Notorious R.O.B.

One of the most valuable pieces of data in our industry, I think, is the annual Power Broker Report and Survey conducted by RISMedia.  The 2008 edition is no exception, and is available here.  I highly recommend it if you’re interested in our industry as a whole.

I like to play with the numbers as soon as I can get my hands on them.  I’ll probably be writing about one or more aspects of this over the next few weeks, but thought I would share some interesting tidbits.

I only looked at the top 750 brokerage companies in the survey report because the numbers started getting wacky.  For example, the #961 company did 13 transactions totalling $70,000 in volume in 2008.  That just doesn’t sound right — either there’s a data entry error, or that company ain’t in business no mo’.

Plus, I excluded the top three companies: NRT, HomeServices of America, and Long & Foster, simply because they are such outliers that they really skewed the results.  For example, #3 Long and Foster more than doubled the sales volume of the #4 company, Prudential Douglas Elliman.

In any case, here are some numbers to chew on:

• The average number of transactions in 2008 was 1,894; the median, however, was 931.
• The average sales volume in 2008 was $498.2m; the median was $208.6m.
• Assuming a 2.5% GCI rate, the average GCI for the Top 750 was $12.5m, with the median coming in at $5.2m.
• Assuming a 26.7% company dollar retained (taken from the 2007 REALTrends Brokerage Performance Report), the average Company Dollar was $3.33m, with the median at $1.39m.
• The companies in the Top 750 employ an average of 271 agents; the median number comes in at 128 agents.
• The average GCI per agent is $53,444, while the median GCI per agent is $38,031.
• The average Company Dollar per agent is $14,269; the median is $10,154.
• In total, the top 750 companies added 43,906 agents in 2008, while 51,753 agents “left” — a net loss of 7,847 agents.  (Note that there’s a pretty good likelihood that many of the 51K agents who “left” went to another company, and forms a portion of the 43.9K number.)
• Similarly, 293 offices were opened in 2008, while 355 offices were shuttered, a net loss of 62 offices among the Top 750 companies (less the top 3 outliers).
• Regardless of the above disclaimer about outliers, among the Top 15 companies ranked by sales volume, the #1 company (NRT) did more than #2 – #14 combined: $132B vs. $131.8B.
• If you take the Top 15 companies by Sales Volume and re-rank them by GCI Per Agent, the only company to appear on both lists is Keller Williams Realty, Oklahoma City, who is #7 on Sales Volume and #6 on GCI/Agent with $403K in GCI produced per agent.  This would make them the most efficient large brokerage in the country.  (At least, based on calculation assumptions.)
• The second most efficient company in the Top 15 by Sales volume is Alain Pinel Realtors, who is #9 in sales volume and #28 on GCI/Agent with $115K in GCI produced per agent.  Incidentally, the #1 company, NRT, is 158th in GCI/Agent with $65K GCI per agent according to this report.
• Without question, Keller Williams dominates the Top 750 list in terms of brokerages represented under its brand.  337 of the top 750 are Keller Williams franchises.  Coming in second is RE/MAX with 141 of the top 750.  Coldwell Banker comes in third with 50 franchises.

There are more interesting tidbits, and there are conclusions to be drawn from the information.  But for now, I thought some of the above was pretty interesting.

More to come.

-rsh

If you could go ahead and try to go virtual, that'd be great, okay?

Let us talk about land.  About buildings.  The pure physicality of bricks, wood, steel beams, stairways, elevators, walls and roofs.  You know, real estate.

Normally, the conversation would be all about homes, condos, and the like — the stuff of the daily business of realtors and consumers.  But I have in mind a slightly different take.

Let’s discuss brokerage offices.

This topic has been swirling around the industry for quite some time now, but a few recent events brought it into focus for me.

First, the LeadingRE Conference in Scottsdale.  I got to speak with Matt Dollinger quite a bit while out there, and thanks to Pam O’Connor’s graciousness, I had the opportunity to hear some of the top broker-owners in the country talk about some of their top issues. The cost of leasing office space and how to minimize it was a frequent topic of discussion.

Second, a brief conversation on Twitter with Derek Massey (@derekmassey) about the desirability of virtual setups vs. physical offices.

Third, conversations off and on with people like Joe Ferrara (@jfsellsius), Eric Stegemann (@ericstegemann), and others who are either trying to start or thinking heavily about “virtual brokerages” with no overhead for office space.

Fourth, this report the existence of which just crossed my RSS feed: Beyond Brick and Mortar, Rethinking the Real Estate Office.  I haven’t read it, and at $299 for a copy, I’m not likely to read it anytime soon.  But if you have, or plan to, please let us know what the findings are.

Direct Cost…

The direct cost of brokerage office is actual, measurable, and large.  According to the RealTrends 2007 Brokerage Performance Report (yes, I need to get the 2008 report), all respondents had Rent & Related Occupancy costs that came in at 4.94% of GCI.  This figure, however, is a bit misleading in my opinion, because rent and occupancy costs are paid entirely by the brokerage.

Since average company dollar is 26.7% among respondents, the actual direct cost is about 3.7 times the GCI figure in terms of impact on the bottomline.  For example, a company with $10m in GCI would end up with $2.6m in company dollar.  Occupancy costs, at 4.94% of GCI is $494,000 or 18.5% of company dollar.

Add in the 0.83% of GCI for Supplies (pens, paper, etc.) that having a physical office necessitates, and we’re looking at 21.6% of company dollar going to expenses associated with having physical space.

In contrast, the combined expenses for Communications (e.g., telephone, high-speed internet, etc.) and Technology (e.g., website) for respondents were 5.1% of company dollar.  Even if you assume that going to a virtual brokerage setup would double the cost of Communications and Technology, we’re looking at 10% of company dollar expenses vs. 21%.

A 50% reduction in cost is something anyone is going to look at, especially now.

vs. Indirect Cost

There is, however, another side to the equation.  Actually, two other sides.  That makes no sense at all, so I suppose it’s more like two factors on the other side.

First, agent productivity.

Some of the brokers at the LeadingRE show expressed the view that agents are unquestionably more productive when they are sitting together in a physical office.  Unfortunately, I don’t know that there is any study or data available on the relationship between office and productivity.  Are we talking a 100% improvement or a 1% improvement?

The impact of productivity is far-ranging, however.  Let’s take that hypothetical brokerage from above and extend the analysis.  Based on my bad math, it goes something like this:

To do $10m in GCI, at an assumed rate of 2.5% per side, and a avg. Home Price of $250,000, that brokerage had to do 1,600 transaction sides totalling $400m in volume.

