REAL ESTATE OFFICE DYNAMICS

What is REAL Trends bench-marking data saying about office dynamics?

by Scott Wright, manager of business analytics

Over the years, the real estate industry has seen radical changes to office dynamics. An update of our benchmark matrix offers a glimpse of just how much things are changing.

In last month’s newsletter, I wrote about the ongoing downtrend in the percentage of Gross Commission Income (GCI) retained. This trend may seem alarming, but since brokers are in the business of making money, they’ve ramped up GCI earned per office. Couple this GCI surge with smarter spending and many brokers were able to make 2015 one of their most profitable years ever.

As it turns out, the formula for this per-office GCI surge is a rather simple one. Naturally, there’s the macro factor of home price appreciation, but the biggest factor is a major increase in agents per office. Since 2012, REAL Trends has seen a whopping 43 percent increase in average agents per office, from 53 to 76.

There’s simply no better way to increase GCI than to boost agent count. Agents are the No. 1 asset for all real estate brokerage businesses, and brokers have been on a recruiting spree as they seek to increase agents per office.

Of course, having a higher per-office agent count will only translate to an increase in revenues it the agents are productive. And, productive they’ve been, with an average per-office increase in sides and volume of 48 percent and 35 percent respectively.

Since these sides/volume increases are on par percentage-wise with the increase in agent count, it’s evident that agents haven’t been any less productive. In fact, as you can see in the chart, there’s been a slight uptick in sides per agent, from 8.9 in 2012 to 9.2 in 2015.

This per-agent increase in closed transactions in a smaller workspace may seem counterintuitive by conventional standards. In many industries, a crammed workspace and inaccessibility to the right workspace would have an adverse effect on employee satisfaction and, ultimately, productivity but interestingly this is not the case in the real estate industry.

Earlier this year, I toured several offices of a large, successful brokerage company in the Midwest. I was astounded by their agent and office dynamics. Incredibly, there were some offices with an average-desk-space-per-agent of less than 30 square feet, with one of its larger offices housing agents at a staggering 15 square feet per agent.

With this kind of workspace, you’d expect to walk in and find a group of sour agents grumbling like cattle in a pen. Rather, what I found was an agent population that couldn’t be happier.

This company had the foundation of a very strong culture, so ultimately I wasn’t too surprised. What it drove home for me is that the traditional workspace paradigm doesn’t apply to this industry.

A real estate agent’s office is not a cubicle with a land-line telephone, but rather a smartphone and tablet. More sales associates are working from home, cars or a coffee shop. As long as they have the support of a physical office that gives them access to a conference room, supplies and marketing materials, they’d rather function in a more agile work environment outside of a cubicle.

These shifting office dynamics allow brokers to assign more agents per office, which ultimately  allows them to operate leaner and generate higher per-office profits.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

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BUBBLE TROUBLE?

FOUR FUNDAMENTALS YOU NEED TO KNOW

Track these four fundamentals and you’ll keep your team out of bubble trouble.

by Larry Kendall, chairman of The Group, Inc. and author of Ninja Selling

“Are we experiencing a real estate bubble?” This is a question we’re being asked more and more by customers, investors, media and even our team members.

Dr. Lawrence Yun, chief economist for the National Association of REALTORS® doesn’t see a bubble at the present for three reasons:

  1. A shortage of supply in both new and resale housing. Bubbles are usually the result of oversupply,
  2. Interest rates are lower now than in the bubble years of the mid-2000s resulting in better affordability,
  3. There is no sub-prime lending causing people who are unqualified to buy housing and then default.

But real estate markets are local and cyclical. A local market can experience a bubble while the national market is cruising along just fine. Even sub-markets such as condos, apartments, office or retail can experience bubbles within a strong overall real estate market.

Do you know how to forecast the real estate cycle in your market? There are four fundamentals you should be tracking. As a leader, you need to be the first to spot the changes so you can put your team and your customers in a position to exploit the inevitable. Here they are:

ONE – Employment. Employment is a leading indicator of a real estate market cycle by 12 to 18 months. This is your earliest warning signal of change. Contact your state employment office and get on their mailing list to receive the monthly employment numbers for your county (or go to their website). Watch for a change in employment (either up or down). Compare the number of people employed last month to the same month a year ago. Is the number rising or falling? This is your best crystal ball, giving you a 12 to 18 month head start.

