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Brokerage Trends: Office Space, Commission Rates and Gross Margins

Aug 5, 2020 6:12:00 AM

As brokers adjust to life in a pandemic, decisions need to be made that will impact brokerage leaders. Here are some trends to watch.

During the pandemic and changing market, several trends have become more evident than ever to brokerage leaders. First, the need for office space for agents, while not going away, will shrink. How much brokerage firms cut back remains to be seen, but REAL Trends’ clients are taking a hard stance towards keeping what they had before COVID-19 struck.

Secondly, the downward pressure on both commission rates and gross margins are driving brokerage firms to find new ways to build relationships with their agents and staff while also reducing costs for their businesses. As we’ve pointed out in prior studies, the retail commission rate is highly sensitive to the relationship between inventory of homes for sale and the number of real estate professionals. The fewer listings available to many real estate practitioners; the lower the retail commission rate.

Gross Margins

Gross margins represent competition for real estate agents, particularly productive agents. The more competition, the lower the gross margin. This trend has been developing for over 35 years but has accelerated in the past three to five years. Many of the new entrants, like eXp, Fathom, HomeSmart, JP & Associates, Realty ONE Group and United Real Estate, offer low-cost alternatives to incumbent brokerage firms, none of which are immune to these low-cost firms. There are also dozens of locally operated, low-cost firms. Competition has never been so fierce.

The brokerage data we receive from our REAL Trends 500 brokerage rankings and other sources shows that these low-cost models are growing faster today than in years past. The data we have indicates that they these low-cost firms have lower per-person productivity than incumbent firms and are attracting many lower producers. However, they are also getting some traction with higher producers recently. Furthermore, Further, even these firms are working hard at building their own sense of culture in their businesses.

We’ve written before about two issues that should be considered. First, powerful firms such as Sears, IBM, General Motors and ABC/NBC/CBS networks did not suffer solely from new competition but from attitudes of dismissiveness, arrogance and distractedness. At this point in the structural change in brokerage firms, it does not pay for any traditional brokerage to view these new challengers as less-than. Just because something worked well in the past, doesn’t mean it will continue to do so.

Second, a firm can’t be all things to all people. You can’t be Walmart and Nordstrom at the same time. Brokerage firms must pick a spot where they feel their resources, culture and market permits them to build a strong position. This is truer today than ever before.

Core Services

One factor separating traditional firms from others includes brokerages that operate core services such as mortgage, title, escrow, insurance and property management versus those that do not. In our valuation work we note that a larger and larger share of earnings for many brokerage firms are coming from one or more of these sources. This clear trend does favor medium to larger brokerage firms as they have the scale and resources to operate these core service activities. Smaller firms regardless of brand or model can build their businesses out to attract the partners needed to execute a strategy in this area. We do note that one related emerging trend is competing brokerage firms forming joint ventures to be able to gain the scale to compete in this area.

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