In September, New York City–based real estate and technology start-up Urban Compass closed a deal with investors for funding totaling $20 million. The investment — from companies such as Advance Publications, the parent of Condé Nast; Joshua Kushner’s Thrive Capital, and venture capital firm Founders Fund — valued the company at close to $150 million.
While a $150 million valuation may seem high for a company that hasn’t yet celebrated its first birthday, it’s not unusual for tech start-ups — like messaging services WhatsApp and GroupMe — to command far more than their near-term revenue potential from investors or buyers.
Still, some industry observers were dumbfounded by Urban Compass’s valuation. And that was not just because of the high-dollar figure, it was also because the company’s business model has shifted substantially since its launch last May, from a unique rental firm that undercut rival firms by offering clients lower commissions, toward a more traditional residential real estate brokerage.
That shift has some industry insiders wondering whether Urban Compass can deliver returns for its tech-focused investors while competing in a low-margin market flush with well-established brokerages.
“These guys are used to the world of outlier valuations based on projections and trends in the venture capital world,” said Anthony Lolli, CEO of residential brokerage Rapid Realty. “But in the world of real estate, it all boils down to, ‘how many deals are you really closing?’”
Real estate brokerage valuations have rarely reached the heights Urban Compass investors are seemingly betting on. Real estate holding giant NRT bought the Corcoran Group for a reported $65 million in 2001, for instance, but Corcoran was already doing yearly sales of $2.2 billion. And with the exception of a smaller deal involving Bellmarc buying A.C. Lawrence in 2012, and becoming a Coldwell Banker franchise, no other major Manhattan real estate companies have traded in more than a decade. (The purchase price on the Bellmarc deal was not publicly disclosed.)
Urban Compass executives declined to comment on the company’s dollar volume of deals or projections for profitability, but maintained that the start-up is consistently hitting the financial goals it set for its growth.
“We have raised over $33 million [in total],” Urban Compass CEO Robert Reffkin said in a recent interview with The Real Deal. “We have a tremendous amount of money in the bank and we feel very secure about our position. I’m focused on creating a multibillion dollar company, and I’m fully confident that we can do so.”
Urban Compass bounded onto the real estate scene in May 2013, generating headlines for its unconventional business model, which initially combined a StreetEasy-style listings website with a team of salaried “neighborhood specialists” who functioned much like rental brokers. But its entrepreneurial founders, Reffkin and Silicon Valley veteran Ori Allon, were also the source of much of the company’s attention.
And in addition to Kushner, Advance Publications and the Founders Fund, the company has a slew of other high-profile backers, including Goldman Sachs and venture capital company .406 Ventures, as well as CEOs like Kenneth Chenault of American Express, Cyrus Massoumi of ZocDoc and megadeveloper Bill Rudin. However, neither Rudin nor Jared Kushner currently have any units listed with Urban Compass.
While in many cases financial backers serve on a company’s board, they typically have little control over the direction a company takes, Michael Mandel, founder of tech company CompStak, told TRD.
“Most decisions don’t require board approval, and even if they do, the investors would have to control the board to control those decisions,” he said.
It’s no wonder why the investors were attracted to Reffkin and Allon, Mandel said, adding that for this type of effort, the backers were also likely willing to accept a high degree of financial risk.
“They were trying to take on an industry in a really fundamental way and to really change the status quo,” he said. “You need to put a lot of money behind an effort like that. If they’re going to put that kind of money behind something that is that high of a risk-reward scenario, they’re going to do it with proven, successful people.”
Allon was the brains behind Julpan, an online tool for analyzing social information, which he sold to Twitter for an undisclosed amount in 2011, and the web search algorithm Orion, which was bought by Google in 2006, also for an undisclosed price. Meanwhile, Reffkin, at age 20,was the youngest analyst ever hired by consultancy giant McKinsey & Co., and served as special assistant to U.S. Treasury secretaries John Snow and Henry Paulson under President George W. Bush, before going into private equity at Goldman Sachs.
Those who knew the duo believed that they could have a big impact on the way technology was being used in the New York City residential brokerage world.
Adding credibility was the early addition of Gordon Golub, who earned his chops as the No. 2 at rental giant Citi Habitats, where he worked for 16 years. Poaching Golub, one of the top rental executives in the city, was seen as a major coup for the fledgling firm.
Urban Compass seems to have struck the right note early on with its technology, which unlike other firms links its listings database with mobile phone technology, allowing its agents to create listings, schedule open houses, and track their customer showings easily on their smartphones.
