Last summer, the SoftBank Vision Fund and other venture-capital investors put $370 million into Compass, a real estate firm promising to shake up the residential brokerage industry. The deal valued Compass at $6.4 billion, which at the time made it 10 times more valuable than
the public company that owns Century 21, Coldwell Banker, Corcoran Group, and Sotheby’s International Realty.
Compass maintained that its technology would make its agents more productive and profitable than traditional brokers. But so far, the company, which was founded in 2012, hasn’t fundamentally disrupted the real estate business, and it continues to play catch-up with industry leader Realogy (ticker: RLGY).
Last year, Compass’ approximately 15,000 agents completed about 112,000 transactions worth $88 billion. The company says that it’s now the largest independent brokerage in the country. But the richly valued Compass remains far behind Realogy, whose 300,000 agents closed 1.4 million transactions worth $505 billion in 2019.
“They are a residential real estate brokerage, just like everybody else,” Susquehanna analyst Jack Micenko says of Compass. “They make their money the same way Realogy does and Re/Max does.”
(RMAX) is a franchisor with some 130,000 agents operating under its brand.
Some former Compass employees say that the company’s technology falls short of being a disruptive force in the industry or providing a significant advantage to agents. Former Compass employees and real estate professionals with knowledge of the company’s operations told Barron’s that Compass often struggles to get its own employees to use its technology.
A Compass spokesman declined to answer questions about the company’s tech platform or the productivity of its agents. As a private company, Compass isn’t required to disclose financials, and it declined requests to make financial data available.
- $88 B
- $6.4 B
2019 Private Value
Co-founder and CEO Robert Reffkin has said that his goal is for Compass to be a “platform to power all real estate decisions” made by buyers, sellers, and agents. His operation, he says, is unique in the real estate industry because it creates a network effect through technology that focuses on both agents and consumers.
Using the Compass platform, real estate agents and prospective buyers are able to share listings and ideas. The realty company also provides agents with technology tools to help with marketing.
In September 2018—the month in which the company announced a $400 million investment from SoftBank, the Qatar Investment Authority, and others—Compass classified two-thirds of its agents as active users of its technology, according to an internal document reviewed by Barron’s. Compass considered any agent who used its technology for at least one minute, once a month to be an active user, the document makes clear.
- $505 B
- $384 M
The company declined to provide other usage metrics to Barron’s.
Compass’ plan to upend residential real estate using technology comes as WeWork, another highly valued SoftBank realty investment, struggles to fulfill its own technology promise. In trying to go public last year, WeWork told potential investors that it had “the power to elevate how people work, live, and grow.”
The company’s S-1 filing said, “Technology is at the foundation of our global platform.” But the same filing disclosed massive losses. WeWork ultimately pulled its planned initial public offering and needed a rescue plan from SoftBank, which later took a $4.6 billion write-down on its WeWork investment.
Compass could face its own reckoning, especially with Covid-19-related shutdowns putting a crimp on real estate transactions. The company’s current value is likely to be a fraction of its July 2019 fundraising figure, given changing private-market dynamics and the performance of public companies in the residential brokerage arena. WeWork’s struggles have weighed on overall private-company valuations, while Covid-19-related shutdowns are hurting real estate stocks. Shares of Realogy and Re/Max have fallen 62% and 41%, respectively, this year.
Several new entrants have struggled to disrupt the real estate market in a profitable way.
(RDFN), as well as SoftBank-backed Opendoor, have poured a huge amount of resources into remaking real estate. Zillow, which grew as a new way for brokers to advertise their services, has pushed into buying and selling homes outright, a service it calls Zillow Offers. The company has lost money in seven consecutive years on a generally accepted accounting principles basis, and Wall Street analysts expect it to lose $427 million in 2020. And that forecast came before the full impact of Covid-19 was modeled in.
In a statement to Barron’s, Zillow said: “We are operating within the investment framework that we laid out for ourselves as we have scaled our Zillow Offers business, and our core business has generated strong earnings that we have been able to invest in making it easier and more seamless for our customers to move.”
Smaller Redfin also has struggled to turn a profit; in 2020, analysts expect the company to lose $80 million for a second consecutive year.
The travails of these realty operations show just how resistant the U.S. residential real estate industry is to fundamental change. The core of Compass’ pitch to venture capitalists is straightforward: Real estate agents are expensive, and the whole home-buying process is a hassle. To reshape the industry, Compass says it focuses on making agents better at their jobs. The company claims its technology can help agents sell properties more quickly than the competition. “One of Compass’ competitive advantages is that every employee has a singular focus on agent productivity,” CEO Reffkin told Barron’s in 2018.
The company declined to make Reffkin available for this article.
Mike DelPrete, a scholar-in-residence focused on real estate technology at the University of Colorado Boulder, says that Compass has struggled with the productivity enhancements. “I’ve yet to see any evidence to support that Compass’ technology is making its agents more productive than the industry average,” he says. “By whatever measure, Compass is among its peers, whether it’s traditional brokerages or luxury.”
Micenko, who covers Realogy, Redfin, and the home-building sector for Susquehanna, says he was shocked by a demonstration he saw in January of Compass’ customer relationship management, or CRM, technology platform. Despite the hype and the resources poured into the project, Micenko recalls thinking: “You can buy this off the shelf for $2 million a year. Realogy and Re/Max and everybody else has a CRM, too.”
Rather than impressing with technology, Micenko says that Compass recruits agents by offering more attractive splits on commissions. “There’s always a food fight for the best agents,” he says. “The market had been, let’s say, 60% to 70% and then Compass came in and was hiring people for a contract period of two years at 85%, 90%, 95% splits,” he says. “What’s going to happen is you are going to get a lot of agents to come over and sell homes, but you’re not going to make any money on it.”
Compass has been on an acquisition binge in the past few years. Its purchases have included real estate companies Pacific Union in the San Francisco area and Stribling in New York, plus Contactually, a Washington, D.C.–based client relationship management software company. Compass now has more than 15,000 agents and an enviable market share in certain locations, including more than 40% in San Francisco.
But the Covid-19 crisis has halted the expansion plans. At the end of March, Compass laid off 15% of its employees, or about 375 people. In a letter to its staff, Reffkin said he was expecting revenue to fall by 50% over the next six months.
As recently as last September, Reffkin was still talking about a “likely” IPO sometime in the future. Those plans are now in doubt. Existing home sales could be down 40% to 50%, year over year, through the third quarter of 2020, Micenko warns, adding: “This is coming at the worst time of the year for a cyclical business.”
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