting. Certainly an IPO would add an war chest of cash unlike any other in the space, but execution is all that matters.
For Compass to grab the type of market share it needs to develop a serious, long lasting competitive advantage, something will have to give, and that’s like quality. Compass has two routes to grab market share:
Acquisitions: These cannot last forever, especially in the luxury and mega-agent world. For Compass to garner 20% market share, it will have to give on quality and go towards quantity, meaning a more direct competition with Redfin, which immediately erodes some of it’s ‘premium’ brand quality. Furthermore, integrations are challenging and impose lots of risk. Lastly, how far does brand loyalty go in real estate?
Technology: Until Compass can prove it’s technology is a serious value add, it cannot claim it’s an advantage. It’s certainly helped the firm on it’s acquisition route (sales pitch), but Compass agents average the same number of transactions as a similar traditional-model based firm, so how is technology creating more efficiencies to develop a competitive advantage?
An advantage Compass has is it’s loud mouth marketing, first-mover advantage (sorry Gary Keller), and impressive resumes across it’s leadership team. Nonetheless, just banding together already high performing teams with technology and wrapping it together under a single brand is not the start of a Black Swan event.
On the NYC Buyer Graph
The NYC Buyer Graph, on the other hand, holds an interesting proposition. Besides the obvious downfalls of monopolizing data (and regulatory constraints), disadvantages to consumers, and need for high adoption among competing brokerages — wait, those are pretty serious hurdles — a lot has to go right for this to become a Black Swan. A potential game-changer, sure? Repeatable, replicable, and reversible? Definitely.
So what could make this a Black Swan? What if country-wide, brokerages banded together to oust the MLS, provide consumer-facing tools, partner with technology teams to leverage data as an asset, and rip back the power in the industry?
Every MLS and national brokerage missed the opportunity to create Zillow for themselves. What if they decided to do it now? Could a game-theory like mentality of, “If we all work together, we can fight a common enemy?” play out in the industry?
This requires significant collaboration, because anything less develops an environment where a handful of brokerages hoard private listings, which are a serious disadvantage to consumers (the advantage swells in favor of the brokerage who, like pre-Zillow times, holds the key to the safe).
The extreme scenario is one where brokerages (and more likely team-based models) develop a portal, replace the necessity of the MLS, and win-out. A LOT has to go right for this to happen, but that’s what makes it a potential Black Swan.
Rating: Black Swan, if everything goes exactly right
So what do you think? What does the future look like? Will the model change a little, a lot, or not at all?