Real Estate Firms Confident Profits are in Their Future

WASHINGTON—Real estate firms are confident in the industry’s future growth and their increasing profitability, according to the 2015 National Association of Realtors Profile of Real Estate Firms, released on Aug. 6.

“A majority of firms have a positive view of the future, with 95% of all firms expecting their net income to either increase or stay the same in the next year,” said NAR President Chris Polychron, executive broker with 1st Choice Realty in Hot Springs, AK. “The improving economy continues to fuel job growth, and while some markets are still recovering, the demand for real property is back, and prospects are looking good for the real estate industry.”

The annual survey found that commercial firms are the most optimistic, with 75% expecting net income to increase, and 22% anticipating it to stay the same. Residential firms are only slightly less optimistic; 69% report that they expect to see an increase in their net income next year, 25% expect it to stay the same, and 6% predict a decrease. Only 3% of commercial firms predict a decrease in net income in the next year.

The typical residential firm has been operating for a median of 13 years, and the typical commercial firm has been in business for 20 years. The average firm, 79%, has one office and two full-time real estate licensees, while 9% of firms are larger with four or more offices and have a median of 125 full-time licensees.

In 2014, a typical residential real estate firm’s brokerage sales volume was $5.6 million, and the typical commercial real estate firm’s brokerage sales volume was $4.4 million. The size of a firm has a large impact on its sales volume; firms with only one office had a median brokerage sales volume of $4.1 million in 2014, while those with four or more offices had a median brokerage sales volume of $250 million. Correspondingly, those with one office had a total of 18 real estate transaction sides in 2014, while those with four or more offices had 900 real estate transaction sides.

According to the survey, 82% of firms specialize in residential brokerage, making it by far the most popular specialization. Residential property management follows at 7%, and commercial brokerage comes in third at 4%. Eighty-three percent of firms are independent, non-franchised companies, while 15% of firms are independent, franchised companies. The remaining firms are subsidiaries of national or regional corporations.

The most common concern named, at 54%, was the Millennial generation’s inability to buy a home because of stagnant wage growth, a slow job market and their debt-to-income ratios.

When asked to name the biggest challenge facing their firms in the next two years, 51% of firms named profitability. The second most common responses, at 46% each, were keeping up with technology and maintaining sufficient property inventory.

Firms were also asked to predict the effect of the different generations of homebuyers on the industry for the next two years. The most common concern named, at 54%, was the Millennial generation’s inability to buy a home because of stagnant wage growth, a slow job market and their debt-to-income ratios. This was followed by Baby Boomer agents retiring from the real estate industry, and, conversely, the recruitment of Millennials and Gen Xers into the real estate profession.

Forty-five percent of firms expect competition to increase over the next year (from mid-2015 to mid-2016) from non-traditional market participants, while 41% expect to see increased competition from virtual firms. Only 16% expect increased competition from traditional brick-and-mortar firms.

However, these concerns are not preventing firms from growing. Forty-four percent of firms are actively recruiting new agents, with 88% citing business growth as their primary reason for hiring new agents.

Eighty-one percent of all firms offer errors and omissions/liability insurance to independent contractors, licensees and agents, making it the most common benefit real estate firms offer employees. More than half (55%) of firms either share the cost of the insurance with employees or have the employee pay the entire cost. Twenty percent of firms offer health insurance to their independent contractors, licensees and agents; in a majority of cases the employee covers the entire cost.

The most common feature (95%) displayed on real estate firms’ websites is property listings. Other common features are agent and staff profiles, mortgage or financial calculators, information about the home buying and selling process, and community information and demographics. Eighty-six percent of firms provide or encourage agents and brokers to use specific multiple listing services, making it the most common software used in real estate firms. Other commonly used software includes comparative market analysis, electronic contracts/forms and e-signature.

The 2015 NAR Profile of Real Estate Firms was based on an online survey sent in July of this year to a national sample of 138,669 executives at real estate firms. The survey generated 4,555 useable responses with a response rate of 3.3%.

John Jordan
Editor, Real Estate In-Depth