While many pundits believe we’ll be bottoming out around the 4 million existing home sales level, it’s also common belief that we aren’t likely to see a sharp recovery like the early-2020 pandemic “V” bounce. Higher interest rates and ongoing economic uncertainty have no doubt thrown wholesale caution into the wind.
With home price increases slowing or dropping; fewer homes sold equals less revenues. As such, for many brokers this sharp decline falls right to the bottom line. While most brokers have some cushion given 2021’s blowout year, the prudent operators have already recalibrated expectations and are managing their businesses to what may be a slow recovery.
Managing to a declining market is easier said than done. Managing above the line via recruiting and acquisitions is very difficult for most firms. Increasing agent count, regardless of the method, also takes time. To get more immediate results, at least financially, when managing to a decline, you’ll find most brokers addressing it below the line — on the expense side of things.
Make an impact by reducing personnel spending
Reducing personnel spending is impactful because it’s by far the largest operating expense for most brokers. Additionally, reducing personnel spending can produce the most immediate results, unlike office leases and vendor contracts that may have longer-term agreements which can be harder to terminate or unwind. Reducing staff, as hard as it is emotionally, offers quicker relief when tightening the outflow.
As such, it’s been no surprise that most of the industry stalwarts have been active in reducing their personnel spending of recent. RE/MAX announced it cut 17% of its workforce in the second half of 2022, Realogy recently announced an 11% reduction of its workforce since June, Keller Williams revealed it had several rounds of layoffs over the last year, and Compass has also had several well-publicized layoffs of recent.
The personnel reductions from these national players corroborates not only with the anecdotal information we’re hearing from our clients across the nation, but with the data we’re seeing in our benchmark database which has long tracked a myriad of key financial and operational data points in the brokerage industry, particularly spending.
Not surprisingly there’s been a structural shift in personnel spending that precedes the pandemic shenanigans. As recently as 2013, firms on average were spending 40% of their Gross Margin (Company Dollar) on personnel-related expenses (see chart above).
From 2014 to 2019, this area of spend dipped to an average of 32%, and then, in 2020, it ticked down under 31% as brokers furloughed and/or terminated employees due to the pandemic.
In 2021, the ‘pandemic pop’ spurred record profitability for most firms, which allowed them to liberally spend in all areas as exhibited by personnel spending surging over 33%.
2022 is a whole different story; however, with our recent benchmark update showing a decline to 28%. This 15% drop is in line with what the major players have announced, and it’ll be interesting to see if we see a further decline in 2023.
If we see prolonged weakness in the housing market, there’s certainly room for further declines in personnel spending. For example, if brokers unwind lease agreements, then office staff are at risk. If vendor contracts are eliminated, then the tech/marketing staff who support them are logical cuts.
Most brokers we’re talking to have been conservative in their 2023 forecasting and budgeting and don’t plan on making additional meaningful cuts to their workforce, so I suspect we won’t see personnel spending fall much below 28%. But we’ll definitely keep an eye on it!
Scott Wright is a partner with RTC Consulting, a firm that specializes in real estate mergers, acquisitions and residential real estate brokerage valuations.