(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Unless the context requires otherwise, the words "Marcus & Millichap," "MMI," "we," the "Company," "us" and "our" refer to Marcus & Millichap, Inc., and its other consolidated subsidiaries. Forward-Looking Statements The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to the potential continuing impact of the COVID-19 pandemic. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 1, 2021, including the "Risk Factors" section and the consolidated financial statements and notes included therein. Overview We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions for more than 15 years. As of June 30, 2021, we had 2,022 investment sales and financing professionals that are primarily exclusive independent contractors operating in 84 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate assets. We also offer market research, consulting and advisory services to our clients. During the three and six months ended June 30, 2021, we closed 3,285 and 5,617 investment sales, financing and other transactions with total sales volume of approximately $17.4 billion and $29.4 billion, respectively. During the year ended December 31, 2020, we closed 8,954 investment sales, financing and other transactions with total sales volume of approximately $43.4 billion. We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing, of commercial properties, and by providing equity advisory services, loan sales and consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property and financing fees are typically based upon the size of the loan. During each of the three and six months ended June 30, 2021, approximately 89% of our revenues were generated from real estate brokerage commissions, 10% from financing fees and 1% from other real estate related services. During the year ended December 31, 2020, approximately 88% of our revenues were generated from real estate brokerage commissions, 10% from financing fees and 2% from other real estate related services. We divide commercial real estate into four major market segments, characterized by price:
Properties priced less than $1 million;
Private client market:
Larger transaction market:
Our strength is in serving private clients in the $1-$10 million
Three Months Ended June 30, 2021 2020 Change Real Estate Brokerage Number Volume Revenues Number Volume Revenues Number Volume Revenues (in millions) (in thousands) (in millions) (in thousands) (in millions) (in thousands) <$1 million 297 $ 200 $ 7,618 192 $ 118 $ 4,518 105 $ 82 $ 3,100 Private client market ($1 - <$10 million) 1,767 5,675 158,136 793 2,614 70,817 974 3,061 87,319 Middle market ($10 - <$20 million) 156 2,134 41,745 43 618 11,591 113 1,516 30,154 Larger transaction market ( � $20 million) 110 5,551 45,404 47 2,074 16,445 63 3,477 28,959 2,330 $ 13,560 $ 252,903 1,075 $ 5,424 $ 103,371 1,255 $ 8,136 $ 149,532
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Six Months Ended June 30, 2021 2020 Change Real Estate Brokerage Number Volume Revenues Number Volume Revenues Number Volume Revenues (in millions) (in thousands) (in millions) (in thousands) (in millions) (in thousands) <$1 million 524 $ 349 $ 13,756 408 $ 254 $ 10,260 116 $ 95 $ 3,496 Private client market ($1 - <$10 million) 2,967 9,343 263,559 2,035 6,615 185,081 932 2,728 78,478 Middle market ($10 - <$20 million) 234 3,201 62,346 134 1,840 34,259 100 1,361 28,087 Larger transaction market ( � $20 million) 193 9,531 76,038 113 5,157 45,600 80 4,374 30,438 3,918 $ 22,424 $ 415,699 2,690 $ 13,866 $ 275,200 1,228 $ 8,558 $ 140,499
COVID-19 pandemic on all aspects of our business and in the regions we operate. We continue to follow the local guidelines in cities where our offices are located, and all of our offices have re-opened and are available to our employees and sales and financing professionals. Our business was impacted by the COVID-19 pandemic during most of 2020, with the total number of transactions and total revenues declining 7.9% and 11.1%, respectively, in the year ended December 31, 2020 compared to the same period in 2019. During the six months ended June 30, 2021, total revenues and total number of transactions increased 52.2% and 46.4%, respectively, compared to the same period in 2020 and 26.6% and 25.2%, respectively, compared to the same period in 2019. While our total revenues were significantly above prior years' levels, some uncertainty exists in our ability to sustain the growth rates experienced during the three and six months ended June 30, 2021, for the second half of 2021. We continue to monitor the economic trends and related demand for our services and will adjust our operations accordingly. Our priority continues to be to support our team's efforts to increase client contact, provide expanded content and advisory services to investors and clients, and preserve our financial position through expense controls. We continue to extend the use of technology and resource sharing measures adopted over the past year as ways to achieve more efficiency on a long-term basis. Given our significant liquidity, we expect our company to be well positioned to benefit from and contribute to the economic recovery and the related increase in the volume of real estate transactions as the pandemic subsides, including making accretive and synergistic acquisitions, which will help expand service offerings and market coverage. Due to a continuing uncertainty around the COVID-19 pandemic, we are unable to predict its potential impact on our financial condition, results of operations and cash flows. These uncertainties include the scope, severity and duration of the pandemic; variants in the virus, vaccination rates and the effects thereof; expectation gaps among buyers and sellers on pricing and property operation, vulnerability to further economic weakness and/or slow recovery; the direct and indirect economic effects of the actions taken by state and local governments to continue to contain the pandemic or mitigate its impact; and the impact of these and other factors on our employees, independent contractors, clients and potential clients. Factors Affecting Our Business Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate investment sales and financing transactions that we close in any period. The number and size of these transactions are affected by our ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale and identify those that need financing and refinancing. We principally monitor the commercial real estate market through four factors, which generally drive our business. The factors are the economy, commercial real estate supply and demand, capital markets and investor sentiment and investment activity. The Economy Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional or local basis can have a positive or a negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending and confidence trends can have a positive or a negative impact on our business. Overall market conditions, including global trade, interest rate changes and job creation, can affect investor sentiment and, ultimately, the demand for our services from investors in real estate.
