Even as real estate companies cut costs and narrowed losses in the second quarter of 2023, the third quarter may deliver the truest test of their financial mettle, Mike DelPrete told Intel.

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Real estate companies have made significant strides in slashing costs, narrowing losses and — in some cases — even posting slim profits in recent months.

But real estate tech strategist Mike DelPrete believes that, while some of that progress is real, some of it may also be a seasonal mirage.

“I want to be careful about congratulating all these companies for lowering their losses, when really, the second quarter was the best revenue quarter of the entire year,” DelPrete told Intel this week on a video call. “It’s all downhill from here.”

DelPrete laid out his case why the real estate industry’s most challenging days may still be ahead, even as companies have raced to cut costs and put themselves in a better position to stay afloat in a down market.

The conversation below has been edited for length and clarity.

Intel: The current market downswing hit few real estate companies harder than Compass, which had been committed to an unprofitable, growth-first strategy before sales went south. Recently, they hit a big milestone, becoming free-cash-flow positive. Why was that so important for Compass, and how did they get to that point?

DelPrete: Reaching free-cash-flow positive [status] for Compass was important because the business was running out of money. 

Just to dig into that, what I mean by that is not that they would ever run out of money, but their cash burn was high. It was very high. It was higher than any of their peers because they had a different strategy before everything changed last year, and that was growth. And to grow, you need to spend a lot of money. And they had a lot of money. And they had easy access to cheap money, so they could afford to spend it. That’s a rational strategy. 

But when the market changes and you’re stuck burning at the same level as before, Compass was not going to raise capital in the same way it could have before. So it had to reach break-even, right? It had to reach cash-flow-positivity. 

And it’s been about 15 months since I first started writing about it. They said they were gonna do it. They had to do it. They went through three rounds of layoffs. They cut their operating expenses by half a billion dollars. And they got there. So that’s a noteworthy milestone to hit.

Compass wasn’t the only real estate company that was put in an uncomfortable spot by this down market. Redfin, for instance, had been essentially, in the words of their CEO, running their business ‘out of the cash register’ for most of this year, and they were doing so with big quarterly losses each time around. 

But they closed their quarterly losses quite a bit. Virtually every real estate company that we track was able to shrink its losses in Q2 this year. Are companies better positioned now for the market ahead?

Well, we’ve got to be really clear. Q2 is the high-water mark, meaning the best quarter in the world of real estate. That is when there are the highest number of transactions. 

So I want to be careful about congratulating all these companies for lowering their losses, when really, the second quarter was the best revenue quarter of the entire year. It’s all downhill from here, and that’s not going to reflect good or bad on the companies. This is the environment we’re in. 

Just because Compass was cash-flow-positive in Q2 doesn’t mean they will hit that again in Q3, Q4 and Q1. Chances are, they will continue to burn millions and millions of dollars. But the point is, it’s a lot less than it was. When you slash away half a billion in operating expenses, things are going to look better over the course of the year. 

But you’re entirely right. This is not just Compass; every single company in real estate is going through the same thing, just at different scales. And it’s basic economics. If revenue’s down, the only lever you can pull is cost. And every company in the space is doing cost-cutting. They’re taking out extraneous expenses. They’re consolidating their office footprint and going through rounds of layoffs.

Whether it’s laying off 5 people or 5,000 people, it’s happening across the industry. Everybody’s in the same situation.

You’ve stressed the importance of adaptability as companies for these companies as the market has been shifting. In what ways might they have to adapt further in the months to come?

Winter is coming. Things are going to get tough again, and the successful companies are going to be the ones that can adapt to that changing environment. 

Much like tracking the history of Earth, whether it’s a meteor strike and change of the environment — the animals and the organisms that will survive will be the ones that can adapt to that changing environment. 

Like cockroaches, they survive. They’re survivors. Big old dinosaurs don’t. So it’s those companies that are able to adapt to the changing environment that are going to be best suited to thrive when the market turns around. And the market will turn around. It might be a year, five years, whatever. 

But it’s not just adaptability. It’s also the DNA of the business. There’s a big difference between the cockroach and the dinosaur. There are different types of business models that are better suited to operating in a down market. 

So that’s the other aspect. It’s adaptability, but it’s also just the fundamentals of the business and the business model — the DNA of that business — that, combined, are going to determine who survives.

Email Daniel Houston

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