If we further assume that every agent did 20 transactions, that translates to 80 agents.  (Now, I know the reality is 80/20 rule, where 20% of the agents do 80% of the transactions, but for simplicity’s sake, let’s pretend they’re all robots.)

A 10% decrease in agent productivity by going virtual means a loss of $1m in GCI, resulting in a $267K in lost company dollar.  The net savings from shutting down the office then is only $227K.  If the productivity loss is 20%, then Hypo Realty ends up losing $40K from the ‘cost-saving’ move as the $534K loss in company dollar more than offsets the $494K in savings.

Second factor, however, is agent splits.  One of the justifications for a brokerage charging a split is to pay for overhead, such as office space.  Get rid of that, and it seems unlikely that the brokerage can maintain the same splits.

Moving from a 26.7% company dollar scenario to a 5% decrease — 21.7% company dollar — means that even if the productivity loss is only 10%, Hyop Realty is now losing $140K from its ‘cost-saving’ measure: decline of $717K in company dollar vs. saving $494K in rent.

All of a sudden, going all virtual doesn’t seem quite so attractive.

And neither of these factors take into account possible ‘soft’ costs, such as loss of brand value due to not having any storefront space in a highly visible street, or possibly a more difficult time in recruiting, or any of the other hard-to-measure impacts.

So What’s the Answer?

Because the financial ‘model’ above is so quick and dirty, it may be that there’s a balance point, especially given the 80/20 rule of productivity where you provide office space to your most productive 20% and gain the benefits of that, while saving on occupancy costs for the 80% who aren’t producing much anyhow.

Without analyzing a particular company’s financials and its market conditions — e.g., prevailing rents for store-front office space — it’s impossible to say whether Virtual is better or Physical is better.

But I figure folks more knowledgeable than I will step forth and provide further insight.  In particular, I think some sort of metrics of agent productivity would be enormously helpful.  Perhaps the Inman report has that answer.

Looking forward to your thoughts.

-rsh

Here is the house / Where it all happens - Depeche Mode

So it turns out that in addition to ruling the world from the Skull & Bones tomb, Yalies also get involved in real estate from time to time.  There’s even a group called Yale Alumni Real Estate Association (YAREA, pronounced Y-Area) that just held its annual conference.  I was invited, so… I went.

Since the theme of the conference was on “Green Real Estate”, and this was an area about which I was more or less wholly uneducated, the day turned out to be one of the most enlightening of my career in real estate.  A blogpost is really not the place to describe everything I’ve heard and learned, and the people I’ve met, but I do want to touch on some of the high points.

Green Capital also means y'know... the other Green

Green Capital

It turns out that in the world of real estate high finance, green is more or less a requirement.  Panelists such as Cherie Santos-Wuest, the Director of Global Social and Community Investments for TIAA-CREF, and Victoria W. Kahn, Managing Director of ING Clarion, made it clear that for them to consider investing in real estate projects, those projects have to meet certain green standards, such as LEED.

Considering that these folks have billions-with-a-B dollars under management, and make eight and nine-figure investment decisions… one would do well to take notice.

Which makes me wonder whether large-scale residential developers, such as Lennar or Hovnanian, ever put together a green subdivision.  And by that, I do not mean — and the folks at the conference do not mean — slapping solar panels on McMansions and calling them “green” houses.

My thought is that while this development is still limited mostly to high-end commercial real estate projects, I see the requirement to be much more environmentally conscious filtering down the ranks first to regional banks then local banks.  It might not be tomorrow, or next year, but I could see a time in the near future when your local S&L will be demanding that the local developer putting up a spec home include rain harvest and greywater recovery systems.

Green Ain’t Mainstream Until It Can Move to the Suburbs

One thing that was very evident — primarily because one of the panelists on the Green Cities panel said it — is that there is a very strong hostility to suburbia.  The green movement is the urbanist movement is the green movement.

The reasoning is extremely solid.  Cities cut down on transportation from one building (your house) to the next (your office, the store, etc.).  Cities enable walking or biking to locations, or public transportation, whereas suburbs are inherently built for the car culture.  Indeed, one might say that the American car culture would be impossible without suburbia, and that suburbia was made possibly only because of Henry Ford and his progeny.

Having said that… unless there is a wholesale change in American culture, most families and people are going to head to suburbia at some point in their lives.  Homeownership is the American Dream, and for whatever reason, owning a co-op ain’t really the same thing psychologically.  Also, people tend not to feel the need for more space and a backyard and such until they are expecting their second child… but once they do….

Plus… let us face facts.  Living in the city — in any city — is far more expensive than living in the ‘burbs on a per-square-feet basis.  I would have loved to have stayed in New York City with my two kids, but the equivalent space I have in my tiny little house in Millburn would have cost not double, not triple, but quadruple in NYC.  To me, it seems a simple matter of supply & demand.  Cities have less land; more people want the convenience of city living; ergo, prices will be high.

My sense right now is that this movement is here to stay, whether you believe in the whole Anthropogenic Global Warming thing or not.  (For the record, I do not, and I think Al Gore is a buffoon.)  Because there are other economic benefits to green buildings — lower energy costs, less water usage, and better health are all great things to have even if you think carbon footprint is something to be maximized if at all possible.

But equally clear at the moment is that the green building movement is still restricted to large commercial developments or large multifamily projects, and remains a fairly small niche.  Until it can cross the gap into the suburbs, impacting single family residences and suburban buildings, and leave behind the elitist disdain for suburbia, I don’t think green buildings can be a mainstream phenomenon.

Costs of Green Technology Must Come Down

A big part of the equation is the cost of green technology and green building techniques.  I got to listen to what was one of the most fascinating discussions about Green Buildings by some of the premier practitioners of the craft.  Architects such as Mark Simon of Centerbrook, Stephen Kieran of KieranTimberlake, and Rafael Pelli of Pelli Clarke Pelli gave presentations on some of the techniques they used on their green building projects and… let me just say that my respect for the architect profession increased by orders of magnitude.

The amount of thought these talented architects put into things like designing a wall — a topic to which I have never given a moment’s thought — is simply amazing.  And the impact of that design is similarly amazing.  I wish I had slides of Stephen Kieran’s presentation where he showed that a properly designed wall has three times the impact of solar panels on energy efficiency.

Kroon Hall, Yale University

This intellectual work has to make its way into the mainstream of American homebuilding industry before the crossover can truly happen.  We’re starting to see it with EnergyStar appliances, and with double-pane windows and such.

