G.M. Filisko is a Chicago area freelance and former editor for REALTOR® Magazine.
After the Cuts: What the Recession Taught Brokers
Most brokerages slashed spending during the downturn. Now that business is up, many are still focused on economizing.
January 21, 2015
The Great Recession that upended the real estate industry was a painful time that many brokers would rather forget. But that would be a mistake. The wrenching economic stretch, officially pegged between late 2007 and the middle of 2009, felt far longer in many places, but it was filled with lessons smart brokers are paying attention to today.
When the recession hit, brokers slashed operating and capital budgets to survive. Today, they’re looking back on those cuts with clear eyes and assessing whether some went too far. Many are thankful the recession forced them to pause and reconsider how they manage expenses and other financial decisions now that business has generally recovered.
“When I look at what we were spending in 2005 to 2007, it makes me sick,” says Mark Remeis, broker at A.A. Green Realty Inc., a 28-salesperson company in Bowling Green, Ohio. “That market downturn was a blessing for us. It made me really delve into how we run our business and what we offer our salespeople.”
Cutting Space Without Regret
Leases were often the first expense brokers attacked, and they haven’t seen any fallout from having reduced their space. “The No. 1 item we addressed very aggressively was our space occupancy,” says Gary Scott, president of Long & Foster Real Estate in Chantilly, Va., who oversees all company-run offices in seven states and the District of Columbia; about 10,000 sales associates operate within those offices. “We were very strategic and we had a methodology. When leases came up, our mission was to save a certain percentage of that occupancy cost on the next lease by paying less, merging space, or reducing the space.”
The company shrunk its space costs by 40 percent, says Scott. With consumers relying so heavily on mobile and Internet searches for homes, Scott doesn’t believe the company lost visibility in any way that affected profitability. That’s also because, he contends, the company worked to swap larger space for better space. “When we were able to reduce space, we enhanced the office,” says Scott. “It was about how the office felt, from the technology used to the plasma screen TVs. You’re walking into a space that’s smaller but nicer.”
At A.A. Green, Remeis hesitated to close a second office, worried it might send a message of weakness to competitors and consumers. “It doesn’t look good when companies close doors,” he says. “We were concerned about the public perception.”
Yet in 2011, Remeis quietly shuttered a branch office he’d opened in 2005 that sat 12 miles north of his main office. He’s glad he did. Eliminating the operational expenses helped the company’s bottom line. It also hasn’t hurt market share, which he says has remained constant. In the company’s primary market, says Remeis, A.A. Green’s market share has actually increased, from about 30 percent before the recession to 40 percent today.
RE/Max Alliance in Denver has also closed offices and hasn’t looked back, dropping from 22 to 18 locations. The brokerage also reduced the hours at some offices, says broker-owner Chad Ochsner. Before the bust, he wouldn’t have considered leaving any offices dark on a weekend day. Now he closes many offices each Sunday and transfers the phones to other locations. “Client needs are still being met,” Ochsner says. “But you don’t need an office open, especially in high-rises, where you don’t get much foot traffic.”
Brokers also shaved staff costs by eliminating administrative and marketing positions or reducing their hours—and some haven’t been rehiring in any sig-nificant way, even though sales activity has returned to prerecession levels.
“Our folks are working smarter,” Ochsner said. “We eliminated some tasks [from staff]. For example, in our market it’s customary to contact the seller prior to a showing [by phone]. This was very time-consuming for our staff and a distraction from more productive tasks, so we outsourced it.”
Culturally, Ochsner says his company flourished after staff reductions. Employees banded together and even volunteered to make more sacrifices, -offering to take three furlough days instead of two. “There was this ‘We’re all in this together’ attitude,” he says. Staffers have been rewarded for their loyalty and selflessness with companywide Christmas bonuses the past two years.
Another line item brokers slashed was advertising. By and large, they haven’t seen a need to ramp back up to earlier spending levels. When the recession hit, Seattle-based Windermere Real Estate sent staffers into the field to counsel the company’s broker-owners and office managers on how to renegotiate leases and identify other potential cuts, says president OB Jacobi, who with his family owns 11 of the company’s 325 offices.
Jacobi says brokers scrutinized their ad spending and found areas to scale back on. “They took a hard-line look at where they were spending money and figured out that times had been so good they weren’t paying attention to where their dollars were going,” he says.
Cutbacks started with Seattle’s main newspaper. “At one time we had nine pages of advertising costing us up to $7 million a year,” says Jacobi. “When the market crashed, we cut way back, in part because the newspaper almost doubled its prices during the down economy. Our local business journal didn’t raise prices, so we maintained advertising with it and still do.”
However, Jacobi notes, what was wise in Seattle wasn’t necessarily wise elsewhere. “During the downturn it made sense for some of our small-town offices to maintain advertising in their local newspapers because those papers are central to those communities,” he says. “In turn, they cut back on other print advertising, like Homes & Land magazine.”
