A Reckoning for Realtors

The slowdown in housing sales is forcing real-estate agents to decide whether the shrinking returns are worth the thousands of dollars and countless hours they're pouring into their businesses.

Good Morning!

Here are today’s highlights:            

• San Francisco will pay for your pop-up.

• Ami Kassar fears the SBA is making the same mistakes as SVB.

• Gene Marks says the metric to watch is consumer demand. 

• Ask Sarah Segal anything about PR at the next 21 Hats Office Hours.

RETAIL

San Francisco is handing out thousands to open pop-ups in empty storefronts: “The latest plan to breathe life into Downtown San Francisco’s empty stores, dubbed ‘Vacant to Vibrant,’ launched Monday and will pay landlords and entrepreneurs to invigorate the beleaguered district with art and pop-up shops. Those running the pop-ups will get three months of free rent and grants of between $3,000 and $8,000. The city aims to have the first pop-ups open this summer.”

• “Those wanting to open a pop-up will need to identify themselves, discuss their idea, and prove their relevant experience. Next, the application will be evaluated and scored by an advisory committee made up of small business owners, artists and representatives from arts institutions, community-based organizations with a presence Downtown, and property owners.”

• “High-scoring applicants will have their pop-up ideas pitched to interested property owners Downtown, and if they’re selected, the process of securing the spaces will begin.” READ MORE

FINANCE

Ami Kassar fears the SBA is headed down the same path as SVB: “My frustration with the current SBA administration started with the Economic Injury Disaster Loan program. The administrators increased the loan limits from $500,000 to $2 million near the end of the pandemic without requiring businesses to offer proof of economic injury. The EIDL is a long-standing, successful program designed to help businesses imperiled by a hurricane,  a tornado, or another disaster. With Covid, the SBA saturated balance sheets with long-term, low-interest capital. The program issued 3.9 million loans for a total of $378 billion.”

• “Now, as EIDL loans start to come due, many business owners need help figuring out how to meet their payment obligations. A recent Business Journal Article reported that the SBA is struggling to work through back-end collections on these loans, and many owners are losing sleep worrying that the government will come for their houses.”

• “And yet, with all of this on the table, the SBA administration is moving forward with plans that suggest it has not learned its lesson. It recently announced sweeping changes to loosen long-standing rules in its lending programs and to open the programs to additional non-regulated fintech lenders.”

• “SVB was not a well-run bank with a sound credit culture. Their lending standards were loose, they didn’t worry about the risk on their balance sheet, and I still don’t know how the regulators let them get away with it. They thought their model was invincible until one day it wasn’t. Sadly, unless someone reins in this SBA administration, I worry that in a few years, commentators will be talking about the SBA and SVB in the same sentence.” READ MORE

Meanwhile, evidence of a credit crunch is mounting: “During the second half of March, the Federal Reserve recorded the largest two-week decrease in overall bank lending in U.S. history. The central bank data also showed the largest ever contraction in business loans over the same time period. ‘The credit crunch has started,’ wrote Apollo chief economist Torsten Slock in a recent note that highlighted the record pullback. ‘The behavioral change in the banking sector is beginning to weigh on the economic outlook.’”

• “Small businesses have been hit especially hard. Last month, approval rates for small business loans fell to 13.8 percent, the lowest level since July 2021, according to the Biz2Credit Small Business Lending Index.”

• “Even at smaller banks, which are historically more likely to back local small borrowers, fewer business owners were able to obtain financing in March; just 19.1 percent of applications were approved.”

• “Seeing the trend lines, business owners are increasingly looking to alternative lenders to get the money need to grow. Just ask Jamahl Grace, the co-founder of the Grace+Love Candle Company. Despite having what he thinks is bankable business with 95 client boutiques across the country and year-over-year sales growth of 120 percent, Grace recently tapped an unlikely source for a loan: his accounting software provider, QuickBooks.”

