The Race to Cut Costs

Across the real estate industry, companies are racing to cut costs in the face of a significant market slowdown.

Why it matters: With dropping revenues, cost control is one of the only levers in a company’s control – and is the key to a sustainable, profitable business.

• The need to cut costs – and the depth of those cuts – are a function of a company’s overall financial health and business model efficiency.

Some companies , like eXp, have the advantage of a more efficient business model with lower operating expenses (OpEx).

• Compared to its peers, eXp is servicing a disproportionately high number of transactions with relatively modest operating expenses.
  

• The more traditional industry behemoths, Anywhere and Compass, have a less efficient model with a much higher cost basis (and thus need to cut faster and deeper).

Dig deeper : Another measure of business model efficiency is the amount of revenue generated per $1 spent in operating expenses.

• Based on this metric, eXp was about three times more efficient in Q3 2022 than its publicly-listed brokerage peers (who are all in the $3–4 range).

Compass has been racing to cut its operating expenses as quickly as possible (it also recently announced a third round of layoffs).

• Compass is driving to cut its non-GAAP operating expenses by 40 percent, or around $600 million annually.

Layoffs are the most visible way that real estate tech companies are cutting costs.

• Since June of 2022, Compass has shed around 1,700 employees (40 percent), while Redfin has also cut deep with 2,000 fewer employees (26 percent).
  

• Many other real estate tech companies have also enacted significant layoffs to cut costs (and in some cases, in order to survive).

What to watch : Among the big brokerages, Anywhere, Compass, and Redfin have already made significant cost reductions, while eXp and Douglas Elliman are under less pressure to cut costs.

• Cost reductions limit a company’s ability to invest in future growth opportunities (ex: Compass has "paused all expansion into new markets” and Anywhere shut down its cash buying program).

The bottom line : The market downturn is forcing all real estate tech companies to cut their expenses in order to achieve, or maintain, profitability.

• Unprofitable companies with high cash burn and high fixed costs have no choice but to cut, and cut deep, to survive.
  

• While 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.