Remeis also reduced ad spending significantly. Before 2007, advertising was by far his company’s biggest budget expense at about 10 percent of gross commissions. From 2007 to 2009, he reduced the company’s ad budget by 30 percent and it hasn’t budged since.
Print ads were also a prime target for Ochsner. He’d been placing ads in the The Denver Post and local and regional publications, and he’d had print magazines published for his company. “We stopped all that and pulled out of print entirely,” he says. “We didn’t miss it. Our clients didn’t miss it. And our salespeople didn’t complain about it.”
But he’s rethought that extreme measure as markets have improved. The company has been tiptoeing back into the print market lately, but Ochsner says he’s more strategic in choosing vehicles and their timing. For example, he’s contracted with a local publishing company to do quarterly local and regional relocation magazines, but he says they’re very geo-targeted and have a longer shelf life than a typical print ad.
“Before, we were taking out a couple of full pages in The Denver Post and sticking in postage stamp–sized black-and-white photos of properties and trying to cover the entire area with that,” says Ochsner. “It didn’t work. We now know we don’t have to promote listings in print. But I still think there’s a place in print to promote our company and the quality of our salespeople.”
Not only were some of the cuts excessive, brokers now acknowledge, but the panic underlying any proposed new spending during the downturn turned out to be counterproductive. In 2007 and 2008, Remeis says, his company didn’t cut tech spending, but it stopped investing in new technology. Since then, however, he’s invested in systems like paperless transaction software. “If I could go back, I wouldn’t have held off on spending for those items,” he says. “On the tech side, I’m glad we started spending money again.”
At Long & Foster, Scott says the cuts before he joined the company in 2010 were what he calls “low-hanging fruit,” and some simply didn’t make sense. “The top-producer breakfast became the top-producer bagel,” he jokes. “It’s the little cuts that often create the most angst, and those cuts had zero impact on our company. They were easy, but the savings never added up. If you’ve got 250 lines on your profit-and-loss statement, you have to look at occupancy, marketing, and salaries. That’s where the money is. If you cut postage, toner, and copy paper, it’s insignificant. We learned you’ve got to have a strategy, and you’ve got to do things that make a difference.”
Ochsner agrees. He used to host a companywide annual party around Thanksgiving. He’d rent out Coors Field or suites at Mile High Stadium or similar venues and have an open bar and heavy appetizers. The cost was typically about $30,000. That was eliminated and replaced with more local social functions. But Ochsner says many of his staff and salespeople miss it. He now wonders whether he should have kept the bash but scaled it down—perhaps offering a cash bar, for example.
While furlough days saved Ochsner’s company about $30,000 a year, he also muses about whether they were necessary, “We might not have had to, and I think about the impact that had on our local, state and national economies. By cutting back on discretionary income for our people, it probably had a ripple effect in prolonging the recession.”
Be Ready for Next Time
Developing a bunker mentality helped some brokers to become better businesspeople. Ochsner is now building reserves more aggressively than he did before. During the downturn, he scraped together funds to purchase the building in which one of his offices was located, after it landed in foreclosure. He also acquired two companies whose brokers were waving the white flag.
In addition, when he renews leases or contracts, Ochsner says he negotiates much harder than he used to. He won’t do things like sign a 10-year lease for any location again, nor will he personally guarantee any agreements. “We won’t put ourselves in a situation where if there’s another downturn, we’ll get stuck,” he says.
Ochsner notes another tactic that helped get him through the tough times: “We weren’t shy about it. I stood up in meetings and told salespeople, ‘The reason we have lights on and you have nice, warm coffee is because of the lender down the hall and your support of her. I can’t force you to use her because of the Real Estate Settlement Procedures Act. But I do appreciate you building a relationship with her and giving her an opportunity to work with your buyers,’” he says. “That was a lifesaver. Thank God for ancillary businesses.”
For Jacobi, the biggest lesson has been to be very conscious of his profit and loss statement. “I’m lucky to have multiple offices,” he says. “I can read the P&Ls and see what expenses are out of whack where. At one office, I see garbage pickup is $100, yet it’s $200 at another. It’s harder for individual office owners, but they need to take a hard look at their P&L to see what they’re overspending on.”
A core strength for any real estate brokerage is the long-term memory of team members. “We have to have learned from [the recession],” says Scott “We can’t forget once things start to feel better.” The downturn reinforced for Scott the value of leadership and the need for communication and transparency. “It’s important in our business to truly have leaders in our branch offices,” he says. “Leaders can’t have fear in their eyes. I’ve personally learned the value of providing a high level of communication and transparency to the sales force. They’ll come with you as you change. You simply tell them the truth. You communicate the whys, the wherefores, and the hows, and they’ll join you.”