MMI - NYSE

Greetings, and welcome to Marcus & Millichap's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin. Thank you, operator.

Good morning, and welcome to Marcus & Millichap's Third Quarter 2025 Earnings Conference Call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steven DeGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including, but not limited to, general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transaction professionals; company's ability to retain its business philosophy and partnership culture amid competitive pressures, company's ability to integrate new agents and sustain its growth and other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2025. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. The conference call is being webcast. The webcast link is available on the Investor Relations section of the company's website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks. With that, it's my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. Good morning, and welcome to our third quarter 2025 earnings call. I'm pleased to report that we delivered a strong quarter with total revenue increasing 15% over Q3 2024. This marks the fifth consecutive quarter of year-over-year revenue growth as we continue to navigate the severe and complex market disruption of the past 3 years. Adjusted EBITDA for the quarter was $7 million compared to approximately breakeven in the prior year period. This year's third quarter results included a $4 million legal reserve that Steve will address in his remarks. Excluding this reserve, the company's SG&A was modestly lower than the prior year, reflecting our ongoing focus on cost management while still making strategic investments in technology, talent and branding. As noted on prior calls, the expensing of investments made over the past several years in talent retention and acquisition during a period of hampered revenue production has been a significant drag on our earnings. We expect this dynamic to shift into operating leverage as the market improves. During the quarter, our results outpaced the market based on transaction growth of 25% for MMI versus an estimated market growth of 12% in transactions based on RCA data for sales of $2.5 million plus assets. This was driven by momentum in our private client brokerage business, which was up 17% in revenue and 22% in the number of transactions. This critical segment, defined as transactions in the $1 million to $10 million price range is improving, thanks to more banks and credit unions returning to the market, gradual price discovery and more investors finally coming off the sidelines. Private client apartments and single-tenant retail posted strong revenue gains of 35% and 16%, respectively. The company's mid-market segment also contributed to the quarter's results with a revenue increase of 35% from deals in the $10 million to $20 million price range, mostly dominated by larger private and quasi-institutional investors and developers. Our team's elevated client outreach campaigns and countless opinions of value that did not culminate in transactions over the past 2 years were instrumental in staying close to our clients during a time of uncertainty and providing guidance when they became ready to execute. This is the essence of Marcus & Millichap's client-centric and relationship-driven culture and business model that continue to differentiate us. Our larger deals valued at $20 million or more declined 12% in revenue and 13% in transaction count for the quarter, similar to what we have reported last quarter. Once again, this is a result of outsized growth in larger deals last year, which led the recovery from the 2023 market shock. Our $20 million and above transactions grew by 19% in calendar year 2024, 30% in the third quarter of 2024 and 59% in last year's final quarter. As a result, we faced a very difficult comparison this year. Given this dynamic, our overall brokerage volume in the third quarter posted a 2% gain compared to a 17% increase in market volume as reported by RCA, again for the $2.5 million plus asset sales. Our IPA division continues to deepen its institutional client base, which we're taking to the next level by the recent addition of 2 new executives, Andrew Laehy, who heads our IPA Multifamily division; and Dags Chen, our new Head of IPA Research. Each of these is a seasoned institutional executive with more than 20 years of experience with some of the most renowned institutional investors in the industry. The added leadership, which we're very excited about, combined with our healthy pipeline and robust exclusive inventory position us well to continue the expansion of our institutional platform as a supplement to our private client market dominance. Financing revenue once again exhibited strong growth, up 28%, reflecting improved lending conditions and our team's ability to leverage our extensive network of active lenders. So far this year, we've closed over 1,100 financing transactions with nearly 350 separate lenders, enabling our team to pivot when lenders move in and out of the market. Revenue growth has been widespread with contributions from our veteran originators, IPA Capital Markets as well as recent additions of experienced originators. We're also seeing steady progress in integrating our sales and financing teams, offering combined services to our private and institutional clients. Our loan sales and advisory division, Mission Capital, is also seeing a significant uptick in activity and has posted solid revenue growth this year as more lenders are finally moving both performing and nonperforming loans to the marketplace. Other developments of note include the net addition of 29 