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Virtual vs. Office: Cost vs. Cost

April 9, 2009
If you could go ahead and try to go virtual, thatd be great, okay?

If you could go ahead and try to go virtual, that'd be great, okay?

Let us talk about land.  About buildings.  The pure physicality of bricks, wood, steel beams, stairways, elevators, walls and roofs.  You know, real estate.

Normally, the conversation would be all about homes, condos, and the like — the stuff of the daily business of realtors and consumers.  But I have in mind a slightly different take.

Let’s discuss brokerage offices.

This topic has been swirling around the industry for quite some time now, but a few recent events brought it into focus for me.

First, the LeadingRE Conference in Scottsdale.  I got to speak with Matt Dollinger quite a bit while out there, and thanks to Pam O’Connor’s graciousness, I had the opportunity to hear some of the top broker-owners in the country talk about some of their top issues. The cost of leasing office space and how to minimize it was a frequent topic of discussion.

Second, a brief conversation on Twitter with Derek Massey (@derekmassey) about the desirability of virtual setups vs. physical offices.

Third, conversations off and on with people like Joe Ferrara (@jfsellsius), Eric Stegemann (@ericstegemann), and others who are either trying to start or thinking heavily about “virtual brokerages” with no overhead for office space.

Fourth, this report the existence of which just crossed my RSS feed: Beyond Brick and Mortar, Rethinking the Real Estate Office.  I haven’t read it, and at $299 for a copy, I’m not likely to read it anytime soon.  But if you have, or plan to, please let us know what the findings are. 🙂

Direct Cost…

The direct cost of brokerage office is actual, measurable, and large.  According to the RealTrends 2007 Brokerage Performance Report (yes, I need to get the 2008 report), all respondents had Rent & Related Occupancy costs that came in at 4.94% of GCI.  This figure, however, is a bit misleading in my opinion, because rent and occupancy costs are paid entirely by the brokerage.

Since average company dollar is 26.7% among respondents, the actual direct cost is about 3.7 times the GCI figure in terms of impact on the bottomline.  For example, a company with $10m in GCI would end up with $2.6m in company dollar.  Occupancy costs, at 4.94% of GCI is $494,000 or 18.5% of company dollar.

Add in the 0.83% of GCI for Supplies (pens, paper, etc.) that having a physical office necessitates, and we’re looking at 21.6% of company dollar going to expenses associated with having physical space.

In contrast, the combined expenses for Communications (e.g., telephone, high-speed internet, etc.) and Technology (e.g., website) for respondents were 5.1% of company dollar.  Even if you assume that going to a virtual brokerage setup would double the cost of Communications and Technology, we’re looking at 10% of company dollar expenses vs. 21%.

A 50% reduction in cost is something anyone is going to look at, especially now.

vs. Indirect Cost

There is, however, another side to the equation.  Actually, two other sides.  That makes no sense at all, so I suppose it’s more like two factors on the other side.

First, agent productivity.

Some of the brokers at the LeadingRE show expressed the view that agents are unquestionably more productive when they are sitting together in a physical office.  Unfortunately, I don’t know that there is any study or data available on the relationship between office and productivity.  Are we talking a 100% improvement or a 1% improvement?

The impact of productivity is far-ranging, however.  Let’s take that hypothetical brokerage from above and extend the analysis.  Based on my bad math, it goes something like this:

To do $10m in GCI, at an assumed rate of 2.5% per side, and a avg. Home Price of $250,000, that brokerage had to do 1,600 transaction sides totalling $400m in volume.

If we further assume that every agent did 20 transactions, that translates to 80 agents.  (Now, I know the reality is 80/20 rule, where 20% of the agents do 80% of the transactions, but for simplicity’s sake, let’s pretend they’re all robots.)

A 10% decrease in agent productivity by going virtual means a loss of $1m in GCI, resulting in a $267K in lost company dollar.  The net savings from shutting down the office then is only $227K.  If the productivity loss is 20%, then Hypo Realty ends up losing $40K from the ‘cost-saving’ move as the $534K loss in company dollar more than offsets the $494K in savings.

Second factor, however, is agent splits.  One of the justifications for a brokerage charging a split is to pay for overhead, such as office space.  Get rid of that, and it seems unlikely that the brokerage can maintain the same splits.

Moving from a 26.7% company dollar scenario to a 5% decrease — 21.7% company dollar — means that even if the productivity loss is only 10%, Hyop Realty is now losing $140K from its ‘cost-saving’ measure: decline of $717K in company dollar vs. saving $494K in rent.

All of a sudden, going all virtual doesn’t seem quite so attractive.

And neither of these factors take into account possible ‘soft’ costs, such as loss of brand value due to not having any storefront space in a highly visible street, or possibly a more difficult time in recruiting, or any of the other hard-to-measure impacts.

So What’s the Answer?

Because the financial ‘model’ above is so quick and dirty, it may be that there’s a balance point, especially given the 80/20 rule of productivity where you provide office space to your most productive 20% and gain the benefits of that, while saving on occupancy costs for the 80% who aren’t producing much anyhow.

