Brokerage Firm Recovery - View Of The Longer Term

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How brokerage firms changed after each recession.

Each time the brokerage business went through a recession, some significant changes occurred in the structure of brokerage firms. Here are some examples:

After the 1980-82 recession, brokerage firms began to increase the size of their offices in terms of the number of agents; stopped offering programs to buy homes from sellers when it wouldn’t sell (yes, leading brokerage firms in the late 1970s and early 1980s were iBuyers). The trend towards franchising in our industry experienced a significate growth.

After the 1988-1991 housing recession, brokerage firms started the process of cross-marketing mortgage, title insurance, escrow, and other services in earnest. The move towards national brands became more pronounced. 1989-1995 were some of the most significant growth years for Coldwell Banker, Prudential, and RE/MAX.

After the 2006-2010 recession, broker-age firms finally stopped using classified advertising. One has to remember that even as late as 2006-2007, classified advertising in newspapers was still the largest line item in many firm’s advertising budgets. It took the recession to kill that idea for most brokerage firms once and for all.

WHAT MIGHT HAPPEN TO INCUMBENT BROKERAGE FIRMS NOW?

Fewer, smaller offices would seem to be at the top of the list. Occupancy costs range from 22% to 32% of Gross Margin for many incumbent brokerage firms. That is only behind employment costs as the most expensive segment of overhead. With Gross Margins coming down from 22% to 14% over the past six years (the national average among all brokerage firms), this was already becoming evident. Now that brokerage firms and their agents are doing most of their work from home offices, it would seem that some brokerage firms will use the next one to two years to reduce the size and number of offices.

Short term, there is a movement to the rural and ex-suburban markets—will it continue? REAL Trends has spoken to the leaders of two major rural, farm and ranch property brokerages who report that their website traffic has grown in the past month, and they see measurable increases in purchases of rural property. Tied with the reported flow of families from major metro areas to suburban and rural markets, this seems to indicate that, at least for the short term, families are seeking shelter outside of major metropolitan areas. Is there an opportunity for metro brokerage firms to expand their offerings into the countryside to follow this shift?

Brokerage firms and their agents will, at last, start building their business practices around the available technology platforms rather than trying to make technology fit their existing business practices.

We (and others) have observed for years that incumbent brokerage firms and many agents sought technology to support their existing business processes and practices. The recession in the housing market, no matter how long or deep, is likely to drive the brokerage community to rethink that approach. Evidence that we’ve seen from Adwerx and a few leading CRM providers seems to be showing a direct correlation between the full use of these platforms (and others) and increased productivity and retention factors. As brokerage firms rethink their approach to technology, they will also take advantage of the information that systems can provide to deliver more useful insights for their firms.

THE IMPACT ON “TECHNOLOGY” BROKERAGE FIRMS

Zillow, Redfin, eXp, and Compass (and their investors) will get to discover that they are in the residential brokerage business and are thus affected like everyone else.

We think the above firms will make the adjustments necessary to survive—different than they may have guessed, but each should survive and become stronger and more focused than before this downturn started. This also goes for firms like Open Door and OfferPad.

While the iBuyer activity seems to have stopped or cooled off measurably, for the time being, these programs will be reinstated once a new floor of housing sales has been determined and what, if any damage, has been done to housing values.

For firms like Zillow and Realtor.com, the decline in housing sales will affect how much agents and brokerage firms spend on online advertising. For firms like Redfin and Compass, the decline in sales will negatively affect their revenues and profit and loss statements. In the case of Zillow and Redfin, the loss of growth from iBuyer activity will have a very significant impact on their growth factors.

It’s funny that, at exactly the time that iBuyer activity would seem to be a real winning strategy (no need for showings, etc.), many of the leaders in the segment pulled back.

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This article originally appeared in the May 2020 issue of the REAL Trends Newsletter. It is reprinted with permission of REAL Trends, Inc. Copyright © 2020. To read the rest of this issue & more, please visit our Real Trends page online.

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