investment brokers in the quarter. As I've shared on previous calls, restoring and improving the company's organic talent development after a post-pandemic disruption has remained a priority, and our actions are starting to produce results, although the turnover rate of newer professionals is still elevated due to a difficult market environment. The quarter's improvement is encouraging as is our continued success in attracting and integrating experienced professionals. Our team also made progress in expanding MMI's brokerage transaction services, which is designed as a centralized resource for analytics and production support to our sales force. We see this as an area that can directly benefit from AI, technology and bringing more efficiency and expanded output to our team and to our clients. Lastly, I'm pleased to report that our auction division, which started in 2022, continues to gain traction, particularly in its collaboration with our investment brokers who are bringing this added marketing channel to many of our clients. So far this year, we've closed 191 sales through our auction platform, accounting for an estimated 25% share of total commercial property auctions in the U.S. Looking forward, we're encouraged by the ongoing improvement in our key operating metrics, including shorter marketing timelines, fewer significant price reductions and near-record exclusive listing inventory. Marketing and closing timelines still remain longer than usual and continue to weigh on productivity, largely due to persistently tight underwriting by lenders and a narrow margin of error on valuations among buyers and sellers. However, the trend is improving, which allows us to allocate more bandwidth to new business development as the market regains alignment. From a market perspective, this year's rate reduction failed to bring down long-term yields and did not spark a significant boost in the transaction pipeline as it did going into the fourth quarter of last year. Nonetheless, we remain cautiously optimistic about the start of a new sales and financing cycle as the market resets with measured improvement in the trading environment for 3 key reasons. First, we believe the Fed will continue to reduce interest rates over the next year, notwithstanding what may or may not happen in December to shore up the labor market. Although long-term rates are likely range bound, the more accommodative Fed and the end of quantitative tightening will be constructive for real estate transactions. Second, the price adjustments that have occurred over the last 2 years are making many assets compelling on a replacement cost basis. Although there is clearly a flight to safety with capital preferring high-quality assets in strong locations, investor confidence and fear of missing out are becoming more evident in the marketplace. This is most pronounced in apartments, industrial and retail in the majority of the metros we serve. The recovery in the office sector is clearly broadening with the growing return to office mandates and average daily attendance at 80% of pre-pandemic levels. This measure was at 50% just 2 years ago and 57% just last year. Last but not least, the pullback in new construction driven by limited risk appetite by equity capital and high construction costs will set the stage for stronger occupancies and rent growth across most property types in 2026 and 2027. Again, this is most pronounced for apartments and industrial, which were the most active in new deliveries over the past 5 years. Self-storage was also affected by this, and we'll see improvements in the coming years. For MMI, our vision of expanding market coverage through improved organic hiring and scaling our experienced professional recruiting as well as synergistic acquisitions remains our primary growth path. These are the parallel paths we have set to expand our private client market share and continue building on IPS success. Going into 2026, we're expanding our growth strategy in retail and industrial in particular, both of which offer significant growth or opportunity in the majority of the markets we serve. We also believe that further scaling of our financing capabilities has much room to run as we're proving through the success of many senior level originators who have joined MMI in the last several years. On the acquisition front, we continue to see a wide bid-ask spread and misaligned expectations on the guaranteed portion of valuations and therefore, capitalizing on more accretive opportunities to recruit experienced individuals and teams. Given the fragmented nature of our core business and the limited number of large viable M&A targets, most of our efforts focus on boutique firms with highly concentrated ownership, which presents its own challenges. We're expanding our recruiting team and resources to increase capacity for additional experienced talent acquisition, while we continue to explore complementary business expansions. From a capital allocation standpoint, our dividend and share repurchase program over the past 3.5 years has enabled us to maximize shareholder value while maintaining an exceptionally strong balance sheet. In the near term, we face a particularly challenging comparison to last year's exceptional fourth quarter, which benefited from the significant reduction in interest rates. That said, we expect to see continued sequential improvement in our business as the drivers of transaction activity continue to improve. Our strategy remains focused on leveraging our unique platform, expanding our market reach and investing in the tools and talent that will drive long-term growth. With that, I will turn the call over to Steve for more details on the quarter. Steve?

