In the waning months of 2018 — a year Compass marked with voracious growth and headline-grabbing acquisitions — Compass CEO Robert Reffkin revealed, in a conversation with Inman, that he promised to be home for his children more in the coming year.
Reffkin was away from his New York home often in 2018, as Compass added more than 170 offices, in big markets like San Diego, Dallas, Seattle, Atlanta, Austin, Houston, Nashville and others. It acquired Pacific Union International Real Estate, Avenue Properties and a number of real estate brokerages that stood in the way of the company’s big market share goals.
“I don’t think I’ve ever seen anybody grow as fast as they have over the past three years,” Steve Murray, the president of Real Trends told Inman.
Two years later, 2020 couldn’t have been a larger dichotomy. If 2018 was spent on the road, in airports, and corporate conference rooms, 2020 was spent at home, as a global health crisis raged.
If 2018 was spent growing horizontally, to new markets and through pricey acquisitions, 2020 was spent bolstering technology tools and growing organically in existing markets. And it helped that the company routinely was setting revenue goals as the housing market blazed.
But just because Compass had a more heads-down, introspective outward appearance in 2020, that doesn’t mean the company isn’t still the same aggressive firm that’s been sued by multiple competitors over recruiting and hiring practices.
Murray, who’s represented multiple brokerages in acquisition talks with Compass, has seen it first-hand.
“They haven’t lost their aggressiveness,” Murray said. “Anyone who thinks that is mistaken.”
So what’s in store for the well-funded brokerage in 2021? Well, a number of potential challenges and possibly a long-awaited public debut.
Will Compass finally go public?
Reffkin has long been clear: Compass doesn’t need to go public. But that doesn’t mean they won’t. Reports have suggested the company has already hired banks to underwrite its corporate cotillion, and sources close to the company have suggested a liquidity event is likely coming in 2021.
To have a successful initial public offering, Compass needs to avoid the same pitfalls that struck down WeWork, another SoftBank-backed unicorn. WeWork’s initial S-1 filing showed major losses and frightened investors, which ultimately led to the IPO being shelved and the company’s CEO resigning.
Investors will be looking at a number of key performance indicators [KPIs] when Compass does eventually file its S-1, according to Anthony Paolone, an executive director at JP Morgan, covering real estate stocks.
Paolone doesn’t explicitly cover Compass as an analyst — since Compass is not yet public — but he does cover one of its top rivals in Realogy and gave Inman some insight into what he’d be looking into, when Compass does go public.
“[I] would suspect KPIs comparable to those of [Realogy] and would add agent count, so: agent count, units sold in period, average price of units sold in period, average brokerage commission rate, and agent commission split (fully loaded with any incentives, signing bonuses, etc.),” Paolone said. “I would want a history of these.”
The company could avoid pre-public offering scrutiny by using a special purpose acquisition company to go public via merging with a company that’s already publicly listed, the same way Opendoor, another SoftBank-backed firm went public.
Stefan Swanepoel, the chairman and CEO of T3 Sixty, a real estate consulting and publishing firm, told Inman that prior to its public debut, Compass will need to focus on “consolidating their processes, streamlining their value proposition and securing the leadership necessary to operate efficiently as a large company, which has grown extremely quickly.”
Will the Realogy lawsuit hurt Compass’ 2021 prospects?
It’s been nearly 18 months since industry giant Realogy, the parent company of brands like Coldwell Banker, Sotheby’s International Realty, Corcoran and others, filed a lawsuit against Compass, accusing the New York City-founded brokerage of engaging in “unfair business practices and illegal schemes to gain market share at all costs and to damage, or even eliminate, competition.”
In September 2020, Judge Barry Ostrager denied Compass’ motion to dismiss the complaint and attempt to compel the two sides into arbitration concerning certain claims in the lawsuit. The next oral arguments, concerning another motion to compel the sides into arbitration over some of the matters in the complaint, is scheduled for Dec. 18. It appears no resolution is in sight.
Compass has settled a number of lawsuits regarding its recruiting practices in the past — including those with Zillow and Zephyr Real Estate — but due to the nature of this complaint, and some of the explosive allegations contained within, it doesn’t seem like the sides are headed towards a quick, quiet resolution.
It’s in Compass’ best interest to “push that thing down the road,” Murray told Inman.
When Compass goes public, it will have to disclose more details about the lawsuit to investors and any potential “bombs” contained within, which in turn could harm the company’s value as it attempts to go public, according to Murray.
Can the company retain its agents?
The company’s mass-recruiting and expansion may come to a head in 2021 when it comes time to retain all of the agents it added. Sources with knowledge of Compass’ recruiting practices have said the company signs agents to two- or three-year contracts initially, which often includes big signing bonuses and favorable splits. Sources have said the company will be dealing with a flood of contracts expiring in the coming year.
“Compass will definitely have to work at retaining agents, but with new models, sweet offers and working from home, all strong alternatives, all companies need to work on retaining good agents and strengthening their value proposition,” Swanepoel told Inman.
