Are Traditional Brokerages Cutting Their Way to Extinction?

As the industry grapples with a significant market slowdown that could linger uncomfortably long, brokerages are scurrying to cut costs. But is that the right direction for growth and success?

The harsh reality is that 10 years from now, traditional real estate brokerages will be obsolete. Why? Because they are refusing to evolve, unable to adapt.

Modern brokerages are winning

The modern brokerage model is winning. Ironically, one big reason for success is that they have little, if any, real estate. This gives them an efficiency advantage, as they have a higher number of transactions combined with relatively modest operating expenses.

Conversely, the traditional brokerage’s mindset is to keep doing what they have been doing. But that’s akin to the definition of insanity: doing the same thing over and over again, expecting different results.

Making the right moves

Industry consulting veteran Scott Wright recently said that smart brokerages that adapt now will find opportunities to grow. Firms that can manage costs and know what to cut will continue to be profitable. Conversely, traditional brokerage profit margins will continue to shrink—massively. 

Yet brokerages can remain competitive and profitable, even with shrinking margins, if they are making the right cuts in their business. As Wright shares, you can’t cut expenses that will materially affect your business, especially the services you provide your agents. 

What will differentiate the winners from the losers is their ability to be “nimble and adapt,” Wright said in a recent podcast.

The toughest cuts are the right cuts

The biggest spending area for brokerages is personnel. The harsh reality is that the most expensive thing most firms can afford to lose is staff. 

But firing someone is emotionally harder than cutting a cost like technology. In this case, downsizing may not be easy, but it is the right choice, especially when the alternative is extinction. 

The winning way

Smart brokerages are cutting their footprint and closing offices because that also means they can reduce personnel. 

Modern brokerage models are winning with virtually zero offices, very little staff and little overhead. They are leaning into technology to help automate and do more for agents instead of hiring staff.

Becoming tech-forward

In the grand scheme of things, a tech platform for agents is exponentially cheaper than opening a new office or adding another employee.

Yes, brokerages should review their tech platforms to ensure they are getting a return on their investment. What isn’t smart is making cuts to reduce costs without doing the analysis.

As leading real estate strategist Mike DelPrete wrote, “Other companies operating more efficient, low-cost operating models are under less pressure to make big cuts—and may be better placed to invest in future growth.” 

The lesson: You can’t cut your way to growth.

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