Thank you, Hessam. As mentioned, total revenue for the third quarter was $194 million, an increase of 15% compared to $169 million for the same period in the prior year. Year-to-date, total revenue was $511 million, up 12% compared to $456 million last year. Breaking down revenue by segment, real estate brokerage commissions for the third quarter accounted for 84% of total revenue or $162 million, an increase of 14% year-over-year. While transaction volume declined 2% to $8.4 billion, the company closed nearly 1,600 transactions at an average commission rate of 1.9%, which was nearly 30 bps higher than last year. The increase in private client volume drove a 4% decrease in average fee per transaction due to the higher mix of smaller deals. We are not experiencing any notable fee erosion in the marketplace in any of our price tranches. For the 9 months year-to-date, real estate brokerage commission accounted for 84% of total revenue or $427 million, an increase of 10% year-over-year. The year-to-date improvement included 8% growth in transaction volume to $23 billion across 4,136 transactions and a 2% increase in the average commission rate. Average transaction size year-to-date was $5.6 million compared to $5.8 million a year ago, reflecting a higher proportion of private client revenue for the 9-month period. Within brokerage for the quarter, our core private client business accounted for 63% of brokerage revenue or $102 million, up from 62% and $87.5 million in the same period last year. Private Client transactions grew 24% in volume and 22% in transaction count. Year-to-date, private client contributed 64% of brokerage revenue or $274 million versus 63% and $245 million last year. Middle market and larger transaction segments together accounted for 32% of brokerage revenue, generating $52 million in revenue compared to 35% and $49 million last year. While we achieved a 4% increase in the number of transactions within these segments, the overall dollar volume decreased 17%, reflecting a change in mix to more middle market activity and fewer transactions in the larger transaction space. Large transactions significantly outgrew the market last year, creating a tough year-on-year comparison. Year-to-date, middle market and larger transaction segments combined represented 32% of brokerage revenue or $136 million compared to 33% and $126 million last year. Revenue from our financing business, which includes MMCC, grew 28% year-over-year to $26 million in the third quarter. The strong growth was driven primarily by a 34% increase in transaction volume totaling $2.9 billion across 406 financing transactions, which was a 28% increase year-over-year. The average financing commission rate was nominally down 4 bps as expected due to an increase in larger deals closed in the quarter. The overall performance reflects the continued momentum and progress in scaling our financing platform. For the 9-month period, financing revenue was $71 million, a 33% increase compared to last year. This growth was driven by a 40% rise in transaction count and $8.2 billion in volume, up 46% year-over-year. Other revenue, primarily from leasing, consulting and advisory fees was $5 million in the third quarter compared with $6 million in the same period last year. For the 9-month period, other revenue totaled $13 million compared to $16 million in the prior year. Turning to expenses. Total operating expense for the quarter was $196 million compared to $180 million a year ago. For the 9-month period, total operating expense was $540 million compared to $496 million last year. Year-over-year increases in absolute dollars for both the quarter and year-to-date period are largely attributable to the increase in cost of services resulting from higher revenue. Cost of services for the quarter was $121 million or 62.4% of revenue compared to 62.2% last year. For the 9-month period, cost of services totaled $316 million or 61.8% of revenue, up 50 basis points year-over-year. The increase in cost of services as a percentage of revenue was primarily driven by year-over-year revenue growth resulting in