“The app is really well done,” said Stephen Kliegerman, head of new development marketing for Terra Holdings, the parent company of brokerages Halstead Property and Brown Harris Stevens. “It’s definitely unique in terms of ease of use,” he said. “It’s a very robust system they’ve built out.”
Reffkin said the company has been approached by other brokerages looking to license its technology, but that it’s currently not entertaining such offers. While licensing the technology would likely be lucrative, opening it up to rivals would undercut Urban Compass’s key competitive advantage, especially now that the firm has moved to a more traditional model, sources said.
“Most brokerages have a third-party technology company create a listings database and a third party create a CRM [Customer Relationship Management] database. If it’s all from different places, it’s not connected,” Reffkin said. “When you start building things the wrong way, it’s very hard to fix it. We’ve built it the right way.”
For all of its success on the technology side, however, Urban Compass has made missteps on the agent side, evidenced by the fact that it adopted an entirely new, and traditional, business model late last year.
At first, the firm handled only rentals, employed agents on salary and set commissions paid by clients lower than the industry average. Rather than paying 15 percent of the yearly rent, the company’s clients paid a commission of just 7.5 percent. In addition, on deals that were co-brokered, Urban Compass got 5 percent, as opposed to the industry standard of 7.5 percent.
The company also used a neighborhood model whereby customers would be passed from agent to agent as they moved from one neighborhood to the next.
Urban Compass has since changed gears on all of those fronts. Agents are no longer paid salaries, they’re paid solely on commission. In addition, the neighborhood model was scrapped, meaning a client can stick with one agent regardless of what area of the city they’re looking in. The company has also expanded to sales and dropped the reduced-commission system.
The investment that the company’s backers made in the firm “seems to be predicated on a different model that has essentially gone away,” noted appraiser Jonathan Miller of Miller Samuel.
Urban Compass executives defended their shift in strategy, saying they were adapting to the market and changed focus primarily to attract more top agents, who tend to prefer maximizing commissions. That’s especially true since the company began moving into the sales arena in December.
The firm, which has 44 agents, is located 155 Sixth Avenue, in an open one-floor space, complete with start-up fixtures like a pool table and beanbag chairs. In February, the company added a new 9,000-square-foot office at 19 Union Square West to accommodate its growing staff.
While the shift in compensation structure seems to have attracted some recognizable brokers, including Town Residential’s Jason Saft and Takeshi “Takk” Yamaguchi, as well as Citi Habitats alumni Steve Halpern and Udi Eliasi, the firm still doesn’t appear to have significant numbers of exclusive listings, even factoring its relative youth.
By TRD’s count, Urban Compass had only nine exclusive sales listings and 92 exclusive rental listings late last month. Company officials declined to reveal their internal numbers, but they were searchable on the Urban Compass website.
Among its highest-profile listings is a $2.75 million apartment at 82 University Place and an $80,000 a month rental unit at 214 Lafayette Street, both of which are listed by Halpern.
And while its technology is indisputably well regarded, sources say the firm may have originally spent too much energy on its software and not enough on the quality of its agents.
“While it was a valiant attempt, it underestimated the value of the agent,” said Jeff Schleider, CEO of boutique brokerage Miron Properties, a competing firm. “To navigate this market and create good customer experiences, you need good information and new technology. But more than that, you need good agents, and good agents cost money. The agent is not a commodity that can be purchased with a salary.”
Mark Menendez, former director of rentals at Douglas Elliman, agreed. “I believe they realized they may have approached the business thinking a little too far ahead,” said Menendez, who currently manages Elliman’s Tribeca offices at 90 Hudson and 4 Leonard streets.
The discount commission model is simply not a draw for the high-producing agents that Urban Compass is looking to recruit, explained Eddie Shapiro, CEO of brokerage Nest Seekers International, another competing firm.
“No successful agent would settle for salary, and those that do lose ambition or motivation,” he said. “I was surprised that someone would try those alternative models again, after there were so many failed past attempts by other start-ups in the 1990s and early 2000s.”
Foxtons North America, which entered the New York metro area in the early 2000s with a discount model, was one of those brokerages. The firm started by offering clients a 2 percent commission, then raised it to 3 percent, and finally to 4 percent, before going bust.
The technology alone will likely not be enough to attract the types of agents that will truly bolster Urban Compass’s bottom line, Kliegerman said.
“I think it would be a good selling point for attracting a certain demographic of brokers, but not necessarily the elite brokers of the city,” he said. “It’s a really good rental tool but not so important as a sales tool. In the rental market, inventory is changing daily and tenants’ needs are immediate, so the technology becomes much more effective.”
Reffkin admitted that Urban Compass’s internal statistics indicated that the salary model wasn’t working as well as the firm anticipated.