TWO – Appreciation. Go to the government website http://www.fhfa.gov and download their quarterly “House Price Index” report. This is a long report (usually 75 pages), so scroll down to the charts that give you “House Price Appreciation by State” and 300 individual metropolitan markets. These charts show the house price appreciation for the last year, the last quarter, the last five years , and since 1991. Want to see if a market is speeding up or slowing down? Take the quarterly change in prices for a market and annualize it (multiply times four). Then, compare this number to the annual price change. Some markets are seasonal, so be careful about jumping to conclusions based on just one quarter. Start tracking each quarter, and you will spot the trends.

THREE – Affordability. The three components of affordability are house price, household income and interest rates. Ultimately, home prices and real estate activity are a function of people’s ability to pay. Track these components to see if the median household income can afford the median-priced home.

FOUR – Supply and Demand Ratios. Tracking supply and demand for your various sub-markets will also give you a clue as to whether a sub-market is overheated and a bubble is building. Here are two examples: A six-month supply of homes is considered a balanced marlet. In our market right now, the price range under $400,000 has a 1.8 month supply (seller’s market) while the price range over $700,000 has a 13.3 month supply (buyer’s market). We have both a seller’s market and a buyer’s market at the same time depending on the price range. Here’s the second example: Apartments are experiencing a 1 percent vacancy rate and double-digit rent increases, making apartments one of the hottest segments. To get to a balanced market (5 percent vacancy) we need to add about 1,500 apartments in our market. There are currently 1,739 under construction with another 2,165 approved for construction. We see a bubble in apartments a year from now and are warning our investors.

Real estate is a cyclical industry. Knowing where you are in the market cycle is a critical skill. Track the four fundamentals, and you will keep your customers and your team out of the bubble trouble.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

GROWTH STRATEGIES FOR BROKERS

Looking to grow via acquisition? There are few basic rues that should govern this approach to growth.

by Steve Murray, publisher

Few brokerage firms are truly growing at the same pace as the market through organic means, such as recruiting and developing sales associates. Many are growing at about the same rate that REALTOR® membership is growing – about 3 to 4 percent per year. Most aren’t growing that quickly. Agent productivity runs about 8.6 transactions per REALTOR® per year and has been within a small variation of that number for the last four years. The peak was way back in the 1998-2002 era when it was above 10 transactions per year.

Benefits of Acquisition – Many brokerage firms that want to grow faster than the market turn to acquisitions or variations of this theme. There are many good reasons for this, including faster growth, elimination of competition, adding key office locations, spreading overhead over more units and enhancing profitability from core services such as mortgage, title and escrow. All have worked when a deal can be done at the right price and term without too much risk.

Basic Rules – There are few basic rules that should govern your approach to growth via this path. First, enlist the help of good counsel – accountants, lawyers and operations leaders who know how to put these deals together successfully. Second, while the numbers are important, it is just as important (maybe more so) that the cultures are harmonious and that the commission plans are not too dissimilar. Many people hurry through the due diligence on culture and commission plans without giving them full consideration. This is, in fact, where most combinations go wrong. Too much focus on the numbers and financials and not enough on the actual fit. Do remember that as much as leaders dislike change, sales associates and employees dislike it even more.

Lastly, while growth through acquisitions and mergers is fun and exciting, leaders should not ignore that recruiting and developing sales associates is fundamental to success. When you don’t have an effective program to grow in this organic fashion, you will keep on buying sales associates while losing them on the back end. The data from REAL Trends 500 and Up-and-Comers rankings have shown this over many years.

One Last Thought – Growing through acquisitions and combinations is no different than recruiting sales associates. After all, you’re recruiting and attracting whole companies rather than individual sales associates. The same courtship that goes on with recruiting agents should be used by leaders when approaching a favored company for a combination. As with recruiting agents, it is often not about the money but more about the intangibles of culture ad service. Keep that uppermost in your mind.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

GROW FASTER

HOW COMPLICATED TO WE NEED TO MAKE THIS?

How can you grow? It’s simple.

by Steve Murray, publisher

Firms that consistently grow their number of sales associates are also mainly the ones growing faster than the market. Firms that are not growing this key number are growing at about the rate of the market. This and other findings will be forthcoming in a analysis of the 2016 REAL Trends 500 and Up-and-Comers report.

