Interest rates continue to climb as the market readjusts back to pre-pandemic levels, but what does it all mean for managing brokers looking to retain agents? What impact is it having on new investment and the ever-increasing supply of business models? We checked in with Jack Miller, president and CEO of real estate consulting and analytics firm T3 Sixty, for his insight into these and other questions.
Residential real estate sales are in a much different position than this time last year. What are managing brokers doing to retain agents in a cooling market?
Agents that joined real estate in the last couple of years need training and support on how to do the basics of building a business in a slower market. Teaching people how to reach out to their network, prospect, market the listings they do have — all of this was not as important when everyone was negotiating multiple offers back-to-back every day. Also, some agents (even experienced ones) will need to learn or relearn proper pricing techniques, how to gauge if a property needs a price reduction or changes to presentation, and fundamentally how to market properties if the buyers are not showing up.
A year ago, we discussed the trend of new investment in the real estate sector. We’ve seen some of those publicly traded companies scale back their workforce numbers, hiring bonuses and other areas of their businesses. Where do you see these publicly traded brokerages headed over the next year and beyond?
There are new model companies that made it over the challenge of getting to profitability, and those companies will be just fine, like other brokers. Everyone (even profitable companies) in slower markets will need to watch expenses closely and manage their cash flow. New entrants that got momentum (lots of agents, large sales volumes) either have or are in process of making expense cuts to get to a cash flow position that is sustainable. If the services they provide cannot be maintained with their operating capital and cash flow, it is simply a waiting game until there are challenges. Companies that didn’t get momentum will struggle, and likely be acquired or close down in a cooler market. The investment industry took on a lot of new ideas in real estate in the last 10 years, and some will make it, and others won’t, due to timing, market momentum or an idea that the market wasn’t ready for. Either way, real estate has evolved! We have new offers for consumers and agents, and fundamentally that is a good thing.
How is the rising interest rate environment impacting the various business models available for agents? Last year, you said that real estate is not a one-size-fits-all industry and there are a number of options for brokers looking to work outside the traditional brokerage model. Will brokerages have to pull back on the perks that differentiate them, or will they expand their options to attract new agents?
These are two different questions. The interest rate environment affects the number and types of buyers that are buying homes, and business model of brokerage is based on the services and fee models that agents want and need.
There is a strong case to be made that in a tougher business climate, or even in just a normal market, there are plenty of agents that want help and support making a living in real estate. The broker that can actually help their agents make more money will always fare well, and in a slower market, this is likely an even stronger offer, as some agents will really need the help — whether it is training, coaching, systems or ready to work business. Conversely, agents that are highly self-supporting, and have already sourced their own systems and know how they make money in a slower market, may choose to reduce expenses. In a market that is returning to normal or cooling, highly productive agents will have the time to evaluate what they want and need and will choose accordingly. There is room for everybody, whether it is high service or low service, with the fees to pay for those services accordingly.
What do you see happening with iBuyer models over the next year? A year ago we discussed the large amount of capital invested in the space.
iBuying appears to have a place at the table in real estate; there are still consumers that value convenience over “best deal” in their lives, and now with a less hectic market we will find out what level of market interest remains.
How long do you see the inventory shortage being a problem, and what will it take to get the country back on track in terms of adequate housing stock?
We wrote about the lack of housing inventory in the 2022 Swanepoel Trends report. This is a significant challenge, as the homebuilder industry nationally never really fully recovered from the prior recession. Based on the numbers we have our 2022 report, we have a cumulative shortfall in homebuilding of approximately 5.5M units, of which 2M are single-family homes. This means that single-family home starts would need to increase by 200,000 to 250,000 homes every year for nearly a decade to effectively close the gap. This varies greatly from market to market, or course, but on a whole presents a challenge to inventory for the foreseeable future.
We’ve seen more and more brokerages move into the title and mortgage lending spaces over the last few years. Some medium-sized brokerages are also pursuing this strategy for expansion. Do you see that trend continuing, and what other areas might brokerages expand into?
This is neither a new idea or a new trend; we have written about the affiliated business trend in real estate many times, most recently in our 2021 Swanepoel Trends Report chapter “The Brokerage Ancillary Business Playbook.” The most profitable brokerages in the country have added ancillary businesses to their portfolios, and we expect that more brokers will come to these approaches in order to maintain and grow profitability. There are companies that now make it much easier to start and run ancillary businesses, or to invest in ancillary businesses that are affiliated with a brokerage or franchise brand, and this additional profit opportunity makes a brokerage much more robust and healthy. As for new areas, we see some brokerages also working to build property management and vacation and short-term rental management, as the cash flows from those businesses help bolster the ups and downs in residential sales.
What other large market shifts do you see over the next six to 12 months that agents and brokers should be paying attention to?
Every year we release the top trends that we think are impacting the industry now and for the next few years at t3trends.com; this year we have notable trends in attracting and hiring talent, as with unemployment rates at historic lows, many companies are challenged to find the right people; we have identified a trend in brokerage technology due to consolidation and a deep need to “spring clean” all of the tech purchases made during a very busy market; the growth of single-family investors in real estate as we shift to more “renters” due to the challenges with affordability and inventory; and a host of other trends that we think every broker and agent should know. The report is available for a $180 pre-order price at www.t3trends.com, and as a bonus we are including digital access to the 2021 and 2020 Swanepoel Trends reports, as well (which includes the chapters referenced above).
Jack is responsible for the overall management and financial health of T3 Sixty. He previously served as T3 Sixty’s chief technology officer and lead of T3 Fellows, a division of T3 Sixty. He has two decades of real estate industry experience with management roles in franchising, franchise ownership and brokerage. Prior to joining the real estate industry, Jack worked in multiple technology startup companies including as a partner and investor. He is a consistent contributor to the Swanepoel Trends Report, as well as various white papers and abstracts on technology. Jack has a B.S. in electrical and computer engineering from the University of Texas.