“We looked at agents that were on salary and agents that were on commission and made our decisions based off of the facts,” he said. “Agents on commission have higher customer satisfaction scores and are more productive.”
The progress so far
Now that it shifted to a more traditional model, Urban Compass is going head-to-head with other New York City firms. Many of those firms have been in business for decades, and some have more than 1,000 exclusive sales listings, along with better-known brands and far greater revenue streams.
Urban Compass has been “making noise in the industry and they’ve gotten a lot of ink in regards to the concept,” Lolli said. “But that was the old concept, which was out of the norm.”
If the company were being valued as a traditional brokerage, it wouldn’t come anywhere close to $150 million, multiple sources said.
“Technology is infinitely scalable, while real estate is more of a traditional business model,” said one industry brokerage head, who asked not to be identified. “It’s people, it’s service-oriented and difficult to scale up. It doesn’t seem like their original investors would have gotten into it just to start another real estate brokerage. I’m sure that’s a conversation they’re having with some of their investors.”
“The valuation process for a tech company and a real estate company couldn’t be more different,” the source added. “You don’t even need earnings at a technology company” to sell for a high number.
One Urban Compass investor defended the company’s shift to a traditional concept.
“Currently, top agents at traditional firms in New York City are constrained in their ability to scale by the number of hours in the day,” said Graham Brooks of venture capital firm .406 Ventures. “Urban Compass has developed some unique technology that automates many of the more tedious processes on both the front end for users and on the back end, to make agents more productive.”
Brooks said .406 expects to see the same level of return, even with the new model in place.
Brooks, the only Urban Compass investor who responded to TRD’s requests for comment, admitted that expectations for “service companies” are always low. But “tech-enabled services,” such as companies like Urban Compass, which embed technology into a traditional service business, can expect the same levels of returns as a technology company, he added.
Indeed, some technology execs said Urban Compass may be able to derive a great deal of profit from its technology platform, and noted that the company is likely to build on what it’s already created.
“While it does seem they’ve gone a bit more of a traditional route in the brokerage world, I wouldn’t make the assumption that they intend to be a traditional brokerage,” Mandel said. “I think their platform will be much more tech-oriented.”
And, Mandel added, there may be an opportunity for Urban Compass given the “recent instability” at listings website StreetEasy, which was acquired by Zillow last year for $50 million and has since seen several top staffers depart.
Urban Compass already nabbed Sofia Song, StreetEasy’s longtime head of research and communications, and for many, the public face of the firm, after her mid-December exit.
“Urban Compass seems pretty well poised” to benefit from that instability, Mandel said.
Jury still out
Reffkin said Urban Compass has exclusive relationships with several city landlords to lease their buildings, but he declined to name them.
Many of the listings presented on Urban Compass’s website are the result of the company’s use of a so-called VOW, a search engine service that allows it to access all the active listings in the Real Estate Board of New York’s database, essentially pulling exclusives belonging to other real estate companies onto its site.
While Urban Compass is certainly not the only brokerage using a VOW, sources said brokerage heads have been irked by the idea that Urban Compass is using other people’s exclusives to bulk out its website. At other companies, the VOW service is secondary to the firm’s own exclusives, they said.
“I suspect they’re upset because Urban Compass is leveraging their membership [in REBNY] to have more content on their site,” Miller said. “I could see how somebody with a lot of listings could be upset that someone else is leveraging it.”
Executives at Urban Compass declined to reveal the number of deals the firm has closed since launching or the amount of traffic to its website. But tracking company Similar Web shows that the Urban Compass site ranked 46,824 in the U.S. for web traffic early last month. By comparison, the city’s largest residential brokerage, Douglas Elliman, ranked 10,658. But the fast-growing, three-year old Town Residential, which has also made a big splash, ranked behind Urban Compass at 64,604.
While it’s unclear how many deals the company is closing, Reffkin did reveal that customer leads, or people requesting viewings of properties listed on the site, have increased 61 percent quarter-over-quarter since launch.
“We’re very proud of that figure,” he said.
While the jury is still out on whether Urban Compass’s new model will be successful, Shapiro said the company faces some challenges in differentiating itself from other firms.
“When you come out of the gate, especially using other people’s money, you have to have a clear plan and message about who you are and how you’re going to make an impact,” he said. “If I were an investor, I would be very upset.”
Mandel disagreed, saying Urban Compass is displaying its willingness to follow the numbers and adapt to the market.
“It’s a lot better to pivot and to try to figure out how to make things work than to keep trying to push through something that clearly doesn’t work,” he said. “They could have kept trying to make what they were doing work indefinitely, but if the writing was on the wall.”