DelPrete: Legacy brokerages make strides, but upstarts have the edge

This article was shared here with the permission of Mike DelPrete for Inman Intel, a data and research arm of Inman offering deep insights and market intelligence on the business of residential real estate and proptech. Subscribe today.

At the close of the first half of 2023, key metrics — agent count, transaction volumes, and overall profitability — highlight a brokerage industry evolving along two paths.

Why it matters: In my recent Inman presentation, I unpacked what a Netflix vs. Blockbuster moment in real estate would look like, and how a receding tide reveals business model resiliency and clues about future growth.

Earlier this year, I suggested that “to identify the brokerage business models of the future, one simply needs to follow the agents.” (Read more: Who’s winning (and losing) the agent count race?)

• There is a clear split between the low-fee brokerage models that are attracting agents, and the legacy brokerages that are shedding agents — a trend that continues in Q2.

• The notable change is Compass, which once again grew its agent count after shedding around 400 agents during Q1 — putting the company back on the growth side of the ledger.

The net change in agents is correlated to brokerage transaction volume; in general, more agents yield more transactions.

• The overall market was up 37 percent in Q2 compared to the previous quarter, which can be attributed to seasonal growth.
• The most notable outliers of the past quarter are Real and Compass, which both significantly outperformed the market.

And transaction volumes directly correlate to brokerage revenue.

• Overall brokerage revenues are depressed in 2023, and continue to follow seasonal trends.
• Compass has maintained its revenue leadership position, with eXp making significant gains over the past two years (while industry incumbent Anywhere has lost its top spot).

Overall brokerage profitability, a function of revenue and a company’s operating expenses, is clearly split into two camps.

• The legacy brokerages had a much better Q2 (including Compass being cash flow positive), but are still unprofitable at a net-income level for the first half of the year.
• With significantly lower fixed costs and operational overhead, the low-fee brokerage models continue to have a structural advantage and are operating much more profitably than legacy brokerages in the down market.

The bottom line: In my recent Inman presentation, I outlined what a Netflix vs. Blockbuster moment in residential real estate would look like.

• Incumbents would have a stagnant market share with high fixed costs and a limited ability to evolve, while disruptors would be exponentially gaining market share with an easy-to-define unfair advantage.

• The shifting market — the receding tide — is revealing these changes across the industry, leading to a bifurcation of business models with key differences in market share, growth and profitability.