Predicting the Future

A Completely Hypothetical Look into the Acquisitions that will Shape the Future of Real Estate

Earlier this year I was invited as a guest on a Podcast by my friend David Abrams of HILO.  During the speed round, one of the questions that David asked me was what superpower I would choose if I was given the opportunity to choose one?  Without any hesitation I had my answer: “I want to be able to predict the future”.  My imagination briefly took me into a world where my ability to see into the future provided me with never ending wealth.  I was able to buy anything and everything I ever wanted.

I now admit that knowing what would happen before it actually did would probably lead to a fairly boring life, since most of life’s excitement comes from anticipation instead of any actual event.  Nevertheless, I decided to have a little fun with this idea in the world or PropTech.  This week’s article is a list of my predictions, purely hypothetical, of the acquisitions that will be consummated over the next 12 months.  I’m sure that this goes without saying, but I have zero inside knowledge about any of these companies.  Some of these may seem far fetched and highly unlikely, but my goal was to mix creativity with some logic to identify areas where 1+1=3.

Costar Acquires Realtor.com

Costar is laser focused on diversifying into residential real estate.  Their last commercial acquisition attempt, RentPath, met intense opposition from regulators which eventually caused the deal to collapse.  As this event most likely set a precedent that any future Costar CRE acquisition would be challenged, and with Andrew Florance’s unquenchable appetite for growth and keen sense for deal making, the next logical step was residential.  Costar made a splash with their first resi acquisition in November 2020 of HomeSnap ($250M), followed soon after by Homes.com ($156M).  Costar has built its business through acquisitions, and there is only 1 crown jewel residential listing portal left that is not yet owned by Zillow.  That company is Realtor.com (parent company Move, Inc.).  Realtor.com is owned by News Corp which they acquired in the fall of 2014 for just under $1B.  Besides for Costar’s desire to grow through acquisition, this deal makes sense for other reasons as well.  First, News Corp is an unlikely owner of this entity.  Sure, they have a strong digital arm, but not many synergies exist between Realtor.com and their core businesses, so the entity should not lose value by being spun off.  Secondly, due to disciplined management, aided by a very strong housing market, Realtor.com’s traffic is at an all time high.  This creates a perfect opportunity for News Corp to exit this investment with a handsome return, while giving Costar an enormous boost in their quest to be to residential real estate what they are to CRE.  They have made it absolutely clear that they are looking to take on Zillow as evidenced by Mr. Florance’s comment at Inman Connect: “The residential agent is Zillow’s competitor”.  This entire list of predictions is hypothetical, but I would actually be surprised if this acquisition didn’t take place.

Zillow Acquires VTS

This is a defensive play.  As noted above,  Costar is making a huge push into residential real estate, and they are one of the few firms with the capital, the desire, and the knowhow to battle the listing giant that is Zillow.  Zillow has announced that they are pivoting their model to focus on iBuying, but they still make the lion’s share of their money from advertising dollars generated from their listing portal and premier agent programs.  Rich Barton may be focused on iBuying, but he is not going to take a fight sitting down.  He didn’t get to where he is by surrendering.  If Costar is going to come onto their turf, my prediction is that Zillow wages an all out war on Costar’s main business line: their Commercial Listing Portal.  Costar is so far ahead of every player in this space (hence why the FTC sued to stop the RentPath deal), and there are very few players who have any chance of catching them.  In the Summer of 2020, VTS entered the game with the launch of their marketplace (a direct competitor to Costar).  They are aggressively hiring teams to court the brokerage community to promote their marketplace over Costar’s services.  VTS is a very well run company (their CEO Nick Romito was just named a Best Boss in Commercial Real Estate by GlobeST), and although their marketplace is still in its infancy, I believe that they have a better chance than anyone of taking share from Costar.  VTS is a private company, and while they show no signs of looking for an exit (they just acquired Rise Buildings for $100M), when you are VC backed you are ALWAYS for sale.  VTS hit unicorn status in 2019 with their Series D ($90M), and it would almost certainly require a big premium to entice them to sell, but Zillow can easily afford to make the deal happen (Zillow’s market cap is currently over $33B).

