Betting the firm: Inside the changing business of residential brokerage
In an era of mega-agents, VC money and social superstars, who comes out on top?
When Mark Zuckerberg announced Facebook’s metaverse pivot last fall, he laid out the vision for a not-too-distant future of extreme online immersion. While his prophecies raised plenty of questions and sneers about a workday glued to the headset, a useful case study already exists, thanks to the traditionally hidebound world of residential brokerage.
Since 2016, eXp — the world’s fastest-growing brokerage, with 70,000 agents and counting — has made its digital platform, eXp World, central to its lean operation, ditching real-world real estate in favor of an online portal. The firm’s virtual campus includes HR and accounting offices, and agents at the company’s annual convention last year tuned in to hear Serena Williams speak about pushing through obstacles. In the fall, two eXp agents, Traci and Dave Gagnon, who met during a training session on the company’s platform, were married in simultaneous ceremonies in New Hampshire and online. This isn’t your grandfather’s Century 21 office.
“We’re past the point of betting on the metaverse,” said eXp Realty’s CEO, Jason Gesing, who sees the metaverse investments as emblematic of the firm’s agent-first strategy. “We think it works. And what’s amazing to me, if you were to pick out a population that likes being around people, it’s not lawyers or dentists, it’s real estate agents. In the past, they could go to their office and sit in their cubicle, but now they can meet folks from around the globe who might have the knowledge or experience they’re looking for.”
The idea that traditional brokerages can not only survive but thrive in today’s tech-powered world may seem quaint. This is, after all, the era of startups offering agents an all-in-one platform, and deep-pocketed startups like Side offering brokerage-as-a-service products for top agents. Social media and Bravo influencers are leveraging their fame to create brands and even their own firms: for example, Ryan Serhant, who launched his eponymous multiplatform shop in 2020 with the explicit message that “nobody cares what brokerage you work out of anymore.” The evolution of tech and media, goes the narrative, has made it easier than ever for agents to succeed on their own terms and harness their own star power.
“The idea of real estate brokers wanting to start their own brokerages isn’t a new one,” Serhant said. “What’s changed now is the ability to build a brand.”
But the 2021 financials tell a far more nuanced story about the changing business of brokerage. eXp, which now has more agents than Re/Max, brokered 400,000 transactions, doubling its revenue in a supply-starved market and steering its parent company to a record profit of $81.2 million. Compass became the top brokerage by revenue (at $6.4 billion, incidentally equal to its 2019 valuation), with transaction value growing twice as fast as the market at large; sales jumped by 72 percent. But it also saw losses of nearly $500 million, including growing losses in the fourth quarter (the company notes $386 million of that was “non-cash stock-based compensation expense,” in part related to its IPO). Realogy, the parent company of Sotheby’s International Realty and Corcoran Group, saw revenue increase 31 percent and net income jump to $343 million. All these firms grew by agent count, and said they saw talent retention that was better than the industry average.
The Real Deal’s own Manhattan-specific sales brokerage rankings from 2021 echo this. In a year that saw record sales volume, $26.4 billion from the top 25 brokerages, the lion’s share came from the top five: Corcoran ($6.5 billion), Douglas Elliman ($6 billion), Compass ($5.8 billion), Brown Harris Stevens ($3.4 billion) and Sotheby’s ($1.6 billion).
“Everybody’s winning,” said real estate technology analyst Mike DelPrete. “I actually couldn’t name a company right now that is losing.”
“I think sometimes people are surprised when the best stays the best, but that’s what you saw happen in 2021,” said Realogy CEO Ryan Schneider. “Twenty years ago, people speculated that the real estate agent would be replaced. Now people see even greater value in the agent. But today they’re asking if the brokerages, and the brands, will be displaced.”
Schneider’s point is that the “end of brokerages” talk fundamentally misreads the cyclical nature of the market. What industry players and observers instead see is bifurcation.
In true Pareto principle fashion, everyone’s fighting over the top-performing 20 percent of agents, according to Clelia Peters, the former president of Warburg Realty who’s managing partner at proptech-focused Era Ventures (and a board member at Side). Within that top tier, there’s fragmentation and fractionalization of business models akin to what’s playing out in media, where a once-omnipotent studio system now contends with streamers and the creator economy.
“What we’re basically seeing is greater and greater power aggregating to the agents who are really defining themselves as distinct brands,” said Peters. “We’re going to see this battle royale for the attention of those agents. How will those agents be served?”
When it comes to firms catering to the elite cadre of dealmakers, tech isn’t the differentiator as much as how the firms’ business models define the agent brand within their larger brand.
Brokerages have traditionally “taxed and extracted value from the person who was supposed to be their customer, the agent,” said Neda Navab, who oversees the Eastern region for Compass. Now it’s about empowering the agents and setting them free from burdensome paperwork and busywork. By next summer, Compass expects agents can do their entire job on the firm’s proprietary platform.
“Before social media, agents didn’t think about the money they’d make for a brokerage as a desk fee or payment for mailers; it was a brand and legitimacy tax,’ said Serhant. “Now more than half of real estate agents start their lead gen on social, so their brands start on social.”
In the case of Side, which recruits top-performing agents, part of the efficiency, and profits, comes from pushing expenses, such as office space and marketing, to the agents, as well as training; CEO Guy Gal has said “nine out of every 10 agents shouldn’t be licensed, let alone actually doing transactions.” The company, which bills itself as the Shopify of the industry, gives high-flying agents the tools to build their own brands.
eXp, which offers a commission split and revenue share allowing agents to recruit and build their own teams within the platform, presents itself as a more hard-charging, power-of-positive-thinking proposition (its founder, Glenn Sanford, resurrected a 19th-century self-help magazine, “Success,” as a platform for agent promotion). Celebrity-first teams within larger brokerages, such as the Eklund-Gomes team at Douglas Elliman (which went public at the end of last year), combine the social media reach of superstars like Fredrik Eklund with glossy imagery and a firm-within-a-firm structure to corner high-end property markets.