producers achieving higher commission thresholds. SG&A expense for the quarter was $73 million or 37.4% of revenue compared to $71 million or 41.9% of revenue in the same period last year. The current quarter results include a $4 million reserve for a litigation matter that we believe has a number of legal rulings we intend to aggressively appeal. Also, as Hessam pointed out, our SG&A expense would have decreased by $2 million year-over-year, excluding the legal reserve as a result of tight cost controls. I'd also like to reiterate that we have continued to make investments in key strategic areas throughout the market disruption with an eye towards long-term competitiveness. For the 9-month period, SG&A totaled $216 million or 42.2% of revenue, down from 44.9% in the prior year. For the third quarter, we reported net income of $240,000 or $0.01 per share, which includes an $0.08 per share charge for the legal reserve that we took in the quarter. This compares to a net loss of $5.4 million or $0.14 loss per share in the prior year. In spite of the $4 million legal reserve, the year-over-year earnings per share improvement of $0.15 marks a notable return to profitability. During the third quarter, we maintained the same tax methodology we adopted in the second quarter and recorded a provision for income taxes of $1.2 million. For the 9-month period, the net loss was $20.9 million or $0.54 per share compared to a net loss of $23.8 million or $0.61 per share in the same period of the prior year. Adjusted EBITDA for the third quarter was $6.9 million compared to breakeven adjusted EBITDA in the same period last year. Year-to-date, adjusted EBITDA was nearly breakeven compared to a loss of $8.7 million in the prior year. Adjusted EBITDA for both the quarter and year-to-date would have been $4 million higher if not for the legal reserve, underscoring the substantial progress in operating performance over the prior year. Moving to the balance sheet. We continue to be well capitalized with no debt and $382 million in cash, cash equivalents and marketable securities, a $49 million increase over last quarter. Subsequent to quarter end, we returned $10 million in capital to shareholders through a dividend paid in early October. During the 9 months ended September 30, the company repurchased nearly 265,000 shares of common stock at an average price of $30.33 per share for a total of $8 million. Since August of 2022, the company has repurchased more than 2.4 million shares of common stock at an average price of $32.03 per share for a total price of $77 million. From the inception of our dividend and share repurchase programs over 3 years ago, we have returned a combined $200 million in capital to shareholders. We remain committed to a balanced long-term capital allocation strategy, which includes investing in technology, recruiting and retaining the best-in-class producers, strategic acquisitions and returning capital to shareholders. We are encouraged to see signs of market stabilization evidenced by improved listing activity, a stronger pipeline, a better lending environment and renewed investor engagement. Ongoing uncertainty around global macro conditions, inflation, tariff policy and the labor market still exist, but the Fed has signaled a more accommodative environment, which should drive more transactional activity. For the fourth quarter, we anticipate quarter-over-quarter sequential revenue growth consistent with normal year-end seasonality. However, being mindful that our prior year results benefited from an exceptional surge in activity as investors capitalized on rate declines. Cost of services as a percentage of revenue should follow the usual pattern as revenue builds through the year and be sequentially higher than the third quarter. As for SG&A, after normalizing for the legal reserve in the third quarter, SG&A for the fourth quarter should increase modestly on a dollar basis. With the current tax methodology, tax expense is expected to be in the range of $4 million to $6 million for the fourth quarter. With that, operator, we can now open the call for Q&A.