• “In about five days, the Sterling, Virginia-based business, which Grace co-founded alongside his wife in 2020, was approved for a $10,000 credit line with an 18.9 percent annual percentage rate. The lender, QuickBooks Capital, offers loans with annual percentage rates that start at 9.99 percent and can go as high as 36 percent. In 2022, the lender originated $1.3 billion in business loans ranging from $5,000 to $150,000.” READ MORE

21 HATS OFFICE HOURS

Sarah Segal will be the featured guest at the next 21 Hats Office Hours, Monday at 5 ET, when she will take questions about all things public relations. We expect a few of the other podcast regulars to attend as well. It’s an open conversation where anyone can ask anyone anything. All 21 Hats Founding Members are invited -- click the subscribe button below for more info -- but if you’d like a free-trial invite, just let me know in a reply to this email.

REAL ESTATE

Realtors face a reckoning: “Though she remains optimistic, [Chrystina] Arnold knows the odds are not in her favor — agents with less than two years of experience earned a median gross income of just $8,800 in 2021, research from the National Association of Realtors found. But daunting statistics like that didn't stop a wave of hopeful dealmakers from testing the waters earlier in the pandemic, when booming home prices promised hefty commission checks. The number of Realtors grew by more than 156,000 in the combined years of 2020 and 2021, according to the NAR, and peaked at a record high of 1.6 million in October. As the pandemic's home-buying craze now seems like a distant memory, the slowdown in sales has forced a reckoning among real-estate agents who must decide whether the shrinking returns are worth the thousands of dollars and countless hours they're pouring into their businesses.”

• “The challenges are most pronounced for newer agents who are still building up their networks, face fierce competition from their veteran counterparts, and haven't yet weathered a downturn such as this one.”

• “Just as the housing market goes through booms and busts, so do the ranks of real-estate agents. Take the chaotic 2008 cycle: In 2006 alone, NAR added nearly 100,000 members and reached a peak of roughly 1.4 million. By early 2012, after the bubble burst, membership had plummeted to 964,000.”

• “When I caught up with Arnold in mid-April, a few weeks after I first spoke with her, she had encouraging news: One of her clients, whom she met at an open house, had just had an offer accepted on a $274,000 home. Arnold said she expected the deal to close in early May. ‘I'm not the type of person to give up easily,’ Arnold told me. ‘I kind of like the odds against me. It just gives me more drive to beat those odds.’” READ MORE

THE ECONOMY

Gene Marks says there’s only one thing that matters when assessing the likelihood of recession: “I don’t think that predicting a recession is as hard as it appears to be. Here’s what I’ve learned in 25 years of running a business: Everything in this world is simply about supply and demand. True, we had a very unusual supply problem post-pandemic. But that’s behind us. This potential recession, like most others, is generally about demand. When demand falls, everything falls along with it. It doesn’t matter if businesses are selling to other businesses, because all products and services ultimately wind up in the hands of the consumer. That means it’s not just demand that matters, it’s consumer demand. And the key is tracking the trends. So, let’s look at the trends of some of the most important consumer items to see where demand is heading.” 

• “Unfortunately, most other consumer-driven demand is tapering. Vehicle sales have fallen each month in the first three months of this year. The same goes for orders of durable goods, which are long-term consumer items like appliances, furniture, and electronics.”

• “Retail sales plateaued in January and advance retail sales are heading down. Restaurant sales have been dropping each month this winter and are now 6.5 percent off their December levels. And the delinquency rates on credit cards have risen significantly over the past year.”

• “So yes, it appears we’re headed toward a recession, and very soon. If you’re running a business, you should plan on that.” READ MORE

In the U.K., inflation remains in double digits: “Britain’s inflation rate slowed last month, but is likely to bring only limited relief to households as it stubbornly held in the double digits because of rapidly rising food prices. Consumer prices rose 10.1 percent in March from a year earlier, the Office for National Statistics said on Wednesday, a slightly slower pace than the 10.4 percent in February.”

• “But economists had expected the country’s inflation rate to drop below 10 percent for the first time since the summer. Britain’s annual inflation rate peaked at 11.1 percent in October but its downward trend was disrupted in February, when the rate unexpectedly ticked higher.”