Without analyzing a particular company’s financials and its market conditions — e.g., prevailing rents for store-front office space — it’s impossible to say whether Virtual is better or Physical is better.

But I figure folks more knowledgeable than I will step forth and provide further insight.  In particular, I think some sort of metrics of agent productivity would be enormously helpful.  Perhaps the Inman report has that answer.

Looking forward to your thoughts.


11 Comments leave one →
  1. Motodot permalink
    April 9, 2009 8:12 pm

    “Some of the brokers at the LeadingRE show expressed the view that agents are unquestionably more productive when they are sitting together in a physical office.” – This could be because the more productive agents just happen to come in to the office. My guess is that it doesn’t make them more productive, it’s just that they have more business to take care of which draws them into the office. On the other hand, because I can rarely skip the opportunity to contradict myself, being in the office does give agents (or anyone) face time with other agents and the opportunity to network which may mean learning about properties that may not have made it to MLS, etc.

    • April 9, 2009 8:59 pm

      I actually find I’m most productive working at my home office where I can concentrate on what I need to do. The office is always so distracting, so I guess it could be a personal thing.

      At Keller Williams we have a touch down center where the people who dont need desks or have home offices go to meet clients and just “touch down” as needed. This actually works well. We have 135 agents and there are never more than 20 agents in the office at at time. I dont think there are more than 40 desks ( a guestimate), so that’s definitely more efficient than my previous offices where agents ( producing or not) took up valuable desk space. If a KW agent wants his/her own non-shared desk, that agent pays for it so its not a cost to the broker.

      I think you are placing too much value on on office signage – its the yard signage everywhere that the public notices. Yes, in walking towns there is store front signage its noticed, but my office store front is in Summit and most of my sales are in Short Hills and the lack of store front in Short Hills is a non issue because when people say ” I see your signs all over the place” or “I see your website everywhere”, I know that my branding is working.

      At Keller Williams, the agents are on a split and then once they’ve paid a certain amount per anniversary year, they are on 100% for the rest of their anniversary year. This is why places like CB wont work becaue overhead should be capped.

      With real estate teams ( which could be virtual or sharing a space or a combination),the splits work because the value proposition is a constant supply of leads that the team leader pays for, lead cultivation and conversion systems in place,synergy,top training on the job from team leader who is a top agent, and HIGH standards and accountability. The team leader holds the buyer agents accountable for converting or the buyer agent is out of there. No time for BS. THAT is the difference.

  2. April 10, 2009 8:31 am

    Thanks for the shout-out, Rob. Nice to get a mention for doing so little. 😉

    I would like to preface my comments with the obvious statement that I am a title guy with no hands-on brokerage experience. Never been an agent, never managed an office (of agents). However, I have had the privilege of working with many agents, as well many managing brokers, and have had my share of conversations about the successes and challenges of the brokerage world today. Lastly, I follow, friend, and connect with some of the best and brightest RE.Net agents (Realestistas as some might call them), so I think have at least some insight into this potentially divisive issue.

    In the tradition of our esteemed post author, I offer no answers, only more questions. I will frame my thoughts by putting on 2 hats: the broker hat, and the agent hat.

    Agent Hat:

    – I am an independent contractor. You “hire” me for my revenue stream. So long as I am delivering that GCI, does it matter whether I’m in the office, my home, or Timbuktu?
    – I need to focus on my job. The chatty, gossipy office environment doesn’t allow for that.
    – Because I am a veteran agent with a heart of gold, I become the defacto assistant broker. I give advice all day when I’m in the office, but I get nothing for it.
    – With all the tech tools at my disposal (website, scanner, email, MLS, various social media sites, cell phone, etc.), there is nothing the office has that I need.
    – I have the world’s best coffee maker at home, and that is my #1 productivity booster (for @HthrFlynn)

    Broker Hat:

    – That chat and gossip may actually be talk of buyers needing properties and sellers needing buyers. Aren’t you best positioned to be in the middle of that?
    – I covered the new contract in the last 3 sales meetings. Why do you continue to use the old one? Maybe because you didn’t know about it? I am the broker of record, and your work-product is in my name. Lack of compliance threatens my license. (Hey, that almost rhymes).
    – The brand and the broker still mean something, and the stronger we are, the better it is for each agent under the umbrella. Giving to “the team” collectively helps us all individually.
    – Energy begets energy. If a rookie sees empty chairs and hears crickets chirping, does he become part of that culture? If, however, the rookie is part of a dynamic, fast-paced, elbow-bumping environment, does she internalize those traits and become more productive?

    I am not even close to knowing the answers or which viewpoint is the most compelling. I too would love to hear the thoughts of people much more enlightened than me. For whatever reason, this topic is a very interesting one for me.

  3. Duke Long permalink
    April 10, 2009 10:58 am

    We are changing our business model and space requirements to do both.

