Payroll-related costs are a huge expense for brokerage leaders. How huge is huge? We took a look at recent data to find out the trends.
For most businesses, personnel expenses lie atop the operating budget. The residential real estate brokerage industry is no exception. On average, payroll-related expenses in our industry are a good 10 points higher than the next major expense category (occupancy.) According to our benchmark studies, this isn’t likely to change any time soon.
As measured by a percentage of gross margin, personnel expenses account for nearly one-third of the average firm’s operating expenditures. While these expenses fluctuate based on commission or operating model, it’s still the largest expense for most brokerage firms. As part of our consulting practice, REAL Trends Consulting takes a close look at what our clients are spending in this area, and we rely on this benchmark to assess the firm. If a firm materially exceeds the benchmark, it’s probably wise to examine how to better optimize its employee roster.
2020 Strikes Again
If we take a closer look at this benchmark data, there’s a deviation that we must watch. In the five years preceding 2020, you’ll notice a pretty tight window in the low 30s. As more 2020 data comes in, we’re seeing personnel expenses noticeably slide. While not dramatically lower year over year, they are at a level unseen in this industry’s history.
What’s the impetus for 2020’s decline in personnel expenditures? The simple answer is the pandemic. The second quarter of 2020 was a time of extreme uncertainty for business owners, and many acted swiftly in reducing their overhead. Naturally, many brokerages focused on personnel, furloughing receptionists and office employees.
As the second half of the year unfolded and the market started opening up again, many firms eased cost cutting, including bringing back furloughed personnel. The question that remains to be answered is: Given all that’s played out over the year, will brokerages go back to pre-pandemic levels of personnel spending?
A Structural Shift
Due to the universal acceptance of virtual business spawned by the pandemic, we believe a structural shift is underway that will indeed create a new normal in personnel spending. This new normal is not due to people being less important in running a successful business, rather it’ll be a reaction to less infrastructure strain as brokerages rethink their physical footprint.
Brokerage leaders have long been worried that downstream and upstream technological advancements in our industry would reduce the need for human capital. Yet, if you look at the five years preceding 2020, spending on personnel costs held the line rather well. Despite all the tech hype, people have and will always be vital to running a successful brokerage.
At REAL Trends, we think that personnel expenditures will be reactionary to what is likely going to be a structural shift in how firms are spending on occupancy-related expenses. Based on what we’re seeing play out with our own clients, as well as responses from various surveys we’ve conducted, many brokerages fully plan to reduce their physical footprints by either closing offices as leases expire or reducing their square footage.
Reducing physical infrastructure will naturally reduce the need for various human support roles. While I don’t think personnel spending will fall dramatically, I do believe that what unfolded last year is a harbinger of things to come.
Scott Wright is a partner with RTC Consulting. Reach him at 303-741-1000.