Top-performing teams are growing faster than top-performing individual agents – by a significant margin. Team production over the last five years, in total and on average, among The Thousand (REAL Trend rankings of the top 1,000 individual agents and teams in the United States) has substantially outpaced that of individual agents. More on this in next month’s REAL Trends.

We try to make the business complicated when, in reality, it isn’t. For brokerage firms, recruiting good people, developing their skills and spending less than what is coming in, are all that brokerage leaders must do to be successful. For agents and teams to grow, they must execute on the fundamentals. Those fundamentals for brokerage firms are recruiting and growing people’s talents in sales and for teams are growing the customer flow and conversion rates.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

 

COMPANY CULTURE

INSTITUTIONALIZATION VS. BUREAUCRACY

A healthy organization first has to know what it stands for, culturally and strategically.

by Patrick Lencioni, The Table Group

Whenever I speak to a group of executives about organizational health, I explain that leaders must “institutionalize a company’s culture without bureaucratizing it.” People universally respond to this, most likely because they understand the painful impact of creeping bureaucracy. But what is it about bureaucracy that provokes such a reaction in people?

Before getting into that, let’s be clear that every organization needs a certain amount of structure to preserve what is good about it. This is what I mean by institutionalizing a company’s culture. Rules, processes and protocol are requirements of any organization that wants to build consistency around its unique strategy and culture. The problem with bureaucratic organizations is not only that they implement too many rules and regulations, but that those rules and regulations seem to serve no clear strategic or cultural purpose.

An example might be helpful: there is a big difference between the bureaucracy of United Airlines (or one of the other big ones, I suppose) and the institutionalization of Southwest Airlines.

If I were to relay all of the maddening and incomprehensibly bureaucratic treatment I’ve witnessed and experienced while flying United, this POV would be long enough to be a book. In fact, if someone else were to write that book, I’d certainly read it because, after all, misery loves company. What makes flying United (or going to the DMV, for that matter) so frustrating is the loss of hope and dignity you feel when you ask an employee a question like “What’s the point of that rule?” or “why does it have to be that way?” Usually, the flight attendant or gate agent just shrugs, either with indifference or on a good day, with sense of empathic hopelessness. There is no sense that they understand why they’re doing what they’re doing, or that they’re empowered to make a decision on their own. And if you take the time to talk to them about their experience working at the company, something I often do, you realize they are victims of bureaucracy as much as their customers are.

Contrast that with Southwest, a company that is not perfect, I know. However, one of the biggest differences between flying the two airlines is not simply that Southwest has fewer rules, but rather that it designs its rules to fit its culture and strategy. This is evident when you ask an employee a question and get a coherent, logical and understandable response.

Years ago, I was flying Southwest and expressed my desire to a gate agent, who was no more than 23 years old, that the company put seats in the boarding area that corresponded to a customer’s boarding number. This would allow me to put my luggage down and rest or go to the restroom without losing my place in line (this was before they had numerical boarding passes). In a kind of confident way, the employee explained that it would cost money to do that, and they’d probably have to raise fares, which violates on of the primary tenets of their business. The policy made sense. I felt acknowledged. No problem.

What’s the lesson in all of this? A healthy organization first has to know what if stands for, culturally and strategically. Then it has to put in place just enough processes and procedures to institutionalize its culture and strategy, and no more. Finally, it must communicate – and make sure that employees can articulate – the reasons for those processes and procedures in a way that preserves dignity and sanity of the human beings that the organization serves.

This approach to avoiding bureaucracy applies whether you’re a CEO leading an airline, a superintendent overseeing a school district, or a president heading a nation. When leaders and the people who work for them fail to understand the cultural and strategic underpinnings of their organization, inevitably create an environment where bureaucracy explodes. Rules are put in place for the sake of having rules, and not to serve the needs of the people they’re supposed to serve. When that happens, everyone suffers, with the possible exception of the bureaucrats who always seem to be protected from the costs of rules and regulations.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

AGENT REVIEWS & RATINGS THE IMPACT OF TECHNOLOGY

Brokerage leaders should take the lead in assisting their agents in establishing their online reputations.

by Steve Murray, publisher

“The holy grail for online real estate portals is to change consumer behavior with respect to how they choose their agent.” -Jeff Turner, RealSatisfied

We agree. We have said that among the most important factors we watch in consumer behavior is how they choose a sales associate. Historically, it has always been through a personal relationship, either a referral or personal knowledge. Turner points out, quite accurately, that if online portals become an influencer in this process, it could change industry dynamics significantly. For the time being, the REAL Trends 2014 Harris Interactive study showed that consumers still made the selection based on a relationship of some kind. NAR’s home buyer and home seller studies showed the same.