But technology like geothermal heat pumps, dual-flush toilets, greywater recovery, rainwater harvesting, and of course the photovoltaic cells have to all come down in price and become far more widely available.  I was privileged to take a tour of Kroon Hall, the new home for Yale’s Forestry and Environmental Studies Department, and the building is simply a marvel.  I wanted almost all of the features in that building in my house — and keep in mind that once again, I do not believe in AGW — but the cost is still exorbitant for single family homes.

Last, But Most Important… Consumer Demand

Today, the consumer demand for green buildings is simply… meh.  In other words, all things being equal, people would prefer to be in a green building.  But all things can’t really be equal when you’re investing in green technology.  Yes, for large multifamily or for big commercial buildings, the savings in energy alone could probably pay for the investment.

But as yet — and based on like, no evidence, but plenty of anecdotes — consumers aren’t willing to pay a significant premium for green homes.  There has to be a relatively short horizon for payback on any investment for consumers to take green buildings really seriously.

Having said that… the Green Building trend is here to stay.  And it will accelerate and continue to do so.  Even after the whole global warming fraud is exposed as pseudo-science, the green building trend will stick because so much of what it proposes is common sense: use less energy, use less water, be smarter about designing buildings, and don’t stuff your home with dangerous chemicals if you don’t have to.  As prices of technology come down, and smart architectural and materials design continue to filter downwards from the big commercial projects, I think consumer demand will be there.

I think I got a glimpse of the future last Friday.  And the future is green.

-rsh

You in MY house now!

In the comments section of my post on Alex Perriello’s confidence in denying a bankruptcy for Realogy, a commenter by name of “Still Don’t Agree” raises several very interesting points.  And because SDA wasn’t a raving lunatic, but apparently a very smart, very logical, and a calm & measured commentator, I thought it worth using his comment as the springboard to challenge some of the conventional wisdom circulating out there.

[And just in case some non-regulars don't realize, I used to work at Realogy, but never in the corporate executive suites, and haven't since November of 2007.  I have no special access to anyone, no inside info (although I would love to get some *hint, hint*), blah blah blah.  These are just my opinions as an industry observer.]

So SDA raises three points worth countering: Unprofitability, Cut in Services –> Loss of Revenues, and the Apollo Factor.

Unprofitability

First, the whole unprofitability issue.  SDA writes:

But bottom line, Realogy has little to no cash reserves, is running out of credit and their revenue isn’t covering interest payments AFTER making $350 million in operational cuts.

Sure it’s a profitable company without that debt hanging over their heads, and kudos to their managers for that, but that debt IS there and it isn’t going to just go away- so looking at revenue before the interest is quite frankly irrelevant. Spin it anyway you or Realogy wants, THEY ARE OPERATING IN THE RED.

To survive, they either have to make more cuts that don’t hurt revenue, increase revenue, find a lender to extend them more credit until the market gets better or get their lenders to restructure debt and/or wave interest payments.

Now, to be fair, SDA makes a great point here.

It is an indisputable fact that Realogy is losing money; it is in fact operating $50M in the red.  In SDA’s view, the reason why they’re in the red is irrelevant, since Realogy doesn’t have cash reserves, and lenders don’t care.

In my view, it’s highly relevant why a company is in the red if I’m a lender.  If a company is in the red because their core operations suck ass, then my likelihood of seeing my money back decreases, and I’m going to freak out.  But if their core operations are profitable, and they’re throwing off cash in desperate economic times, and they are making interest payments… and because of said interest payments to me, they’re in the red, well, then I’ll be cautious and watchful but happy to cash their checks.

Why would I want to mess with someone making payments and bring lawyers and bankruptcy judges and special masters and such into the picture?  Because I like the idea of going a couple of years before a distribution is made in which I’ll get a few pennies on the dollar on my unsecured debt?  And that only after I’ve spent a couple of million bucks paying my own creditor counsel?  Yeah, okay.

Now, let’s examine this “Realogy has no cash reserves” statement.  During to the Q3, 2008 Earnings Call, which is the latest available, Tony Hull the CFO said this:

Turning to the balance sheet on page 7 of the 10-Q, we ended the third quarter
with a $280 million balance on our revolving credit facility along with a reported cash balance of $269 million. This total includes $226 million of available cash from a draw-down on our revolver. We elected to hold cash because of current market uncertainty.

So they’re holding $269M in cash, and $280M on the revolver of which $226M is available?

Since Realogy’s net loss after interest and depreciation was $50M in Q3, this would imply that Realogy can limp along under Q3 circumstances (the latest quarter for which we have data) for some ten quarters, or two-and-a-half years?  Geez — call the lawyers and get to the courthouse!  They’re going down!

So in brief, to survive, Realogy doesn’t have to make any cuts, doesn’t have to get any more loans (assuming that the revolver is appropriately papered by sophisticated lawyers and relatively ironclad), until Q3 of 2011.

Could business get worse and shorten that timeline?  Sure.  It could also get better.  But the “Realogy ain’t got no cash” argument rings hollow to me.  Then again, what do I know?  I’m not a Wall Street analyst….

Cut in Services –> Loss of Affiliates

The second point that SDA brings up — and others have brought this up as well — is that the $350M in cuts at Realogy, and the expectation of further cuts down the line, will lead to affiliates and agents leaving Realogy family:

After $350 million in operational cuts I question how they could make further cuts that wouldn’t impact revenue. The company’s customers aren’t people buying homes, rather it’s the agents and franchise brokers they service. At some point in time if services are cut too drastically, franchises will leave and agents, who are independent contractors, will find other brokers to work for.

With the market and economy as they are and all the negative media starting to swell around their company I doubt they can drastically increase revenue. That would mean recruiting successful agents away from other companies at a time when ever competitor is waving that US News report in front of the agents they already do have.

Okay, let’s take this at face value for now and agree, for the sake of discussion, that SDA is absolutely correct that the budget cuts lead to service cuts.

For those service cuts to lead to mass exodus of productive affiliates, Realogy has to be providing some set of franchisee/agent services that these cuts is impacting.

For the vast majority (and I mean well over 90%+) of franchisees, the reason they became franchisees in the first place was not because of some ill-defined service Realogy provides but simply because of the (perceived) power of the brands like Coldwell Banker and Century 21.

I’ve sat in on some of the “VIP meetings” where corporate staff try to sell a franchise to an affiliate.  I’ve even made presentations at those.  And you know what?  Despite all the goodies we dangle in front of them (“10% off at Staples!” and “Discounts on your cellphone plan!” and so on), at the end of the day, the decision to sign up is based on the principal broker’s feeling that the brand will bring them business they wouldn’t otherwise get.

