DOUG AZARIAN
Higher overhead costs

Most Bay State real estate firms saw profits dip or flatten last year, according to a recent survey.

About 42 percent of firms in Massachusetts reported an increase in profits in 2005 from the prior year, compared to 66 percent of firms nationwide, according to the 2006 Profile of Real Estate Firms that was completed for the state by the National Association of Realtors. That’s down from 66 percent of real estate firms in Massachusetts that said they had higher profits in the last state profile done by NAR in 2004.

But even though fewer firms saw a jump in profits this past year, the survey shows that the number of multi-office real estate agencies has grown and that Bay State firms are employing more agents than they did three years ago.

While seven out of 10 firms in Massachusetts are single-office firms, the number of firms with three or more offices has increased from 9.6 percent three years ago to 13 percent in 2005. In addition, the median number of agents has gone up from 4.5 to seven during that time, and 63 percent of the firms said they were actively recruiting new agents.

With the housing market booming in the past two to three years, the fact that there are more multi-office real estate firms and more agents at companies comes as no surprise to Cape Cod broker Doug Azarian.

“What I think has been happening is Â… that the large companies are trying to grab market share,” said Azarian, president-elect of the Massachusetts Association of Realtors. “2003 to 2004 up through 2005 were the best years ever in the industry for sales and revenues. You have the larger companies trying to consolidate and bring in smaller companies to increase market share.”

Azarian, broker-owner of Century 21 Dream Homes in Falmouth, said a number of smaller firms either have expanded in order to remain competitive or have been acquired by larger companies.

He noted that any increase in the number of multi-office firms has been offset by a jump in newcomers to the industry who are starting up single-office companies. “You have a lot of new [Realtor] members that became single-office firms,” said Azarian.

Richard F. Cahill, president of Norwell-based Jack Conway & Co., said a shift in market conditions over the last two years has forced smaller and single-office firms to merge or sell to larger entities.

“What you’re seeing is other offices either merging in or selling to other companies as a result of market conditions,” said Cahill.

Inez Steele, executive director of The Realty Guild – a network of independently owned offices in Massachusetts – said because business was strong enough in the past five years, offices were able to expand to other locations.

“I also find a number of highly motivated young professionals getting into the business and they follow a business plan of starting with one location and expanding to other locations on a general timetable,” she said.

The 2006 profile follows a similar profile that was done in 2004. In the latest survey, fewer firms reported higher profit margins.

‘The Bottom Line’
Azarian attributed the drop-off in profits to the higher overhead costs that Bay State real estate firms are facing – including steeper office rents, maintenance costs and wages for staff. Local companies also face higher expenses than firms operating in other parts of the nation, he said.

The profile also revealed that about 80 percent of brokerages in the state are independent, and the number of firms with a franchise affiliation declined slightly to 20 percent. In addition, just 30 percent of all agents in Massachusetts are affiliated with a real estate franchise, compared to more than half of sales agents nationwide.

“I think the increase in the number of companies operating as independents shows a growing dissatisfaction with working for franchises and chains,” said Steele. “The Realty Guild is seeing experienced agents opening their own shops because they feel that as an independent they can service the public better.”

However, Steele was cautious about commenting on the survey results because the profile was based on responses from a relatively small sampling of firms. The 74-question survey was sent to 2,500 real estate firms throughout the state, but only 147 responded.

Cahill, of Jack Conway & Co., said the decline in number of companies with a franchise affiliation may be the result of cost-saving measures that firms have undertaken.

“When you get into a market adjustment, you have principals looking at the bottom line” and trying to determine whether paying a franchise fee makes sense, he said.

Like companies across the country, Bay State firms have boosted their spending on technology. Seventy percent of Bay State firms spent more on technology last year compared to 2004. The majority of firms – or 86 percent – have a Web site through which a median of 14 leads were generated in 2005.

Technology has helped streamline many operational activities for firms throughout the country, according to NAR, and is allowing brokers and agents to communicate with clients more efficiently.

“Everyone realizes that technology is so important in staying ahead in this industry. It’s necessary and initially it’s expensive but it does yield a result and a potential for a lot of growth and productivity,” said Azarian.

Residential brokerage was the primary source of revenue for 94 percent of all real estate firms in Massachusetts, compared with 79 percent in the 2004 survey. A third of the firms indicated that commercial brokerage was a secondary-business activity.