[Operator Instructions] Our first question is from Mitch Germain with Citizens.

I appreciate the chance to ask a question. And I know you talked about some of the tougher comps in the larger transaction segment of your business, but your hiring efforts have been on more experienced producers. So maybe just talk about that dynamic in terms of the ability to get some of that larger deal activity accelerating again.

Sure, Mitch. The look sort of beyond the headline numbers in that category for us shows that in the usual price ranges where our IPA division and more senior Marcus & Millichap professionals execute transactions in the $20 million to $50 million price range. Our business has been fairly steady. There was pretty much a same amount of deals done this year in the third quarter than last year. What happened last year is that we had an outsized number of very large deals, $70 million plus that we executed, which is predominantly why the comparison has become tough. Last year, we executed 21 deals priced above $71 million and this year, there was $7. And there is no particular pattern to that or reflection of any change in strategy. It's just a matter of the size deals that many, many of our institutional clients and large private clients happen to execute at a given time. So the strategy, both on the support levels of our existing IPA and senior Marcus & Millichap teams that are doing larger deals is unwavering, is on track. No changes at all have been executed there other than adding more leadership, adding a new Head of Research and investing more in expanding the IPA platform and capturing more share of the larger market transaction because we really believe it integrates well with our private client business, particularly as we see more and more of our private clients move equity from smaller assets and multi-decade held portfolios into larger institutional quality assets as they get closer and closer to retirement and estate planning. That bridging of the capital migration from private owners to the institutional market is a huge value proposition of IPA and Marcus & Millichap. And we're just really at the beginning stages of building that out, especially as the demographics continue to move in that direction. On the hiring front, the experienced brokers that we target for acquisition or recruiting are very select in terms of which markets we have what need and what product type we have what need. And it's those needs and avoiding overlap with our existing capacity in a market that drives the recruiting strategy. So it's a very market-by-market, property type-by-property type effort, and it takes a long time because you have to develop relationships with those individuals. They have to get to know the platform over time. And many of them are with other brands where they may not be maximizing their potential. And frankly, that's the reason that a number of them have joined IPA Marcus & Millichap over the last 5 years.

Got you. That's super helpful. Curious about the conversations you're having with some of your customers. I know that many of them have really been on the sidelines last several years. And it does seem like some of them are now returning to the markets. Are you getting a sense that they've either, A) Just accepted the new pricing dynamic that's in the market? And B) Are you seeing them begin to feel a little bit more constructive about transacting in this backdrop?

Yes and yes. We're seeing more motivation to put property on the market because of the reality that there is no Fed miracle. Many of our private clients over the last 1.5 years were expecting a much more dramatic drop in interest rates, the evidence for which wasn't there. And we've been very consistent in our analysis of the market where we did not believe interest rates would go back down significantly, and they haven't. That realization is now creating more motivation is the first thing. The second is more and more of our private clients that didn't have a reason to sell are now facing reasons to sell because of loan maturities, maybe some operational issues and death, divorce, partnership breakups and all the other private client motivation. So we are seeing motivation also pick up due to that reason. Most importantly, though, Mitch, is a combination of moderately better interest rates. We have seen lender spreads come in, which is favorable. But the price adjustments is the primary reason there is now more alignment in the market where we had a lot of unsuccessful listings on the market over the last 18 months due to unrealistic pricing. And frankly, for us, there was a process of price discovery because there was so much moving around in the marketplace. It was hard to tell where the market really was. You had to put product out to market the best you could with great underwriting and see what the market response was going to be. The number of listings that are now basically aging or becoming unsellable at the expected price of the seller is dropping, which is telling us that the market is finding that realignment. And then more and more of our deals are having less significant price adjustments and fewer are falling out of contract, all of which tells us that this alignment in price expectation is starting to happen. Is it there all the way? Absolutely not. We still have a ways to go. There's still plenty of owners that believe their assets are worth more than they actually are based on real numbers and especially year 1 and year 2 operations, which is where we're finding the most friction between buyers and sellers.

Great. Last one for me is I checked your financials to see when was the last time you had a similar level of revenues and you're extremely more profitable back then. And so I'm curious, and I really appreciate Steve's discussion around some of the legal reserve and some of the platform scale. But what's the new magic number to get back to producing the type of profitability that you did before? Obviously, you've had cost of living adjustments and numerous issues that may have changed in your business from 4 years or 5 years ago. I'm just curious, how do you become a bit more scalable and start to see a little bit greater improvement in bottom line when you start producing, I don't know, 200 plus in terms of revenues per quarter?