The argument that service cuts will inevitably lead to loss of affiliates is somewhat like saying that folks aren’t going to buy Gulfstream G650′s because of the price of fuel.  It’s completely ancillary to the core decision.  Keep in mind that affiliates sign a ten-year agreement during which they fork over 6% of all commission income in exchange for use of the brand.  They’re going to jet because the Realogy field rep only comes once a quarter instead of once a month?  Come on now.

Further, to claim that even if the affiliate broker won’t leave, the agents will is to not understand agents very well.  And it is to be ignorant of the real revolution going on at the heart of real estate today.  If even a single agent really leaves his Coldwell Banker branded brokerage to go to some other franchise brand over the “cut in services”, I’ll print this blogpost out and eat it.  In fact, that the agent cares not at all about the services provided by the Realogy brand is the real problem here.

You can verify for yourself if you’d like — go grab your local Century 21 agent and ask her what services she’s afraid of losing when Realogy cuts another $20m in costs.  If her answer is anything other than “Nothing”, please come back and tell us.

Now, let’s actually examine that assertion for a moment.  Again, from that same earnings call transcript, here’s Richard Smith, Chairman of Realogy:

As to NRT management’s ability to attract and retain top-producing agents, as in prior periods, NRT retained approximately 92% of GCI from its top two quartiles of sales associates in the third quarter. The top two quartiles generate approximately 88% of NRT’s revenue.

Consider that the NRT is Realogy’s company owned stores (if you will).  If the budget cuts have a service impact, the NRT agents are the ones who will be most directly impacted.  Affiliates have their own budget, their own issues, but the NRT is directly tied to Realogy’s financial problems.

If cuts in services lead to mass defections, then the NRT should have been losing droves of these top producing agents.  They have not.  I have no idea whether 92% retention is good or bad for brokerages, but it certainly doesn’t smell like panic to me.

And one final piece of counter-evidence from the wider agent world.  This is from a Keller Williams agent in Boise ID speculating on the coming bankruptcy for Coldwell Banker and ERA (this is the “competitor waving that US News article” thing):

It seems a high debt load and low cash reserves may be signaling a likely default in a troubled market. Why am I surprised? Well mostly because the of number brokerages Coldwell Banker has been buying up in the Boise area. I’ll be watching this one closely in the weeks and months to come.

Here’s a hint: when someone is buying up competing brokerages, that someone ain’t hurting that bad.

The Apollo Factor

The final point that SDA raises is that lenders might want to push things to force Apollo to cough up some dough:

That means Realogy’s survival basically hangs on the charity of lenders who, at some point in time in the near future, will more than likely have to wave interest payments in order to allow the company to make payroll. Problem is, Carl Icahn, their largest lender, isn’t exactly known for his charity and other lenders have their back so far against the wall right now that you can’t be sure they will always do the logical thing.

More important, if you’re a lender in this situation, it’s pretty hard to forfeit the interest you are owed when equity holder Apollo has mighty deep pockets.

Okay.  Maybe this makes sense to someone on Wall Street, but as a former bankruptcy guy, I just don’t get it.

Unless Apollo signed a guarantee of some sort on Realogy’s debt that puts them on the hook in the event of a default or bankruptcy, that Apollo has deep pockets is completely irrelevant to bankruptcy.  Because Apollo presumably is the equity interest here.  With such a high debt load, in the event of even a Chapter 11, Apollo’s interest is likely to be extinguished completely.  That sucks for Apollo, but it isn’t as if Apollo is going to then be liable to the creditors.

An equity holder’s liability is limited to the amount of equity in the company.  That’s the whole premise of limited liability.

So all that a lender would achieve here is taking over Realogy’s equity from Apollo in some sort of satisfaction for the debt.  Think of it as a giant foreclosure.  But to do that, we’re talking about years — and I mean years — of litigation in bankruptcy court with Realogy, with Apollo, with other creditors, with the Trustee possibly, with vendors, with unions, with landlords and so on and so forth.  And during these years of litigation, no one gets paid a damn thing.

If you’re a lender — even a nasty one like Icahn — and you’re actually making a vulture play to take over Realogy via the credit path, you’d be far far better off just offering Apollo a private deal to swap equity for debt.  Everyone keeps getting paid, Icahn takes over Realogy, and Apollo goes away, and no one is much affected.

Anyhow, I have no earthly idea why I keep writing on this topic, but I do confess a weird sort of fun in it.   But then, I’m not a Wall Street guy, and those guys are financial experts who wouldn’t ever make a mistake on debt valuation or things like that now… would they?

-rsh

PS: Final parting thought.  Why is this robust defense of Realogy happening on my widdle WordPress blog and not on the Realogy corporate blog?  By people who know what the hell they’re talking about?  Mark (Panus) — call me, I can help you with a social media strategy.

I guess because of the recent story on US News.com, there’s been quite a lot of speculation about Realogy going bankrupt. My original post back in November of last year on why I thought Realogy made for a particularly poor bankruptcy candidate is getting rather large amount of traffic, and the comments have been illuminating as well.

Well, I have some followup.  Again, keep in mind that I no longer work at Realogy, and while they are a client of my employer, Onboard Informatics, I have no special access to any inside information.

Feelin' Good!

I do, however, have friends in the RE.net and realestistas who send me interesting information, and the latest salvo is something Realogy sent out to various franchisees and agents who work for Realogy franchisees. I debated whether I should post it or not, but looking at the information in the email, I see nothing confidential, and a whole lot of information that is missing in the commentariat.

The email, from Alex Perriello, CEO of the Realogy Franchise Group, is full of confidence:

Earlier today we saw a business writer’s blog post get picked up as a “news” report pertaining to the financial condition of a number of companies, including our parent company, Realogy. This coverage generally focused on the long-term debt and viability of these companies.

Although Realogy is currently in a quiet period and we cannot release certain financial information in advance of our fourth quarter 2008 earnings call in March, we certainly could have addressed the fundamentals had this reporter taken the time to attempt to carry out his due diligence by contacting Realogy for the facts.

I want to point out a number of “silver linings” for Realogy that clearly have not been taken into consideration by either the media or the financial ratings agencies:

• During the past several years Realogy has moved aggressively to mitigate the impact of the economy on our company. We have successfully reduced our overhead by more than $350 million and continue to focus on maximizing the effectiveness of our cost structure.
• As we have focused on costs we have been equally focused on growth. In spite of the woes of the housing market we have made great progress in advancing our company. From new franchise sales to the retention of franchisees and their sales associates to signing new clients at Cartus and Title Resource Group, we continue to be forward thinking, highly focused on the future of our company and the industry.
• In 2009, we expect to benefit from considerably lower interest rates since a significant portion of our bank debt is tied to LIBOR;
• None of our corporate debt is due until at least 2013; and
• Unlike many companies in today’s economy, we have the support and commitment of one of the best financed private equity firms in the country, Apollo Management.