  4. April 12, 2009 2:47 pm

    Lots of good comments from everyone here. As with many things, this isn’t “either or” but rather, “both and.” Brand is also culture, and it’s hard to have a meaningful culture without a place to go to bring together those people who have a common philosophy and purpose, not to mention the energy and sharing of skills and market intelligence.

    But it’s obvious that good agents are out of the office working much of the time, so having dedicated space for every agent doesn’t make financial sense either. The answer is probably a hybrid…smaller space with shared work stations. And let’s face it, with the changes in the real estate world, there are new innovations in technology, social media, financial analysis, etc. that even the most seasoned agents can benefit from learning about from their colleagues, just as those colleagues can learn from their experience and market knowledge.

    And maybe I’m old-fashioned, but if I’m entrusing a major real estate transaction to a practitioner, I kinda wanna know that they have “a real office.” The real question is not virtual vs. brick and mortar, but the right balance of both.

    • April 13, 2009 4:03 pm

      Hi Pam –

      Thanks for the comment. FWIW, I think you’re 100% on the money that brokers need to balance the need for physical space vs. need to save money in the connected world of today’s realtor.

      My question is… in balancing that, does a broker/owner/manager have metrics (even industry averages) of the impact of office setting on agent productivity? Wouldn’t that be an awesome study, to see how being in the office vs. being virtual impacts productivity over a period of time?

      That way, a broker can make rational decisions on how much space is really required without damaging the company’s productivity to the point of losing money by trying to save money. 🙂


  5. Sarah Stelmok permalink
    April 13, 2009 5:14 pm

    I see both sides of the equation. I work for a company that is proud of their office space. They have room for about 80 agents and on any given day I only see about 15 people using their desk space. These 15 agents are the top performers for the branch. They use the office because they negotiated free copies or free faxing in their employment contract. There is also an unlimited supply of paper, pens, contracts, and sodas for them to steal… I mean “borrow.” They get free work out of the support staff, they see the office as a central location they can be reached at, and they feel a sense of belonging and being needed. Many agents visit the office because they have no where else to go to hang out or they consider it a social scene. I, for one, go to the office to work. I like to separate my work life from my home life and that means I don’t mix work activities with home. (Well, I don’t mix them very often). I don’t have time to stand around and gossip. I have work to do. I have to close my office door alot because of all the chatter in the hallways and the multiple interuptions to ask me a question that they should really be asking the broker.

    I see that managing Brokers like office space so they can keep a watchful eye on their independent contractors. Let’s face it, brokers look at us as employees, not independent contractors. I heard a broker the other day punish an agent for not being in the office often enough. She had not come in for a month so he wouldn’t let her sit at the Duty Desk. First, sitting at a Duty Desk is no prize! Second, she’s an independent contractor who sets her own hours and if she decided to take a month off, so be it. That’s her choice. Third, there is no rule that says you have to be in the office a certain amount of hours to get the “privilege” of being an unpaid receptionist. The broker was mad that they couldn’t control the agent’s activities. The agent has the right to not come in to the office.

    I have explored the virtual office scenario and I think it works for some agents and brokers. If you are a good broker who can be reached by various modes of communication/ technology, the virtual office should work for you. If the broker only hires experienced, trust-worthy agents then a virtual office should work for you. If you are an agent that has experience and only needs a broker for larger issues, then a virtual office should work for you. If your clients aren’t impressed by the office atmosphere and don’t mind meeting you at your house or in a coffee shop, then a virtual office may work for you.

    There are benefits and risks to both business models. I personally see the advantages and disadvantages of both and will need more time before I decide which model is best for me and my clients.

  6. April 13, 2009 6:23 pm

    This is a great discussion, and an interesting insight into your profession.

    I’m a home office, solo lawyer. That works for me because I’m disciplined enough to still get work done, and I don’t waste time commuting to and from some official (and expensive) work space. My real work is usually done in court anyway!

    Some multi-lawyer firms are moving to virtual arrangements. As Sarah said, if people are still reachable and they’re trustworthy, it doesn’t matter where people are working.

  7. harmonsmith permalink
    April 28, 2009 6:38 am

    Virtual offices are getting more and more popular in this world of cost cutting efforts and internet capitalizations. What was once considered integral in a company’s business strata now is a bane to business because of their high costs and restrictive contracts. Many have turned to virtual offices for their office solutions as they pay only as much as they use – meaning this is a commodity that is highly liquid and thus poses no risk as a long term economic hindrance. I am also running a small business using this facility by valleyhq I am very satisfied and feel like I am able to increase my business now.

  8. April 29, 2009 9:14 am

    @Andrew & @harmonsmith –

    I think the appeal of virtual offices/home offices is obvious in today’s society. For the worker’s perspective, it saves having to commute through traffic, unreliable public transportation, etc. For the employer, it saves a lot of money.

    But there is another side to the equation, and I’m wondering if there’s any quantitative productivity data on having people in the same physical location vs. dispersed and working over the phone/web.



  1. Daily Digest for 2009-04-10 | Joe Spake - Memphis Real Estate

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