As recently as 2013, brokerage firms spent 40% of their gross margin on personnel. In 2022, it’s down to 28%
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 in 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, 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, Anywhere 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. As recently as 2013, firms on average were spending 40% of their Gross Margin (Company Dollar) on personnel-related expenses.