Please also remember that private equity funds managed by Apollo Management and co-investors originally invested $2 billion in our company. Apollo has a substantial ongoing interest in the success of Realogy. Our senior management team is highly confident of Apollo’s commitment to Realogy. If there is any question as to Apollo’s overall financial strength, one need only look to Apollo’s success in raising approximately $15 billion in capital last month for its newest investment fund.

That does not sound like a company that is preparing a bankruptcy filing, nor one that really needs to.

I can personally attest to the cost-saving measures that Realogy has undertaken being a multi-year effort that goes back long before the actual “bursting” of the housing bubble.  I was working on cost-cutting back in middle of 2007.  We saw the storm coming long before it actually hit.  Could more have been done?  Perhaps.  Does more need to be done?  Undoubtedly.  But it isn’t as if Realogy got caught with its pants down when the market downturn hit, wholly unprepared for what was to come.

The fact that Realogy’s debt is tied to LIBOR is significant — and Alex is absolutely right to point out that they’ll have an easier time making debt service in 2009.  How much easier?  Who can say — but certainly, low interest rates help Realogy on two fronts.

First, low interest rates helps buyers enter the market (assuming they can get credit), which helps Realogy’s core business of buying and selling real estate.  Second, it lowers their debt service burden.

The fact that Realogy’s corporate debt is not due until 2013 is significant — it really makes me wonder just how much pressure there could be given that Realogy has four years to turn things around before they really have to worry.

Unless I missed some major story, Realogy has yet to miss an interest payment on its debt.  It has renegotiated a bunch of loans, but in this economy, who wouldn’t at least try to do the same?

Seems to me that the confidence is not entirely misplaced here.

Why Realogy did not release this to the wide public, to the entire RE.net, is puzzling to me.  There’s nothing in here that is confidential, and the letter went to a large group of individuals: brokers, agents, and staff of Realogy franchisees.  I think Alex is right to excoriate the original “reporter” Rick Newman.  He simply didn’t do his homework.  But he should have also gotten his communications people to start engaging the RE.net on getting the word out.

(Plus, a bit of an aside but… seeing as how Mr. Newman’s books are about 9/11 at the Pentagon, and Vietnam-era bomber pilots, why is he writing a column on business and economics?  Shouldn’t he be writing about the War on Terror, and Iranian nukes, and leave business reporting to, y’know, people who write about businesses?)

So, I guess I’m back to reiterating points from the first post, but with new info:

• Realogy makes for a very unattractive candidate for bankruptcy;
• Realogy keeps making debt service payments, and hasn’t missed one yet;
• Chapter 11 Reorganization is possible as a corporate takeover play by bondholders seeking to extinguish Apollo’s equity in Realogy; but
• It doesn’t look like Realogy really needs to file bankruptcy; they seem awfully confident.

And I can’t say their confidence is entirely misplaced.  Seems pretty spot-on actually.

-rsh

So it appears that commercial real estate isn’t going to escape the imploding economy after all. (H/T: Peter Pays Paul) This is probably not the best time for NAR to be talking up commercial real estate. But that’s another story, for another time.

This is the time to look on the bright side of the coming CRE bust.

As Calculated Risk points out (quoting Reuters):

U.S. office vacancy rose to 13.6 percent, up 0.5 percentage points from the second quarter, its largest one-quarter jump since the second quarter of 2002. The third-quarter vacancy rate was the highest since the second quarter of 2006 and was 110 percentage points higher than its recent low of 12.5 percent set in the third quarter of 2007.

And as we all have heard, U.S. unemployment has hit 6.7%. While that’s pretty good compared to places like, say, France (7.7%) or Germany (9.1%), it is a 15-year high for the United States.

So uh… just where the heck is the good news in all this?

There has not been a better time to start a company in the past decade.

Think about it.

Unemployment is relatively high, which means labor costs will be lower, and you can find some really talented people at very attractive cost.

Commercial real estate is getting hammered, with higher vacancies and delinquencies and the like, which means that you can probably drive rents to historic lows as well if you’re looking for office space, or retail space for your new concept.

If you’re an investor, and you’ve got cash (or rock-solid credit able to overcome higher lending standards), you probably can pick up some incredible deals on commercial properties. Sure, maybe wait it out some more, wait for more landlords to get truly desperate, but… I suspect that the whole fear-driven atmosphere will make it pretty sweet for those who keep their wits about them and have cash to back it up.

So, in the immortal words of Monty Python,

If life seems jolly rotten
There’s something you’ve forgotten
And that’s to laugh and smile and dance and sing.
When you’re feeling in the dumps
Don’t be silly chumps
Just purse your lips and whistle – that’s the thing.

-rsh

(Disclaimer: Move, Inc. is a client of Onboard Informatics, my employer.  But I have spoken to no one there, nor anyone here who deals with Move, for this post.  Everything here is my opinion, based on my own research into publicly available information.)

In what is an unusually long post for him, Dustin Luther laments the current state of Move’s stock:

When I started at Move in May ‘06, the stock (and my options) was priced at slightly above $6.  Today, I see the stock end today at $0.89, making for a very sad looking chart and definitive proof that I know nothing about timing my employment options.  I’m also not particularly good at reading financials, but I do know enough to know that having a market cap of $136M when you have $140M in total assets (down from over $200M in total assets from last year) is not a good thing.  I’d think they’d be an obvious take-over target except my guess is that many suitors would view the contract with NAR as more of an impediment to growth than an asset.

Yes, MOVE is an excellent takeover target.  And that contract with NAR is an asset (valued by MOVE itself at about $1.5m it seems, based on their Q3 2008 10-Q.)  And I think that contact could end up being pure gold if it means exemption for Realtor.com from the various IDX and VOW rules.

But really, that would mean that Move’s shareholders have lost their nerve completely.  And there’s no reason to panic, from what I can tell.  In fact, I think this is an amazing opportunity to build up long positions on MOVE.  (I am not a financial advisor, nor anyone competent to advise you on stocks, so uh… think of this post as being like a stock tip from your cabbie or something.)

Let me list my reasons.