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COVID-19 pandemic. Retail, hotel and seniors housing properties delivered more modest gains, beginning their recovery from the severe impact of the pandemic. Office space demand remains comparatively weak, but it has finally moved back into positive territory following four quarters of negative space demand. A key consideration for office space will be the extent to which companies bring their employees back to the office. It appears that some headway has been made as a modest recovery of housing demand in major urban metros like New York and the Bay Area manifested in the second quarter of 2021. Whether employees fully return to the office, adopt some form of hybrid work week or continue to work from home could significantly impact future commercial real estate space demand. Through the pandemic, housing and space demand followed the population migration to suburban areas and to smaller cities, drawing increased investor capital to these areas. If workers return to offices in the urban core of major metros, the trend could at least partially revert to pre-pandemic trends. Regardless, on a macro-level space demand drivers appear to be reviving, and this is supporting increased investor activity. Capital Markets Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt and, as a result, credit and liquidity impact transaction activity and prices. Changes in interest rates, as well as steady and protracted movements of interest rates in one direction, whether increases or decreases, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes generally influence the demand of investors for commercial real estate investments. Capital liquidity remains strong with debt financing available for most property types in most markets. Although hotels and some retail properties have faced difficulty in obtaining financing through the COVID-19 pandemic, lenders are becoming increasingly active in these segments. On a macro level, banks and government agencies have been the most active lenders, but commercial mortgage-backed securities and life insurance company lenders have become increasingly active, further increasing the availability of debt capital. Interest rates were particularly favorable through the second quarter of 2021, with the ten-year treasury hovering in the 1.5% range, and have since dipped even lower. The low cost of capital has been promoting investor activity, but elevated inflation risk could force the Federal Reserve to begin to tighten their monetary policy earlier than previously expected. We believe such action could result in upward pressure on interest rates and could potentially weigh on investor activity depending on the speed and magnitude of any changes. Investor Sentiment and Investment Activity We rely on investors to buy and sell properties in order to generate commissions. Investors' desires to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients are often motivated to buy, sell and/or refinance properties due to personal circumstances such as death, divorce, partnership breakups and estate planning.
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COVID-19 pandemic. It appears some buyers still hope to find distressed properties in these hard-hit segments, but well-financed owners have generally been able to weather the worst of the downturn and the majority are expected to hold through the nascent recovery until pricing fully revives. We believe the investment climate remains positive, but could be inhibited by a significant COVID-19 resurgence or variants, Federal Reserve actions or commentary that pushes interest rates higher or by the release of potential tax policy changes by Congress. Prospective increases in personal, corporate, capital gains and estate taxes have the potential to dampen consumption and business investment while simultaneously rendering existing investment and estate plans obsolete. Tax policy changes could spark a short-term wave of transactions or they could slow transaction activity depending on exactly how the changes are framed and the time frame in which they are enacted. In addition, questions remain about the future of 1031 tax deferred exchanges, but this tax code section has survived many attempts at elimination largely because studies have demonstrated that cancelling this tax code section would likely cause considerable economic and tax revenue losses. Nonetheless, based on the foregoing, we believe the emerging medical solutions to the health crisis and the nascent release of pent-up demand among consumers and real estate investors should ultimately outweigh tax policy headwinds. Seasonality Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investor's ability to compare our financial condition and results of operations on a quarter-by-quarter basis. Historically, this seasonality has generally caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted both positively and negatively by major economic events, political events, natural disasters or pandemics such as the COVID-19 pandemic, which may impact, among other things, investor sentiment for a particular property type or location, volatility in financial markets, current and future projections of interest rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may accelerate or delay transactions due to personal or business-related reasons unrelated to economic events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually, pursuant to which higher commissions are paid for higher sales volumes. Our historical pattern of seasonality may or may not continue to the same degree experienced in prior years. Operating Segments We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes. Key Financial Measures and Indicators Revenues Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees.
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Aug 06, 2021
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