Walmart Acquires Realogy

The single biggest event when consumers make the most significant amount of purchases at one time is when they buy a home.  Realogy participates in approximately 25% of all US real estate transactions (at least 1 side).  Not only does Realogy offer the key to getting inside consumers homes at the exact time that they are moving in, but they are primed to be acquired based on the significant discount that they are trading at.  Realogy’s in-house brokerage division closed sales volume of $184B (333K sides) in 2020.  In comparison, Compass closed sales volume of just over $151B (144K sides) during the same period, yet Realogy’s market cap is $1.77B compared to Compass which just went public at approximately $7B).  In addition to closing more sales volume at its in-house brokerage than Compass, brokerage only represents one business line for Realogy.  Realogy also owns the nation’s largest franchise network along with a huge title division.  Realogy does carry nearly $3B worth of debt, but that still doesn’t come close to explaining the discount that it is trading at compared to Compass when they both operate the same model. Realogy’s 2020 Revenue was $6.2B vs. Compass’s revenue of $3.7B during the same period.  With a market cap of nearly $400B, and intense pressure from Amazon, Walmart’s acquisition of Realogy would be about as significant as a rounding error from a financial standpoint.  In regards to synergies, Walmart would gain access to a direct channel into the largest single pool of homebuyers in the country (possibly the world).  If Walmart doesn’t make a bold move like this soon, someone else will.  Rarely do buying opportunities like this exist that include a massive concentration of target customers, trading at a discount of this proportion. 

Amazon acquires LATCH

Multi-Family is currently the darling of the PropTech world, and the amount of capital that is being invested in this space is at an all-time high.  However, the majority of the tech that is being rolled out ends outside the resident door.  The area of this asset class that has not yet been cracked and which represents the holy grail of opportunities is inside the resident unit.  A truly smart home needs to have the tech from inside the resident door integrated with the tech outside the resident door, and Amazon has not been shy about their pursuit of getting packages delivered inside your apartment.  The example always used is that Amazon wants to get to the point where their drivers can enter your home while you are away and put your groceries away in your refrigerator; but there are so many other opportunities as well.  Most people (including myself) still cringe at the thought of a stranger alone in their home, but I have no doubt that this will become the norm at some point.  It all comes down to access and security.  Amazon has partnerships with different hardware and service providers, but a challenge of this magnitude would be optimized with an end-to-end solution.  Ring, which Amazon acquired in early 2018 for $1B, will most likely be the vehicle that they use to access Single Family Residential properties, but LATCH helps them close the loop of an end-to-end solution for the lucrative Multi-Fam segment (their are approx 48.5M multi-fam units in the US).  I am still perplexed by LATCH’s valuation (they recently announced that they are going public via a SPAC at a valuation of $1.6B), but the synergies that Amazon can extract out of this deal justifies a premium.

Opendoor Acquires Houzz

Opendoor’s entire model revolves around buying homes, investing capital (the least amount possible) in upgrades, and reselling them as quickly as possible.  Opendoor currently operates in about 30 markets, and with that number expected to increase rapidly in the near future, they need access to a constant stream of reputable contractors across the country.  Houzz gives them instant access to a network of contractors, all competing on price and rankings via a marketplace, who can quickly and effectively complete the work needed to get the homes back on the market.  Opendoor has enough volume to justify keeping this service in-house, and this acquisition allows them to differentiate from the scores of iBuyers that are launching carbon copy models.  If iBuying becomes the industry norm and sellers decide to get offers from each company simultaneously, margin compression can cause the entire model to implode.  The winner will be the company that operates most efficiently by both controlling costs and increasing the speed of getting improvements completed so that the homes can be relisted.  Although a marketplace like Houzz relies on 3rd party contractors, controlling the platform can provide the edge needed to come out on top.

Playing CEO

If this exercise taught me anything, I learned that it is fun to play CEO - especially with other people’s money.  I invite my readers to join in the conversation by commenting below with potential acquisitions that you predict may take place over the next 12 months (the more creative the better).  If anyone predicts one that comes true, I will make sure to give you credit in a future article so that the entire world knows about your superpower.