Mitch, this is Hessam. Let me share some comments on that one, and then I'll turn it over to Steve. The most important difference over the last, let's say, 6 years, 7 years of our operating structure is the fact that we have invested capital in talent acquisition, talent retention and essentially talent development at levels that the company hadn't engaged in prior to this period. And as a result of that, we have more experienced market leaders that have joined the company from the outside. Our retention of our top-level producers has been stellar, and we have invested in their careers by bringing them on or keeping them at Marcus & Millichap over the long term. As you know, all of those kinds of long-term agreements have performance thresholds, have stickiness for the company's ultimate margin protection over the term of an agreement. But that capital that's been invested is actually being amortized on an ongoing straight-line basis at a time when all of that talent is facing a disruptive marketplace that has not been functioning. Therefore, their normal just long-term average revenue production capability has been significantly hampered. So you have an additional expense line of a noncash item in the amortization of the capital that has been put out in getting this amazing talent pool retained and added to our company, yet the revenue component from all that talent has been significantly held back. As that starts to change, what has been a drag should become an operating leverage for us. In terms of the comparison of cost structure, that's probably the largest item, and it's a noncash item, as you know. Other investments in the platform do include a much bigger commitment to technology that we have implemented over the last 5 years than previously to when I became CEO. because, frankly, the company needed to move a lot faster and be a lot more nimble on things like a CRM system on things like automated matching of buyers and sellers to our website. And a lot of it was really sprung out of the pandemic because we pivoted and took major leaps forward in internal automation and a lot of automation we now offer to our clients through MyMMI, which is a major investment in a platform where clients, buyers, in particular, can tell us what they're looking for and the matching of their investment parameters to our fresh inventory is an amazing sort of mechanism for bringing efficiency to both our clients and to our sales force. So those are some key elements of why the expense structure has changed. We're building the firm for a much larger revenue base than where we are today. And because of the talent that's been brought on board and retained and these investments, we really believe in a normal market operating environment, we'll be able to achieve that leverage. So I just want to give that context, but let me turn it over to Steve.

That's pretty broad context. I guess a couple of additional points I would make and specific to your question, Mitch, that significant leverage, you're starting to see it happen at this revenue level. We're just shy of $200 million in this quarter. you can kind of do the math that sands the legal reserve, what results would have been. So we're kind of at that inflection point where you really see an acceleration of profitability, perhaps not all the way back to where we were at comparable revenue levels 6 years, 7 years, 8 years ago for reasons Hessam mentioned. But this is the inflection point. One additional point, the investments in not only retention and recruiting of those senior agents, the technology as well that Hessam mentioned, but central services where we will also gain additional leverage by adding more value and therefore, connectivity to the firm with our producers. So just a couple of additional points to tack on there.

Our next question is from Blaine Heck with Wells Fargo.

Hessam, you mentioned the banks and credit unions expanding lending, which is clearly a positive for the transaction market. But I'm wondering if you can give some context around the scale of that expansion and how you feel about their willingness to lend today, especially on smaller transactions just relative to their activity maybe last year and relative to a more normalized level of activity in a functional transaction market.

Happy to, Blaine. There is a marked difference from even a year ago in just the number of lenders at any given time willing to give us quotes on certain assets, number one. Number two, with quotes coming back so out of market about a year ago, a good number of lender quotes were just not usable. And if you contrast that to where we are today, we have more lenders signaling to us that they're back in the market and the quotes that are coming back are a lot closer to consummating a transaction than they were even a year ago. The loan to values are improving. And the -- part of that is lender spreads having come in. And probably the most important change is that it seems like what was clogging up the banking system in terms of loans that had to be extended, loans that needed workouts and so on has largely been addressed or there are plans to address them and fewer lenders appear to be clogged up versus a year ago. So it's taken our team of 100 or so originators across the country that are technologically connected to our -- to each other on a collaborative basis where we have real-time information sharing on what lenders are quoting at what levels based on specific loans that are being requested or mandates that we have. And that information sharing is another reason we're able to move faster in securing the right financing for each of our clients. In terms of the composition of where the capital is coming from for our financing, something close to 50% is now being funded by banks and credit unions. That percentage hasn't changed a whole lot from a year ago, but the time that it's taking and the number of lenders you have to knock on doors with a year ago is where the improvement has been. So it's taking less time to secure loans from banks and credit unions. We're seeing that also predominantly from the regional banks, a lot of regional banks were out of the market a year ago that are back in the market, which is for us as a local private client provider that regional bank connectivity has been significantly important over the history of the firm, and it's improving.

Great. That's great color and seems like a marked improvement over the last year. I guess to the second part of the question, when you compare the activity today to maybe what you saw in pre-pandemic periods, are we all the way back? Are we halfway back? How would you compare the activity versus kind of optimal capital efficiency?

On an overall basis, we believe the market is still somewhere around 15% to 20% below normal as a whole. But if you look at various price points and property types, the real answer is in that level of detail. So for example, if you look at Southern California, for example, or if you look at other regions like Texas, some markets are a lot closer to the velocity in what we consider a normal period, and we used 2014 to 2019 as the last sort of 5-year period of a normal, less choppy environment. The Texas markets are a lot closer to that normal than, let's say, the California markets are. Large apartments are still well below their normalized 5-year average pre-pandemic as are small apartments and single-tenant net lease. I would say that small apartments and single-tenant net lease are about 20% to 25% below where that average trading in a normal environment should fall.

Got it. Very helpful. Switching gears, can you talk a little bit more about the auction business? I don't think we've discussed that in very good detail in past quarters. Just how large you see that segment growing in the next few years? And maybe touch on any differences in the fees you generate from that business versus your more typical brokerage business? .

Absolutely. Well, first of all, it goes back to specialization and expertise. We built the capabilities that are now in place organically by bringing on auction specialists that had significant experience -- and then shortly after we knew that there was a real market for it, both internally in terms of the collaboration and externally, we brought on Jim Palmer as the executive in charge. That goes back to our philosophy that you have to have management that has had practical experience in the niche. And Jim certainly brings that with his years and years of involvement in the auction business. So the combination of auction specialist producers that are dedicated to the auction business that's all they do, strategically located in various regions under the direction of a dedicated executive with experience, Jim Palmer, is the combination that has made this very successful for us. And one of the benefits is that for our investment sales force that is out there, especially in a disruptive market with conventional marketing -- and as we've discussed and I've made comments on just earlier on this call, the response to listings, aging listings and listings that weren't movable in a conventional way over the past, let's say, 24 months, we've found that more and more of them are good candidates for marketing through an auction platform. And the auction platform obviously has the benefit of having prequalified bidders where we know that they're financially capable and committed to executing transactions. And as we've not only been able to find the right niche in executing the auction model, the benefit of the internal collaboration is that we collect the brokerage service fee for the seller and then there is the auction-related fees on top of that and a buyer premium that is added. So it's a win-win for the client. and it's multiple fee generation opportunities for the firm.

Got it. That's very helpful. Last one for me. With respect to the litigation, was this a onetime event? Or do you expect some ongoing headwinds? And maybe you can just give some color on the nature of the litigation. Is this related to ongoing segments of your business such that there could be more coming or just a more nuanced situation?

Yes. Blaine, I'll take that. First of all, I'll refer you and everyone to the 10-Q that will be on file with the SEC later today for some additional context. In addition to that, I'll say that we do anywhere from 8,000 to 10,000 transactions a year. So inevitably, from time to time, disputes of varying nature will -- are going to arise, most of which go away in the normal course of business. A very small number of those actually go to trial. And this matter, unfortunately, which involves a disputed disclosure-related claim actually did go to trial. It certainly is an outlier. We believe that the verdict, which went against us was rendered in error. And therefore, we have very strong grounds for appeal. We intend to exhaust all our legal avenues to have the award reduced or reversed entirely. The -- so no, it's not an indication of any greater pattern or a specific segment of the business. It's an extreme outlier. No -- not an indication of any greater issue. With respect to the amount, just based on the information that we've got available and our assessment at this time, we felt that was the appropriate amount to reserve.

There are no further questions at this time. I'd like to hand the floor back over to Hessam Nadji for any closing comments.

Thank you, operator, and thank you, everyone, for joining the call. We look forward to seeing a lot of you on the road and having you back on our next earnings call. This call is adjourned.