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Zillow’s and Redfin’s technology have helped convince investors they have a good chance at beating out the competition in the world of post-COVID-19 real estate.
Amid the coronavirus pandemic and a sharp downturn, investors on Wall Street are placing their bets on two of real estate’s newest and most disruptive kids on the block, online real estate players Zillow and Redfin.
Their traditional, publicly traded counterparts – Realogy, which owns Century 21, Coldwell Banker, Sotheby’s, and RE/MAX – have done OK over the last three months, with their stock prices recovering a respectable amount of lost ground since falling off a cliff in mid-February.
Overall, the publicly traded residential real estate brokerages have seen their stocks prices make a stronger comeback than their counterparts in the commercial real estate sector, like Jones Lang Lasalle and Colliers International.
And there’s no contest when it comes to the REITS in particularly vulnerable sectors, like apartment developer Avalon Bay and mall giants like Simon Property Group and Brookfield, who have seen only a partial bounce–back.
But Zillow and Redfin have proven to be standouts in an already relatively strong sector, with home prices surging and signs that sales are coming back to, even as malls and office buildings sit half empty and renters are unable to pay.
Shares of Zillow, as of last week, were closing in on their mid-February price, while Redfin’s stock price has surged past its pre-pandemic level.
For Zillow and Redfin, it’s a case of two companies with business models well-suited for the challenges of a post-COVID-19 world, combined with a belief on part of some market observers that they represent the wave of the future.
Numbers Tell the Story
It’s been a roller coaster ride on Wall Street for companies across a wide range of sectors, and residential brokerage firms have been no exception.
In the month leading up to the coronavirus lockdown in mid-March, RE/MAX’s stock price fell off a cliff, plunging by more than 50 percent, from $39.09 on Feb. 3, to low of $17.70 on March 17.
Investment analysts say Zillow’s and Redfin’s ability to offer online alternatives to full-service agents position the companies well for the post-pandemic real estate market.
Since then, shares of RE/MAX have clawed back to $32.90 as of last Wednesday, making up considerable ground.
Century 21 and Coldwell Banker owner Realogy has had a tougher slot, plummeting from $13.11 a share on Feb. 17 to just $2.78 a share on March 16. Since then, it has climbed back to $7.42 a share.
However, Zillow and Redfin, with their business models skewed heavily toward online transactions, have suddenly found themselves with the right business model for troubled times.
And it shows in their stock prices.
Zillow, trading at more than $60 a share last week, was in striking distance of its last peak on Feb. 17, when it hit $65 a share. And that’s after losing more than half of its value in the run-up to the mid-March lockdown, when it bottomed out at $27.19.
And Redfin has put in an even more impressive showing, with its stock price trading in the mid-$30s last week, up from $32.43 a share on Feb. 17 and from its low of $11.60 on March 16, when it has lost roughly two-thirds of its value.
Virtual Tools Win Over Investors
Meanwhile, in the wake of the pandemic, both companies have made the most of their virtual business models.
Use of Zillow’s 3D home app surged in April, with agents creating 525 percent more home tours, according to Zacks Investment Research.
Soon after, Zillow relaunched its Zillow Offers program, after initially suspending it amid the coronavirus lockdown in March.
Zillow has pitched its initiative, in which it makes cash offers for homes with minimal interaction, as a way of safely selling a house while avoiding as much in-person contact as possible.
In another sign of the times, Redfin last month began to recall 350 furloughed workers, having put 1,000 employees on ice in the initial stages of the coronavirus crisis. The online real estate platform and brokerage cited an explosion in pent-up demand from homebuyers. There’s little doubt on Wall Street that the company’s lower-cost, Millennial-friendly model could give it a leg up on legacy brokerages.
The resilience of the two big online real estate giants, in turn, has not only grabbed the attention of investors on Wall Street, but the number–crunching analysts at Moody’s as well.
In evaluating a $245 million debt issue by RE/MAX, Moody’s cited the “long-term risk” posed to the residential real estate giant by Redfin and Zillow, as well as newer contenders in the iBuyer space.
The online real estate platforms and virtual brokerages were already a competitive threat before the pandemic, with current crisis has only served to accelerate the rate of change in the real estate, Moody’s noted.
Scott Van Voorhis
“The demographic and societal trends which would lead to a significant adoption of online alternatives to full-service agents are likely to get stronger traction during the coronavirus outbreak,” analysts at Moody’s wrote. “This shift is a long-term risk that could have a material adverse effect on RE/MAX‘s business when the outbreak is over.”
It’s too early to say whether the writing is on the wall for the traditional brokerage houses.
But after being dismissed for years as upstarts, Zillow and Redfin are finally having their moment in the sun, even if it took a pandemic to get there.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