1.  As Dustin points out, when your market cap is $136m, and your cash is $114m… um, yeah, you’re undervalued by alot.  In fact, the cash position is likely significantly better than $114m, as explained in the 10-Q, and is likely to be closer to $235m.  (The reason has to do with auction-rate securities, failures in that market, etc. which I noted earlier this year.)  But if you’re a shareholder of Move, you’d be an absolute moron to sell $235m for $136m, wouldn’t you?  Even discounting the ARS by some amount because of the risk, with the entire might of the U.S. government focused on bailing out the finance industry, I can’t see $121m worth of ARS being valued at only $22m (which is what $136m – $114m represents).

2.  The core business over at Move doesn’t seem that bad to me.  I’m no CFA, but looking at their Q3 results… yeah… there have been declines, but I see nothing to warrant a doom & gloom scenario.

Revenues went from $63.3m in Q3 of 2007 to $61.2m in Q3 of 2008.  it’s a loss, sure, but… not enough to warrant a drop from $2.50 a share range in Nov of 2007 to $0.94 today (when I just checked it).  The market must be pricing in some sort of future risk, but I’m just not sure I see it.

The management’s report contains this gem:

These changing conditions resulted in fewer home purchases and forced many real estate professionals to reconsider their marketing spend. In 2006, we saw many customers begin to shift their dollars from conventional offline channels, such as newspapers and real estate guides, to the Internet. We saw many brokers move their spending online and many home builders increased their marketing spend to move existing inventory, even as they slowed their production and our business grew as a result. However, as the slow market continued into 2008, it has caused our rate of growth to decline. While the advertising spend by many of the large agents and brokers appears steady, some of the medium and smaller businesses and agents have reduced expenses to remain in business and this has caused our growth rate to continue to decline and we may continue to experience a decline in revenue as we move into 2009.

So the big players are holding steady on their ad spends on Realtor.com, while the small guys are struggling to stay afloat.  This isn’t… shocking… but if it means losing about $2m per quarter for the next eight quarters… um… Move can deal with a $16m loss with their balance sheet.  But when you get even deeper in the weeds you get this:

Real Estate Services revenue decreased $1.4 million, or 3%, to $54.5 million for the three months ended September 30, 2008, compared to $55.9 million for the three months ended September 30, 2007. The decrease in revenue was primarily generated by a decrease in our HomeBuilder.com ^® business due to decreased Showcase Listings revenue and a decrease in our REALTOR.com ^® business due to decreased Featured Products revenue primarily due to reduced purchasing by one large broker customer. These decreases were partially offset by an increase in our Top Producer ^® product offerings. Real Estate Services revenue represented approximately 89% of total revenue for the three months ended September 30, 2008 compared to 88% of total revenue for the three months ended September 30, 2007.

So… the 3% decrease for Real Estate Services (which is where Realtor.com goes) is because of ONE customer?  I wonder who that is.  But that doesn’t strike me as a fatal flaw.  And then Move goes and sees increases from Top Producer?  In this economy?

Color me distinctly unimpressed with doomsayers.

3.  Move continues to invest in their core business.  The latest 10-Q is showing that they’ve spent $6.8m in product and web site development.  For the year, they’ve spent $20.5m on product and web site development.  I have to ask… who else is investing this kind of money into product and web development?

I seriously doubt that the RE 2.0 upstarts like Trulia and Zillow are spending $20m YTD on web development.  And if they are, I’m willing to bet neither of those companies have $235m in cash in the bank.

The thing that would concern me is if because of the economy, Move decided to slash and burn investment into its platform.  That would have serious reverberations down the line, at a time when the future of online real estate is still very much up in the air.  But $20m is not slash and burn by any stretch of the imagination.

4.  Their margins aren’t substantially affected.  Check out this beauty:

Gross margin percentage decreased to 81% for the three months ended September 30, 2008 compared to 83% for the three months ended September 30, 2007. The decrease is due to a decrease in margins in both the Real Estate Services and Consumer Media segments resulting from decreased revenues and increased costs in the segments.

Yeah, you read that right: 81% gross margins.  Those are some freakin’ sweet numbers.

Move could probably do more to cut some expenses, especially in Sales & Marketing, and in G&A (particularly the corporate overhead, which is unallocated to a business line).  They represent respectively $19.6m and $11.7m.

5.  Move still has the biggest war chest in the RE tech space:

We have generated positive operating cash flows in each of the last two years. We have stated our intention to invest in our products, our infrastructure, and in branding Move.com ^TM although we have not determined the actual amount of those future expenditures. We have no material financial commitments other than those under capital and operating lease agreements and distribution and marketing agreements and our operating agreement with the NAR. We believe that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future.

That seems right to me.  As the 10-Q indicates, even while reporting significant losses, Move was generating positive cashflow from operations — to the tune of $12.3m YTD.  Combine that with their $114 in short-term cash, $121 in auction-rate securities, and you’re looking at a formidable player somehow flying under the radar.

I figure the market has to get over its nerves re: housing market.  But until it does, fact is, Move and its properties are performing pretty darn well, and getting punished simply because they are connected to real estate.  And anything real estate is toxic right now to investors.

So I think I’m calling my broker and loading up on Move at $0.94 a share.  A drop of $2m in YOY quarterly results should not drop a stock from around $2.50 a share to less than half that.

Relax, Dustin.   And call your financial advisor.

Noah Rosenblatt over at Urbandigs notes potential huge problems over at Realogy (H/T: 4Realz):

According to Crain’s “Seven area firms make endangered list“:

“The most vulnerable, according to S&P, include Realogy, the Parsippany, N.J.-based owner of such brands as Century 21 and Corcoran Group. The firm, which was taken private last year by Apollo Management in an $8.8 billion leveraged-buyout, has struggled mightily amid the housing crisis. Last week, the firm warned that it’s at risk of violating the terms of its bank loans and is trying to swap $1.1 billion of bonds for new debt at a discount.A default does not necessarily mean the end of a company. Traditionally, many companies in default have been able to negotiate new debt terms with their creditors. But with so many defaults looming, experts warn that fewer companies will be able to restructure their debt. As a result more of troubled firms could wind up in bankruptcy court and being liquidated.”

I think Noah is right to point out that this was likely a foreseeable event given the state of the financial markets back in mid-2007:

I discussed the LBO Buyout Boom as a Reason To Worry way back in June of 2007, as cov-lite (great for borrower, bad/riskier for the lender) deals were being done as LBO deals started to dry up after an unsustainable buyout boom:

“My Point – Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn’t take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I’ll repeat this again –> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don’t think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders”

However, I think in this case, Crains (and others) are hyperventilating just a wee bit at least as far as Realogy is concerned.

The reason isn’t that I know something others don’t about the strength of Realogy or any such thing.  The reason mostly has to do with incentives for bankers and bondholders to allow a default and the consequences of such.  There is next to zero incentive for any creditor of Realogy to force the company into bankruptcy.