• “The Bank of England then raised interest rates for an 11th consecutive time in March, to 4.25 percent, the highest since 2008.” READ MORE

MANAGEMENT

A CEO has gone viral for telling her employees they have to leave “pity city:” “The chief executive of furniture company MillerKnoll is facing backlash after a video of her telling staffers worried about not getting a bonus to ‘leave pity city’ went viral. ‘Questions came through about how can we stay motivated if we’re not going to get a bonus,’ CEO Andi Owen said in a brief video shared on social media, adding that some of the questions were ‘not so nice.’ Ms. Owen, who has run the company since 2018, told employees in response to focus on things they could control, such as being kind and providing the best customer service.”

• “‘Don’t ask about, What are we going to do if we don’t get a bonus? Get the damn $26 million,’ she said. ‘Spend your time and your effort thinking about the $26 million we need and not thinking about what are you going to do if we don’t get a bonus, all right?”

• “She continued: ‘I had an old boss who said to me one time, You can visit pity city, but you can’t live there. So people, leave pity city, let’s get it done.’”

• “According to filings to the U.S. Securities and Exchange Commission, Ms. Owen made more than $4.9 million in total compensation in the fiscal year ending May 28, 2022. That included a bonus tied to her performance that totaled $1.29 million.”

• “Social-media outrage over Ms. Owen’s remarks took off after they were posted to TikTok. ‘Andi Owen, CEO of MillerKnoll, gaslighting her employees while she collects a FAT bonus. These people are the ones fueling an anti-work movement,’ one Twitter user wrote. ‘I swear to God I thought this was satire,’ said another.” READ MORE

MARKETING

Social media platforms gave new life to multilevel marketing companies but they are also where MLM sellers get flamed: “The MLM model — made famous by brands like Tupperware, Mary Kay, and Amway — has been around for decades. Also known by names such as network marketing, pyramid selling, social retail, and referral marketing, the model involves selling products to people you know and recruiting them to sell the products as well. Recruiters get a percentage of the sales from people they add to their network, known as their ‘downline,’ while those higher up the chain are known as the ‘upline.’ Given this structure, it is much more lucrative to add people to the network than actually sell the end products.”

• “While the business model of MLMs is a timeworn tradition, the tactics used by salespeople have come a long way since the Tupperware parties of the 1960s. Facebook provided an easily accessible network of high-school acquaintances to target, and Instagram gave recruiters a space to show off their extravagant lifestyles as a kind of FOMO marketing. Despite TikTok banning MLM content in 2020, marketers still find sneaky ways to captivate users on the platform.”

• “‘On TikTok, because the video format is so short and concise, they can get away with very misleading content or content that doesn't tell the whole story,’ Jennifer Rajala, an MLM whistleblower who uses her TikTok account to warn people about the dangers of MLMs, said. ‘For example: 'I just made enough $ to take my family on our dream vacation. Ask me how.' There's no mention of the MLM so people reach out because they are genuinely curious.’"

• “Over the past few years, MLM companies have been under increased scrutiny. Critical documentaries have highlighted the industry's most predatory practices. Social media is flooded with MLM ‘horror stories,’ while others have flocked to the anti-MLM subreddit, a group with over 800,000 members that markets itself as a community designed to ‘stop MLM schemes from draining your friends dry.’” READ MORE

THE 21 HATS PODCAST

‘It’s Going to Take $8 Million in Financing:’ This week, Stephanie Stuckey tells Paul Downs and Liz Picarazzi how she and her partners have taken their business from $2 million in annual revenue to more than $13 million in three years. What’s frustrating, she says, is that she could be selling a lot more pecan snacks and candies. But with production at capacity, she’s not doing much sales outreach until they can fully revamp their manufacturing operation, which will require a significant investment. “I spend my days doing financial paperwork,” Stephanie says. Plus: Liz explains why her business picks up when the weather warms up, and after a slow start, Paul gets a boost from a big manufacturer.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren