The Power is Now

Compass Comes Back to Earth – Curbed

Photo-Illustration: Curbed; Photo: Alamy

Among showily disruptive tech companies, the narrative, as much as the product itself, is the thing. WeWork’s culture was manifested in a fever-dream vibe, with tales of tequila-fueled ragers and megalomaniacal tendencies, all of it overseen by a man who’d previously started a company selling baby clothes with built-in kneepads. Tesla was going to throw out every established idea about making automobiles (not to mention the tunnels they run through) and rethink it all from the ground up. Compass Real Estate, though, was a little different: It was going to be the steady, stable, bankable disruptor for a bankable field. Co-founder Robert Reffkin was an alumnus of McKinsey and Goldman Sachs who ran marathons for charity. He had grown up with a single mother who’d been a real-estate agent in the Bay Area, conferring a sheen of familiarity with an industry that he’d never worked in, yet his relative distance meant that he didn’t run the risk of being contaminated by stale ideas. Investors were eager to pour money into a company that could grab a chunk of an incredibly lucrative, comparatively low-tech industry.

Compass felt like a safe bet, even if its own tech innovations were modest at best — the company’s platform helps agents do everything from planning open houses and determining market valuations to creating renovation visualizations with an AI-powered tool (a lot of it is AI-powered, in fact). The tech actually is great, current and former agents told me, but less revolutionary than just really pleasant. “I feel like I’m equally efficient now,” said one agent who left, explaining that it hadn’t changed the types or quantities of properties she sold. “But it was nice to work with.” The problem is that the tech needed to be more than nice because, like so many other start-ups, Compass was burning through money to acquire market share.

For a long time, the burn rate didn’t matter. The company had a lot of things going for it: sophisticated branding that appealed to seasoned brokers and their city–dwelling clientele (city-dwelling, that is, when they weren’t at second homes in Aspen or the Hamptons), striking a sweet spot that felt fresh and not cheesy in an industry where high-end brokerages tend to toward either the fusty or the flashy. Over the past decade, Compass’s tasteful black-and-white signs have become ubiquitous not only on the stoops of New York, where the company started — you’ll find them everywhere from Red Hook to the Upper East Side — but in affluent enclaves all over the country. They’re in Aspen and San Francisco, Boston and Austin, Palm Beach and Palm Springs, in trendy areas and stodgy ones. The signs are an effective, elegant means of conveying Compass’s increasingly powerful position. Yet they are a curiously old-fashioned technology for a start-up that has raised $2 billion by portraying itself as a company with revolutionary tech. Critics have pointed out that the most disruptive thing about the company was the amount of money it had to spend.

And spend it Compass did, much of it on acquiring other brokerages and wooing agents with lavish incentives (stock options, signing and referral bonuses, and expense accounts, to name a few), allowing it to build formidable operations in those high-end districts. But all that growth was in other ways a problem. Early on, Compass focused on recruiting elite agents, but over time, they started throwing money at any and everyone, according to a former Compass agent.

“The earlier agents were told, ‘You’re so great and special to be here,’ but a few years later it was ‘Everyone who’s in line gets in.’ ” Agents trying to build out their teams found out that junior agents they’d been recruiting were having side meetings with Compass, which was giving them better offers. Not only did that kind of manic recruitment waste money and lead to morale issues, it also meant that there was never enough support staff to go around. There was little to no onboarding, said one former agent, the number of PR and tech support people never increased proportionally to the number of agents the company was bringing on, and marketing meetings were 25 to 30 minutes, tops — so short that she stopped bothering to make them. ​​And while she’d initially been impressed by Compass’s marketing templates, she quickly realized sophisticated designs were useless if half the brokers in the city were using the same ones. “My first week, I thought, This stuff is great. But then they started growing by leaps and bounds, and I was like, Isn’t everyone going to have the same shit?

It appears, in any event, that the spree may be over. The company saw its stock price drop to $3.53 last Wednesday, down from its initial public offering price of $18 in 2021 (and even that was significantly less than the $23 to $26 price it had been planning for). It’s not crashing and burning — more coming back to Earth, settling into the reality of being not the next big thing but just another brokerage, albeit one that still spends more money than it makes. Reology, by comparison (now known as Anywhere Real Estate), which owns Corcoran, Sotheby’s, and Coldwell Banker, among others, reported $23 million in profits in the first quarter of 2022. Earlier this month, during its earnings call, Compass announced that it would lay off 10 percent of its workforce — about 450 employees. Its geographic-expansion plans and mergers and acquisitions would also be put on hold and, most likely, some offices consolidated. Even with those cost-cutting measures, claims that the company will be profitable in 2023 seem increasingly unlikely, with interest rates rising and the national sales market slowing down. “It has never been more clear that it’s a traditional brokerage — that’s how it makes money. It’s at the whim of home sellers and buyers, said Mike DelPrete, a scholar in residence at the University of Colorado Boulder who analyzes the financials of real-estate companies. “The difference between it and Realogy is that its cash burn is astronomically high.”