Compass, which in many ways has become the poster child of a modern brokerage, wraps the traditional model in tech language with platforms and agent apps and tools, as well as a venture capital and now public markets war chest. Peters says Compass’ true innovation might simply have been updating the industry’s dowdy branding with an appealing tech aesthetic, but as it gets further from its IPO — the stock price has fallen nearly two-thirds since its debut — it may be weighed down by the challenge of maintaining its brand.
That’s particularly true in the face of such well-funded competition. Side, for one, has raised money — $250 million so far — at a prolific rate. It was valued at $2.5 billion after its latest disclosed $50 million raise last June.
“This is a market share merry-go-round,” said DelPrete. He’s seeing elite agents getting even more efficient, and more sought-after.
“Agents just go from one place to another; whoever has the newest technology or is going to be able to offer people the most money. Re/Max started this trend back in the day with their 100 percent commissions. Then Keller Williams came along with a different model offering agents more money. Then Compass came along, offering agents more money.
“They [agents] are no dummies,” he added. “They’re entrepreneurs.”
That’s why tech, or the promise of ease that it offers, has been such a powerful selling point. But though it may make a difference at the margins, and effective platforms can help with retention, it tends to offer incremental gains for most, said DelPrete. He sees the world fundamentally moving to a place where everybody’s databases are the same. In which case, the differentiator between agents becomes more old-fashioned: Who builds the best relationship, and between brokerages, who can give agents the platform to do so?
“My suspicion is that with Compass and these other players, they’ve got powerful machines, and they have engineers and people looking after it,” said Nikki Greenberg, a real estate tech analyst at Australia-based QIC Real Estate. “But like a Mac, some may just use it for word processing, and some may use the full power of the machine.”
One of the most powerful draws isn’t a back-end tech tool. It’s no surprise that most of the brokers with the highest profiles and greatest entrepreneurial success, such as Serhant and bloggers-turned-brokers like Bloodhound Realty and Chase McAnear, have vaulted ahead with the one thing, a true online following, that brokerages can’t provide, and used this asset as leverage. As Serhant said when he launched his own firm, “It’s an attention game. It’s not who has the better postcards, it’s about who can attract the most eyeballs.” It’s what he says helped him close on a $132 million mansion in Florida last year, one of the priciest home sales in U.S. history.
“I look at real estate as the new Tinder,” said Seth Nelson, who oversees California’s Orange County for the Eklund-Gomes team. “People’s attention spans are ungodly short these days. How can you [take] an asset, like a home, and turn it into a product people want to look at, feel, see, touch? That’s the name of the game.”
Nelson, who owes his position to a blind Instagram DM to Eklund that the broker immediately responded to with an invite to meet at the Hotel Bel-Air, says it’s all about leveraging networks. The team works with Society Group, a real estate PR firm, to create polished social media content for each listing (Elliman offers international reach through its partner company Knight Frank) and connects the team with luxury new development opportunities — which get blasted over Eklund’s social feeds. Boasting 75 team members across 12 markets, Eklund-Gomes estimates that a quarter of its sales stem from social media.
“If you’re not figuring out how to live in a modern-day world of exposure and content and distribution, you’re going to get left behind,” said Nelson.
But some younger agents argue that the high-gloss approach is already outdated.
Madison Sutton, who cultivated a large TikTok following as @theNYCAgent and even teaches social media classes to her colleagues at Brown Harris Stevens, said visions of perfection are “very outdated.” TikTok has brought forth a lo-fi, more personal way of communication, useful for establishing trust.
“It allows you to have an emotional connection with the viewer,” Sutton said. “He or she seems like someone who will listen to me and will go on a journey that’s very stressful now, especially in New York.”
TikTok’s effectiveness in marketing real estate also underscores just how much traditional ideas of showings have evolved in recent years.
“The pandemic put everyone into their phones, so they saw the power of what you could do visually and virtually,” Serhant said. “I sold a house two weeks ago in Palm Beach over FaceTime; I never went there. I recently sold 600 acres of land as an inflation play in Wyoming. Neither me nor the buyer went there. Traditional brokerages spend a third of their operation expense on rent and desks. No large firm will ever get out of that.”
Agents face tough decisions, especially when it comes to choosing platforms and brokerages. There’s no question that luxury is where the market is focused; even Realogy, despite having a constellation of brands touching on difference price points, is focused on a “spectrum of services” to “compete and win in the luxury and premium, and even ultra-luxury space,” according to CEO Schneider.
That same idea of transitioning through tiers may also describe an agent’s career journey.
In this post-Compass world, DelPrete sees a career arc: An agent starts out at Keller Williams to get trained, moves up to Compass to get experience with top clientele, becomes an established name and departs for Side and the promise of running their own brokerage. Side’s Gal shares a similar view — that existing brokerages are set up to support average agents (in part, he says, because lower deal volumes mean higher commissions for brokerages), so elite talent do all the “heavy lifting.” In that case, why not step out on your own?
Others see a push toward the idea of collaborative teams becoming bigger in a more decentralized industry, akin to what eXp promises top performers or how Eklund-Gomes, which has its own full-time CEO, is organized. Compass’ Navab said that teams will be a big focus of near-term tech development. Like other competitors seeking to lure and retain top agents, Compass wants to keep them locked in, regardless of how big the company logo appears.
“We don’t want anybody to do the dull work of launching their own brokerage,” Navab said.