With the housing market cooling off in the second half of 2022, led by sharply declining existing home sales from the same period of a year ago, we expect investors and purchasers of residential brokerage firms to largely stay on the sidelines to see what the final impact on profitability for brokerage companies and their related entities will be for 2022.
In discussions with many purchasers and investors, we sense that they may shift their valuation basis from a multi-year average, which is what most have been using since mid-2021, to the more traditional trailing twelve months basis which would only include 2022’s results. This would be a meaningful change in how residential brokerage firms are valued.
Eventual return to a vibrant M&A market
There are several factors in favor of a return to a vibrant market for residential brokerage firms and their related entities. First, there are many active purchasers and investors that are eager to continue to grow their footprint in the industry.
Second, there are a limited number of high-quality brokerage firms available at any given time and for that matter, there are not that many large quality brokerage firms left in the market.
Lastly, organic growth continues to be a challenge for the majority of brokerage companies, regardless of their brand, business model or location.
These factors would tend to indicate that purchasers and investors will return to the market in 2023. Their aggressiveness will be based as much on their desire to grow as it is the competition for the remaining smaller number of high-quality brokerage companies.
Waiting on the sidelines
For now, most purchasers we’ve spoken with have confirmed that, in their view, 2020 and 2021 were bullish one-time events in terms of housing sales and profitability. They have commented that brokerage firms through the boom, while having record profitability, were also seeing measurable erosion in gross margins.