However, we also asked consumers whether or not they checked out their selection via online sources. Over 50 percent of Millennials, nearly 40 percent of Generation X and nearly 30 percent of Boomers said they did. And, in each category over half said it affected their final choice, either positively or negatively.

Turner again says “70 percent of agent search is organic which means it is an act of validation not an act of identification. He shared this information at a recent broker summit hosted by the South Carolina REALTORS®. He also said that this data is, in part, from his examination of consumer reviews of more than 50,000 agent-assisted transactions – not a small sample.

A conclusion one can draw from this is that brokerage leaders should take the lead in assisting their sales associates in establishing their online reputations.  Whether it is through firms like RealSatisfied or other means, consumers are increasingly seeking to find out more about a sales associate whom they know or to whom they have been referred. We believe the importance of this area of brokerage practice cannot be overestimated.^

This article originally appeared in the August 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 members who are active in all aspects of the real estate industry.

ENOUGH ABOUT MILLENNIALS

By Patrick Lencioni, The Table Group

Am I the only person in the world who’s tired of hearing people talk about Millennials? whether it’s a complaint about their entitlement mentality or a declaration of their brilliance, it all strikes me as shallow and simplistic.

Now, I do not deny that every generation has a few things that make it unique. Today’s young people get their information differently than I did. I get that. And they communicate with one another using different devices than I did. No doubt. And I agree that they have different expectations around employment than I did. But isn’t that true of ever generation? Why is it that we seem to be fascinated with this new collection of human beings, as though they come from another planet?

My fascination with all this is related to my most recent book, “The Ideal Team Player,” because it has ramifications on how we go about bringing Millennials into a workforce that is increasingly team focused. There seems to be a fear on the part of recruiters and hiring managers that they’ll be forced to deal with hordes of self-focused, isolated and lazy geniuses who are incapable of working well with others.

As it turns out, there is a better way to think about hiring good people than focusing on a person’s generational stereotype. It comes down to looking for three simple, timeless and observable virtues that are reliable predictors of whether someone of any age will be a good team player. Thankfully, while generations change, the nature of teamwork does not.

The first and most important of the three virtues is humility. And yes, plenty of Millennials are humble. Humility is a timeless virtue, one that society will always yearn for, even when its celebrities and cultural icons seem to renounce it. Plenty of Millennials are just as tired of self-indulgence and narcissism as the rest of us. They’re capable of caring for others more than themselves and have the ability to enjoy team success more than individual achievement.

Another critical virtue is hunger, the desire and willingness to work hard, to go above and beyond what is required for something worthwhile. While paper routes and lawn-mowing businesses for teenagers may seem like a thing of the past, hard work and sacrifice is alive and well among young people. The question is whether or not they’ve ever been made to work hard. I’m convinced that a large percentage of people in any demographic group, including Millennials, are capable of hard work, and a certain percentage are destined to be slackers. The key is finding the right ones to hire, and weeding out the others.

The third virtue that indicates that a potential new hire will be a good team player is what I call smarts, which is having common sense about people, and knowing how one’s words and actions impact others. while it may be true that millennials have spent a disproportionate amount of their time using abbreviations and Emojis to communicate, it doesn’t take long for them to adjust when they realize that the guy or gal sitting next to them in a meeting needs a little eye-contact and emotional connection. All human beings, yes, even teenagers, yearn for interpersonal connection and are capable of embracing it.

And so, let’s take a breath and realize that our society, and our economy, will survive the onslaught of Millennials. Companies that place a high priority on teamwork, on finding people who are humble, hungry and smart, will have no problem with them, or with any other generation for that matter.

In the spirit of this current generation, I’ll close with a tweetable summary: Teamwork is not limited to any one generation. Millennials aren’t so special. In fact, they’ll be just fine. Patrick Lencioni is founder of The Table Group and author of several books including. “The Ideal Team Player,” and “The Five Dysfunctions of a Team.”^

This article originally appeared in the July 2016 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2016.

The Minnesota REALTORS® is the largest professional trade association in the state with more than 17,000 member who are active in all aspects of the real estate industry.