Compass has framed its cost-cutting as a prudent response to a cooling sales market. “Due to the clear signals of slowing economic growth, we’ve taken a number of measures to safeguard our business including the difficult decision to reduce the size of our employee team by approximately 10%,” a company spokesman wrote in an email. “These measures allow us to remain focused on our strategy of being the best company in the world for empowering real estate agents to grow their business while at the same time making continued, steady, progress toward our profitability and free cash flow goals.”

Certainly, it’s not the only company to pull back as interest rates rise and hints of a recession loom. Other brokerages, including Redfin, have also laid people off recently. But as DelPrete pointed out, Compass spends much more than its publicly traded peers, and will need to shed a lot more staff — something like half — to be profitable. “Their model has always been that they raised a lot and spent a lot, but then the market slowed down,” he said.

In the earnings call, Compass CEO Robert Reffkin said that while the company was pausing geographic expansion, it didn’t plan to stop adding agents. “It’s just much more profitable recruiting … where there’s still of course the demand to come to Compass as an opportunity,” he said. But the problem with laying off staff is that it’s likely to drive some of those independent-contractor real-estate agents away from rather than toward the company. If they bolt, revenue will drop, necessitating further cuts. A big part of the appeal of going to Compass wasn’t just the sleek branding; it was working with a company that has lots of resources.

Or had them. It hasn’t really felt that way for a while, according to a current Compass agent, who said that before the company went public it started charging agents for things like Docusign, Adobe, and Property Shark. “The nickle-and-diming of the support services is really annoying when you’re an agent who’s bringing in all this money and they have to pay for basic stuff like that,” he said. Although it was hardly the most frustrating thing since the IPO — that would be the stock price. Before the IPO, a lot of agents bought stock through Compass’s agent equity program, applying part of their commissions toward future stock options. “The stock is crushed,” the agent said. “It’s now worth significantly less than it was when they bought it. The ones who went heavy got smoked. They would have done better buying it now than at the ‘discounted’ price.”

In the first three months of 2022, the company spent $142 million, and on its most recent earnings call it confirmed that it has $476 million left in cash and access to $350 million in credit. This isn’t a terrible position to be in. “Running out of money is a relative term,” DelPrete said. “They definitely have, like, a year of runway left.” But that year isn’t going to be as lucrative as the previous one, even in the New York market. The Olshan Report, which tracks Manhattan sales of $4 million and above, recorded 20 contracts signed last week, as opposed to the 30-plus average between the beginning of 2021 and early May of this year.

The promise was that Compass’s tech would close that gap: boosting productivity and efficiency, eventually allowing the company to turn a profit. But even if the tech is helpful, it’s increasingly clear that it’s not a magic bullet: Real estate is still a time-consuming, personal business in which the biggest factor affecting “efficiency” is often the market itself. It’s unclear if AI-powered tools like the company’s “likely to sell” feature — which offers agents the names of people who may be inclined to list their properties — is a significant improvement on older technologies like sending out postcards and holiday greetings. Acquiring other brokerages and poaching agents, on the other hand, is clearly effective — Compass has grown into the largest brokerage by sales volume in the country — but also expensive. And it doesn’t work as well when you’re laying out to bring in not only the rainmakers but junior brokers who may founder working independently (instead of with an experienced team). For all that, the company is also still just one player among many: Its national market share grew to 6.1 percent in the first quarter of 2022.

Compass was always aspirational. Of course it was: It’s a real-estate brokerage and a start-up, both of which feed off and generate dreams of more comfortable, moneyed futures. It embodies both the sensible appeal and the hucksterism of the industry: Somehow, real estate is supposed to be both a solid, responsible investment and a get-rich-quick scheme, all rolled into one. In reality, the returns are often less than stunning, and people do get burned. Disruption itself sometimes gets disrupted when it encounters the physical world. WeWork put a sexy spin on subleasing office space — a potentially lucrative business, but hardly a novel one, and one in which the fundamentals still apply. Zillow’s ibuying spree, on the other hand, was quite innovative, but it was also a fiasco, one the company shut down after it suffered huge losses thanks to an overly optimistic algorithm, leading the chief executive to conclude that the practice had “a high likelihood, at some point, of putting the whole company at risk.”

“At the best of times, our business was a narrow-margin business, but I think their strategy of building market share without regard to the cost of the market share is a very dangerous strategy,” said Frederick Warburg Peters, president of Coldwell Banker Warburg — admittedly a competitor, but a pretty clear-eyed one. “A series of very complex things have to go right in order for it to work.” And now is not the time when things are going right. “We’re going into what is going to be a tough period for at least the next eight months. More interest-rate increases, and most economists believe we’ll go into a mild recession to tame inflation,” Peters said. “In 2021 Compass wasn’t profitable, and that was under the best circumstances. Two thousand twenty-three — that’s not going to be their year.”

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