“Based on conversations with Compass agents and others, we know that Compass has been working to build up its value proposition to agents and is constantly increasing its leverage and value to agents as its brand, network and offerings grow.”
The company also has a carrot to dangle: that long-awaited liquidity event.
The company made a change to its agent equity program in late 2019, according to an internal memo obtained by Inman. The changes shortened the vesting schedule of agents stock options to either 2021, or when a liquidity event occurs.
Reffkin and Compass displayed a hyper-agent focus in 2020. Reffkin advocated for agents, as independent contractors, to be included in the stimulus relief package. The company spent the better part of the first half of the year rolling out a new tech tool or update seemingly bi-weekly.
Murray said there’s no question that Compass will have a tough time retaining all of the agents that it recruited in the big push over the past few years. But that’s not a problem unique to Compass.
For agents, it’s less about the split and the monetary or technology support and more about how they bond with leadership. Those relationships and agents’ wants or needs change almost daily.
“To think that [Compass] is going to have some huge retention that’s gonna be far better than anybody had, I don’t think so,” Murray said. “But I do think it’ll be better than normal.”
Has the company reached its market share goals?
Plainly, no, Compass has not hit 20 percent of market share in the top 20 markets in the U.S. by the end of the 2020. It won’t hit those goals in the next two weeks. The company never revealed which markets it meant, or how close it was to those goals. A source close to the company told Inman it even stopped putting out market share reports.
“We can state with clarity that if you are saying, do they have 20 percent of market share in Denver or 20 percent of Chicago, no,” Murray said. “Of course they don’t.”
The goal was overly ambitious from the start and very quietly fell out of Reffkin’s stump speech. But as late as January 2019, the company still internally was saying it was possible. In fact, in a memo obtained by Inman that month, Reffkin said the company was ahead of schedule on its market share goal.
Falling short of that over-promise shouldn’t completely diminish the company’s growth, however. There’s another way to look at it, Murray explained.
“If I were them, the way I would present this in perspective is, ‘look, our target really was the top 40 percent of the high-end stuff,’” Murray said. “‘It’s where we put all our efforts into acquisitions of agents and companies.’”
If you’re just looking at the higher-end of the market, Murray says he doesn’t know if they’ve hit 20 percent in markets like Denver and Atlanta — but they’re a lot closer if you look at it that way.
Can Compass’ tech deliver and differentiate it?
Compass has long called itself a real estate technology company. It’s raised money like a technology company, it’s valued like a technology company and the company hires like it’s a technology company.
But its advantage isn’t strictly that it’s a technology company.
“The secret sauce of Compass is that you’re combining vertically integrated tech with a huge network or distribution and a very strong brand,” Zach Aarons, the co-founder and general partner of MetaProp, a real estate technology venture capital firm based in New York City, told Inman.
Building technology is just one part of the puzzle, the other is getting agents to use it. Compass would not share adoption numbers with Inman — the way a company like Keller Williams likes to tout how many agents use its software and tools — so it’s unclear just how agents are taking to Compass’ tech.
There have been times in the company’s history when Reffkin has waxed about building a platform for the industry-at-large, not just Compass agents. It nearly licensed its tech to an indie brokerage in 2018, before the deal ended due to backlash from agents.
“There’s been times in Compass’ history when they’ve probably needed to raise money and pitch themselves more as a tech company and said, ‘we’re gonna roll out our tech to agents that aren’t even Compass’ agents, it’s that good,’” Aarons said. “That’s never gotten any adoption, so clearly their technology as an out-of-the-box thing isn’t that amazing that it’s changing people’s lives all the time.”
But even getting all of the company’s agents to adopt its proprietary technology isn’t necessary for it to be considered successful.
“You don’t really need to [drive agent adoption] as long as your agents are producing,” Aarons said. “It’s good to do for cultural purposes — if you have everyone using the same tech it does have benefits that are intangible and non-monetary that become monetary in the long-term because you retain more employees and recruit better — but you don’t have to push on it that hard, honestly.”
In the long-term, once Compass goes public, Aarons said to look at whether Compass trades like Redfin or Realogy to gauge the success of its deep investment in being a tech company. The former has seen its share value explode in 2020 with its reputation as a tech-focused brokerage.
But Aarons cautioned that, in the long-term, the delta in valuation between a company like Redfin and Realogy — or Compass and Realogy once Compass goes public — will grow much smaller, because, in the end, the tech stacks won’t likely be a big differentiator.
“We know the teams at all the big brokerage houses — they’re pretty sophisticated in terms of technology,” Aarons said. “It’s become exponentially easier to build this stuff and cheaper.”
“In 10 years, the traditional brokerages are going to look like tech-enabled ones and the tech-enabled ones are going to start looking more traditional and the whole market gets up-ended.”
Compass declined to make Reffkin available for an interview for this story and declined to comment on any of the questions about its market share numbers, tech adoption statistics or challenges to going public.