Realogy has next to no assets.  Really.  If you think about their business model, as a franchisor of service businesses, their main assets are the brand names and the people who work at their various company-owned stores or franchisees.

In the case of some of the other firms named by Crains, such as JetBlue or Hovnanian Enterprises, they own real assets that can be auctioned off or sold off to raise a fair amount of money.  Airplanes and real estate are both real assets.  In those cases, it might make a lot of sense for creditors to push those companies into Chapter 7 liquidation proceedings and recover their losses that way.

But Realogy’s real assets are negligible, to say the least.  It owns no buildings that I know of (unlike other franchise models where the franchisor owns the franchise location and receives rent from the franchisee).  All of its company owned stores are lessees of other landlords.  Whether its servers, technology equipment, office equipment, and such are worth a lot is unknown, but one suspects that Realogy probably doesn’t own the equipment in its datacenters (it probably leases them from the hosting facility), and used furniture isn’t exactly going to make a huge dent in the billions owed.

In a Chapter 7 liquidation, you can’t hold on to any of the talent that makes Realogy the company it is.  People will get laid off, or walk out, but they’re not going to be sold at auction to repay creditors.

The best chance of getting repaid for a creditor is to let Realogy continue to operate, until things turn around.  That Realogy lost $200m or so in the past three years is relevant only to the shareholders of Realogy, namely Apollo Management, the private equity fund that bought Realogy in 2007 for $6.6B.  I’m sure their equity is hovering near zero at the moment.  But I’m equally sure that Realogy has been making all of its loan payments, including interest, for the past year and a half or so.

Realogy still owns NRT, which is still the #1 brokerage in the country by quite a margin, and did 323,000 sides in 2007.  Even if we assume that the NRT’s sides are down significantly, it will still be doing a couple of hundred thousand deals.  And that’s just NRT; all of the CB, C21, ERA, and Sotheby’s franchises (not to mention Coldwell Banker Commercial) will do deals.  They are perenially among the top brokerages in the country, some with billions in transaction volume.

The cashflow from all those operations are still quite significant.  Creditors want to keep that going for as long as possible.  Forcing Realogy into bankruptcy will likely cause significant disruptions of that continuing cashflow.  Certainly, forcing Realogy into liquidation will.

What could happen, of course, is that significant creditors end up replacing Apollo Management as the beneficial equity holders.  When Realogy debt is trading for pennies on the dollar, it’s impossible to think that Apollo’s equity is worth very much.  It may be that the banks and bondholders simply restructure the loan, extend the timeline, etc. but take over Apollo’s equity in Realogy in exchange.  That way, when the market turns around, those creditors will realize a fairly significant gain.  Chapter 11 bankruptcy is a popular way to make those kinds of deals happen, especially if Apollo ends up trying to resist the takeover by bondholders.

But however such boardroom intrigues play out, the real point is that a company that is generating very significant cashflow — even at a loss after all the expenses and such are taken care of — but has no real assets is not one that creditors want to exterminate.  To say Realogy is on the Endangered List is hyperventilating by a bit.  It is in financial difficulties, sure, and in the short-term there will be (and has been) layoffs, cost cutting, and so on.  It will, however, survive on the strength of its ability to generate revenues and operating cashflow.

-rsh

PS: While I worked at Realogy for years, I own no Realogy stock (unless one of my mutual funds bought it), have no inside relationships, etc.  This is just my opinion as an observer of the industry.

In part 1 of this series, I looked at per-person productivity numbers which simply made no sense. Thankfully, people like Russell Shaw and Jay Thompson stepped in to provide at least an explanation. Simply put, there are too many agents chasing the same number of deals.

So despite large improvements in personal productivity of a realtor thanks to technology, sales per agent had to go down as the denominator (# of agents) increased throughout the industry.

Seems logical to me.

So I looked at recruiting and training figures. Oh, how fun!

Show Me The Money

Again, according to the 2007 REALTrends Brokerage Performance Report, the average and median spends (as a percentage of GCI) look like this:

Recruiting

Average: 0.39%, Median: 0.19%

Training

Average: 0.45%, Median: 0.30%

REALTrends thinks that recruiting costs went up “somewhat” over the past few years, while training costs are back to 2004 levels. Then they make this statement:

With the assumption that training and recruiting are linked together, it follows that where brokerage firms are spending less to recruit or have less success in recruiting due to market conditions, then some proportionate decrease in training will occur. (p. 28 of Report)

If true, then here lies another significant issue for brokerages. In this post on OnBlog, I ran through some assumptions to get at what the GCI involved is, and came up with $12.6m in GCI for the “average” or “median” respondent. Let’s go with that for the purposes of illustration.

That means the average brokerage spent $56,700 on training in 2007 (0.45% of $12.6m). We have no way of knowing how many employees that represents, but the company I picked to generate that GCI number (#250 on the PowerBrokers 500 list) had 255 total agents with two offices. That means this hypothetical brokerage spent $222 in training costs per agent. Keep this number in mind.

According to this study by the American Society for Training and Development:

The average direct expenditure per employee in the consolidated sample of organizations rose to $1,103 per employee in 2007, an increase of 6.0 percent from 2006. The average learning expenditure per employee in both ASTD Benchmarking Forum (BMF) and ASTD BEST Award-winning organizations was higher than the consolidated average. For BMF organizations, average direct expenditure per employee was $1,609 in 2007. The BEST Award winners spent an average of $1,451 per employee on learning and development.

In other words, real estate companies spend one-fifth what other companies spend on training. There’s more.

According to this report by Bersin & Associates, “The average spending per learner is $1,273. The highest spending sector is technology ($2,763) and the lowest is retail ($519).”

Because of the jankiness of my data (all sorts of assumptions going on there), I can’t say for sure that real estate brokerages actually spend less than half ($222) of what McDonald’s or The Gap spends ($519) on training. But I think it’s pretty clear that brokerages are closer to retail than they are to technology in terms of training expenditure per person.

But here’s a way to gut check the numbers. Let’s pick a brokerage at random from the PowerBrokers 500 list. (Shake, shake, shake… roll dice — #173) Okay, #173 has 480 agents doing $580m in transaction volume. If this company were to spend the American corporate average, as per Bersin & Associates, its training budget would be $611,040. Does anyone believe that any real estate brokerage company spent $600K on training in 2007?

Our Assets Walk Out the Door Every Day

Back in the day, when I was thinking of law, a senior partner at a major NYC firm told me, “Our assets walk out the door every day.” Which seems obvious. Can’t really have a law firm if you ain’t got no lawyers.

