Industry insights

Inflation and interest: The hidden costs to brokers in the CRE deal cycle

If you’re like most, you’ve been feeling the financial squeeze this year. In the wake of the pandemic, supply chain issues, and other national and global factors, nearly everything has grown more expensive. And despite the Fed’s three consecutive interest rate hikes in 2022 (so far), inflation has continued to rise. In June, the consumer price index (CPI) surged to 9.1% year-over-year, hitting a 40-year high.

Economists are split on how this will play out long-term, though many predict this period of high inflation will last well into 2023 — with interest rates continuing to rise in the interim.

Regardless of what happens over the next several months, one thing is for sure: it's never been more important for brokers to find, win, and close deals quickly. Not only do you need to boost your income to cover ever-increasing costs of living, but rising inflation and interest rates are significantly impacting your earning potential and the value of your commission.

Here’s how inflation and interest affect your income as a broker, plus three things you can start doing now to shorten your commercial real estate deal cycles and increase your earnings.

What does inflation mean for your commission?

As a broker, you invest time and money into your deals today in exchange for a commission check several months in the future. Over time, that money loses value, and as inflation grows, it loses value even faster.

For example, let’s say you win a new listing today. Nine months from now, the deal closes for $1M, and after all of the back office processes are complete, you finally receive your big, beautiful commission check. Only, by then, it’ll be worth less.

How? Well, thanks to inflation, the commission for a $1M transaction won’t go as far as it would have when you first won your listing. Adjusting for inflation and investment risk over the course of 270 days, a commission on a $1M property is worth about $2000 more today than it will be in nine months.

Put another way, the purchasing power of your commission drops as inflation rises. And that’s true even during “normal” times when inflation is closer to the 2% targeted by the Fed. During periods of high inflation, like we’re experiencing now, this erosion of value is particularly devastating to a broker’s earning/purchasing power.

To make matters worse, the longer a listing remains on the market, the greater the risk that the listing exclusivity period will end. When that period ends (usually at the one-year mark), your commissions will be sliced in half.

How interest affects your earning power

Of course, some inflation is always expected. In our economy, there will be times when consumer demand exceeds production, production costs increase, or wages rise in response to rising employment, and all of these circumstances can lead to inflation.

But when inflation rises too quickly and lasts too long, it can hurt individuals, businesses, and the economy as a whole. That’s why the Fed raises interest rates in periods of high inflation. This rate hike helps reduce consumer spending, decrease demand, and (hopefully) lower prices.

As a broker, you invest your time and money into a deal and hope that investment will pay off in the form of a hefty commission check several months later. Meanwhile, you have personal and professional costs to cover. And while you may not borrow money in the form of a loan, you’ll still have to borrow money from yourself!

Theoretically, all the personal funds you’re using to cover those expenses in the interim will be repaid when you receive your commission. However, that comes at an opportunity cost. Instead of placing your money in an interest-bearing investment (which will earn even higher interest when the Fed raises rates), you’re using it to cover expenses while you work and close a deal. And the longer a deal drags on, the higher the interest cost.

To offset this lost opportunity, you need to earn higher commissions.

How can I calculate the impact of interest and inflation on my future commission?

To better understand what this means for you, you’ll need to quantify the impact of high inflation and interest rates on your real earnings. One popular method for this is by using the risk-free rate.

In the US, the risk-free rate is calculated based on the interest rate on a three-month US Treasury bill. The nominal risk-free rate is the current yield of that three-month Treasury bill without factoring in the impact of inflation, while the real risk-free rate is the yield minus the impact of inflation.

The real risk-free rate tells you how much you’d need to make from an investment to not experience inflation risk.

Here’s how it works:

Each day a deal is delayed is equal to the risk-free rate of investment, divided by 365 and multiplied by the amount of the payment:

Each day of delay   =    Risk-free rate of investment   ÷   365   x   amount of your commission payment

The reality is you’d pay double the risk-free rate in today’s economic environment.

3 things you can do to avoid erosion of your real earnings

We know this can feel like a lot of doom and gloom, but there’s also good news. First, if the Fed’s efforts are successful in slowing inflation without leading to deflation, it could help us avoid triggering a true recession.

Second, you still have some control over your income and how much inflation and interest impact your earnings.

Here are three things you can start doing right now to ensure you maximize your income:

1. Negotiate a higher commission with the seller

One of the more obvious methods for boosting your income is to negotiate higher commissions into your agreements with sellers. It’s worth noting that this is usually more challenging to accomplish in a competitive market because there’s almost always another broker who is willing to take less (especially in cases where you’re working with a new client who has no prior experience with you).

That said, it’s still worth a shot, especially if you can share a documented history of success. Savvy sellers know that they’ll get what they pay for when it comes to working with brokers. Many may be willing to pay a higher commission rate if it means being represented by an experienced, highly successful broker.

2. Negotiate a bigger commission split with the brokerage

Another way you can overcome losses from inflation and interest is by negotiating a larger split with your brokerage.

Of course, every firm has its own method of calculating commission split plans. Some brokerages allow brokers to take home 100% of their commissions but collect expenses and desk costs as annual or monthly fees. Others provide 50/50 split plans, but don’t charge any fees and may even cover all operational expenses. Some vary split plans and fees or create tiered plans where brokers are paid a higher split percentage after they bring in a certain amount of revenue.

In most cases, your ability to successfully negotiate a higher commission split will depend on your track record with that firm. Brokers with recent success will find it easier than those who are newer to the firm.

3. Shorten the CRE deal cycle

The third and most feasible option in this market is to shorten the CRE deal cycle Because, the faster you can get a listing to market, find a buyer, and close the deal, the less inflation and interest will erode the purchasing power of your earnings.

And one of the best ways to shorten the deal timeline is by leveraging Buildout. Here’s how it helps:

First, you can use Buildout Insights to quickly find accurate property data, identify opportunities, and reach out to prospective new clients.

Then, you can use our marketing tool that enables you to build proposals (complete with sample marketing assets) in minutes, so you beat your competition and win new listings faster. After you’ve signed a new client, you can quickly produce professional-quality marketing collateral, create a beautiful property website, and automatically publish your listing across all relevant third-party syndication sites with just a few clicks.

Once you’ve found the right buyer and closed the deal, our back office solution streamlines operations so accounting can quickly process transactions and get you paid faster. 

Finally, our CRM helps you easily manage your pipeline, gather insights and analytics, strengthen existing relationships, and build a huge book of business, so you always have new opportunities on the horizon.

By simplifying the experience and speeding up the timeline with a CRE dealmaking solution, you can make sure you’re getting more from the time and money you invest in your work.

While there are plenty of predictions about how inflation and interest will impact commercial real estate, no one knows for sure what will happen. As a broker, it’s crucial you’re always prepared for economic changes and market fluctuations. And by staying informed on how various factors can impact your income and adopting the right tech, you can take the right steps toward earning the highest possible commission.

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