Last month the always brilliant Mike DelPrete wrote a featured article asking a question that has significant ramifications for the entire real estate industry: “What is Compass’ end game?”
The question itself is critical for three reasons:
- Already an industry leader, Compass has not been the beneficiary of over $1.5 billion, with a $6.4 billion valuation to simply be a slightly improved “typical” real estate brokerage. Softbank, investing through its Vision Fund, expects, we assume, to benefit from significant disruption in the industry. There is an expectation among analysts that Compass will transform itself into a brokerage that approaches real estate in a significantly different way. The pressure is on its CEO Robert Reffkin and his team to deliver.
- Smart analysts are starting to anticipate that Compass will be encouraged by its investors to move to an IPO very soon. As an outside observer this makes sense for two reasons. First, there seem to be some headwinds in Softbank’s efforts to raise additional funds for more real estate investing. Second, economists are starting to anticipate a slow down in the economy, and consequently real estate, in late 2020. This would not be ideal from an IPO perspective. If an IPO is, in fact, imminent, Compass will need to move quickly to the next phase of its plan; some type of end game.
- The combination of Compass’ resources coupled with the pressure to ramp up its impact quickly could be a potent mixture. It could be one that has unintended consequences for the rest of the industry. After all, when an industry leader moves dramatically and at speed, one would suspect that the ripples would be felt widely.
DelPrete believes that the evidence suggests Compass may well be looking to develop a real estate platform as its audacious and disruptive goal, and he may well be right. In fact, the evidence does seem to point in that direction.
The question that I have been grappling with since reading DePrete’s article is the following: What if Softbank and the rest of the Compass’ funders have miscalculated?
What if it the very nature of the real estate business creates a catch-22 in which dollar-fueled talent acquisition, in of itself, prevents the type of disruption necessary for transformation and the significant profits that can be earned as a consequence?
Why do I ask this question? Well, the premise is rooted in the critical difference between Compass and one of Softbank’s other big platform bets, Uber.
If asked to summarize the route to massive profits via Uber, I suspect the non-expert response might be as follows.
- Uber is using tech and low-paid drivers to disrupt the taxi and public transport industry.
- While it is losing money now, there are two massive cost savings on the horizon.
- Electric vehicles will virtually eliminate fuel costs and automation will remove the need for drivers.
- Uber should then turn substantial profits.
Now let’s compare that to DelPrete’s Compass hypothesis, where the company looks to build a platform based on the work of its highly professional agents and their exclusive listings. To make significant money, Compass would need to reduce the compensation of those agents and/or sell leads generated via the agents’ own listings and have other less compensated agents close that business.
The flaw in this plan is two-fold. First, the top agents are the ones providing the fuel for the website — they’re the ones who have the relationships with the high-net-worth clients and are securing the listings. Why should they take less money or have their own brokerage compete with them for generated leads?
Two, these hyper-connected agents have options — there are, and always will be, high-end brokerages happy to provide them with the splits and benefits they feel that they merit.
Unlike Uber, the drivers (metaphorical in the Compass sense) are not replaceable. And to pull them out runs the risk of the facade collapsing.
To my mind, when I consider the bet made by Softbank, I wonder whether it really understand the role of the agent in the transaction.
Don’t get me wrong, real estate agents are certainly at risk of being disrupted by the flood of money entering the market and will need to transform the way they do business. That is a certainty. I am also certain that Compass will be a successful real estate company. Robert Reffkin is a brilliant CEO and has amassed a lot of talented agents.
What I am less certain about is whether Compass can be the disruptive force that many expect it to be.
What am I missing? What do you think about my assumptions? Please share your thoughts below in the comments.
Raj Purohit is the associate broker with Keller Williams Capital Properties in Washington, D.C. Follow him on Twitter or Facebook.