The same holds true for real estate brokerage. Again, this seems obvious. No agents = no brokerage. The best website in the world, the best marketing, the best office space, the most comfortable chairs — none of these things will mean a thing if the people stop showing up for work.

So what gives?

I know a part of it is that the agents are all 1099 independent contractors who can walk at any time. So a brokerage has very little incentive to train an agent only to see her walk out the door and across the street to a competitor. I believe this is a fundamental weakness of the brokerage model — but there are small companies and teams that overcome that weakness.

Perhaps another part is that the training happens prior to someone being hired, as people have to study for the real estate license exam.  But a licensing exam isn’t the answer.  One, licensing exam tests factual knowledge, not sales technique or customer management.  Two, it is a well-known fact that real estate licenses are notoriously easy to get.  Easier in some states than getting a hairdresser license.  So relying on licensing schemes strikes me as a non-good way of getting ‘trained’ professionals.

Maybe a third is NAR training to get the REALTOR designation.  I haven’t heard anyone talk about how hard the REALTOR designation is to get, so I’m classifying this one as “too easy, too many” type of a deal.

From my perspective, the apparent lack of training (if true) really helps me to understand a bunch of things that I couldn’t understand before. Like, why do so many agents suck so bad? Why are so few of them informed about their own market? Why do so few of them do an adequate job of followup and CRM and marketing? Why is it that so few of them can speak intelligently to intelligent professionals?

I had a lot of trouble squaring the number of poor experiences I’ve had personally over the years with various real estate agents with the smart, professional realtors I’ve met over the years working in the industry.

Well, no longer. The pieces are falling into place.  They are not trained.  They are not trained.  They. Are. Not. Trained.

When it appears that the average fry cook at McDonald’s is better trained than the average real estate agent who is handling the most important purchase of a consumer’s life, the claim that realtors are licensed professionals is a joke.

The apparent lack of training — if real — points to a fundamental problem in the industry.  This isn’t something that can be fixed with a blog.  Or a nifty agent website.  When the basis of the business is on trustworthiness, expertise, and professionalism, spending so little on training is going to yield precisely the expected result: crappy agents.

No wonder that the Per Person Productivity numbers are down across the board.

-rsh

Numbers make me hot!

Over at the OnBlog, I posted an item discussing the difference between how much brokerages spend on print advertising vs. their website. That was for the clients (past, present and future) of Onboard Informatics. This blog is where I get to talk speculative BS with friends in the RE.net.

So… let me start out by saying how much I love the REALTrends guys. They are providing an invaluable service to the industry with their research into productivity numbers and metrics. If you don’t subscribe, and you have anything to do with brokerage operations, you probably should. Go. Subscribe. Buy their reports. Tell ‘em the Notorious One sent ya.

I am getting most of my inspiration from the 2007 REALTrends Brokerage Performance Report. (I’m sure this stuff is copyrighted, but I have no desire to hurt REALTrends; I’m considering my usage of their stuff as fair use in order to discuss the issues.)

Ummm…

So the first thing I noticed is from the Executive Summary, where RealTrends noted that Productivity Per Person (PPP) dropped again in 2006, and noted that this drop “continue[d] the downward trend of nearly 10 years”.

Wait a second. Nearly 10 years? Ten?

So we’re talking about 1998 – 2008… during which time period we have had the single biggest real estate bubble in the history of the United States, nay, the world resulting in the financial cataclysm of 2008. I don’t quite understand. This means that the PPP is divorced from the real estate market as such — even during the height of the real estate bubble, the PPP dropped.

Let us keep in mind that this ten year period is when the PC revolution truly hit home: “Productivity grew from 1.33 percent to 2.07 percent between the periods 1975-1993 and 1995-2000, according to Dale Jorgensen of Harvard University, Mun Ho of Resources for the Future, and Kevin Stiroh of the Federal Reserve Bank of New York.” If you’re so inclined, you can read the original report here (PDF).  It’s actually really good.

Anyhow… so it appears that in the midst of the biggest increase in worker productivity in a generation, real estate brokerages suffer a drop in productivity.  What explains this phenomenon?

Could it be that real estate is somehow immune to productivity gains from technology? Having email, computer, smartphones, and all the rest simply do not make buyers want to buy any more houses, or buy them faster, or with less work on the part of the agent?  Did real estate agents decide that with all the productivity gains they were making thanks to technology, they weren’t going to work any harder, but spend more time on the golf course?

Again, the market conditions of the past couple of years can’t explain this. This drop in productivity was happening throughout the biggest boom in real estate in memory. So what explains the PPP numbers?

WTF?

If those numbers make you scratch your head, this one will blow your mind.  Again, according to the REALTrends Report, “Profitability slid to 4.3% [in 2006] from 7.4% [2005] and 7.8% [2004] for the previous two years respectively.”

Now.

From the exact same executive summary, we learn that

(a) employment costs dropped 0.4% of GCI from 2005 to 2006;

(b) advertising expenses dropped 0.55% of GCI from 2005 to 2006; and

(c) occupancy costs (i.e., office rent) rose 0.3% of GCI from 2005 to 2006.

These three things taken together make up 75% of all costs of operation in 2006.

So in summary we have a whopping 41.8% drop in profitability for all brokerages in spite of their cutting employment costs and advertising costs, because office rent went up by 0.3% of GCI?

It seemingly makes no sense, until you consider that apparently, at least the Top 100 Brokers (that is, the Top 100 of the REAL Trends 500 list) actually added agents and offices between 2005 and 2006.

In 2005, there were a total of 210,154 agents working for the Top 100; in 2006, that number was 212,431.  The number of offices went from 4,034 to 4,077.  Meanwhile, PPP (Per Person Productivity) went from 9.5 to 8.1 — a drop of 14.8% — and total # of closed units went from 1.99 million to 1.73 million (a drop of 13%).

Incidentally, the 2005 numbers were worse than 2004 numbers.  PPP went from 10.0 to 9.5; total closed units went from 2.08 million to 1.99 million.  But agent numbers went from 208,000 to 210,000 and office numbers went from 3,998 to 4,034.

So let me get this straight.  Brokers were adding costs while their productivity and revenues were falling… not as an aberration, but as part of a trend?  And people were trying to become real estate agents in the midst of what was clearly a bubble bursting?  And other people were hiring them?

o.0

Maybe the three-to-one spend on print advertising over website is not the biggest problem that brokerages have.  And maybe our industry needs fewer Web 2.0 consultants and more straight-up business consultants that understand arcana like “cash flow” and “ROE”.

-rsh