The Real Deal New York

Can Compass compete in commercial?

Resi brokerages have struggled to make a dent on the commercial side
By Rich Bockmann and E.B. Solomont | August 29, 2018 09:12AM

Compass CEO Robert Reffkin playing Jeopardy (Credit: DJgame2 and Gameshows Wikia)

Meridian Capital Group wasn’t looking to build a retail leasing division. But when industry veteran James Famularo became a free agent after the collapse of Eastern Consolidated, Meridian jumped at the opportunity.

That wasn’t the case with Compass. The company, which has been growing aggressively since landing $450 million in funding last year from SoftBank, already had plans to launch a commercial division when it hired Eastern’s Adelaide Polsinelli this month.

On the West Coast, Compass recently acquired San Francisco-based Paragon Real Estate Group, a $2.3 billion firm with a track record in commercial. And the company confirmed it is in late-stage talks to acquire Pacific Union Realty International, also based in San Francisco, which did $14 billion in (residential and commercial) deals last year.

Before its deal with Compass, Pacific Union beefed up its commercial team in San Francisco and Los Angeles. Sales volume for the division is projected to hit $500 million this year.

And Compass just this week hired the former Eastern team headed by retail veteran Robin Abrams to handle commercial leasing.

Robin Abrams

“We’re talking to commercial brokers in five of the major markets we’re in right now,” CEO Robert Reffkin said during a recent interview at Compass’ Manhattan headquarters at 90 Fifth Avenue. He declined to say how much market share Compass is shooting for.

Compass — which is looking to dominate the brokerage industry following the SoftBank funding — is not breaking new ground by branching out into commercial. Plenty of residential firms before it have gotten into that world.

But will Compass be the first to make a significant dent on the commercial side of the business?

“The million-dollar question is to what degree” a residential firm handles commercial, said Town Residential’s Andrew Heiberger.

Before largely shutting down earlier this year, Town had a commercial division, and Heiberger acknowledged that when assignments were too big — say, a large commercial lease or $200 million investment sale — the company knew it was unlikely to beat out well-established players, including public companies and real estate conglomerates.

“To think that you’re going to transact one of those [major deals], it’s more of a needle in a haystack kind of approach,” he said. “It’s not really something you can model or build a business around.”

Adelaide Polsinelli

Polsinelli told The Real Deal that Compass’ expanding commercial platform is an asset for brokers, and that the company wants to grow the commercial side “to become as dominant a platform as the residential is.”

Industry experts said the brokerage looks to be serious about making a dent in the commercial market by hiring Polsinelli, who joined the company with former Eastern principal Ronda Rogovin, as well as Mitchell Goldstick and Trystan Polsinelli, Polsinelli’s son.

“Compass is leveraging their brand name and their core competency – the technology that backs up their platform – and they’re leveraging that with a high-name broker who has a proven track record,” said Jeremy Nazarian, a broker at Venture Capital Properties.

Not Letting Deals out the Door

Compass has long had ambitions to be all things to all people: a one-stop shop for all real estate needs. In addition to commercial, the company is getting into other lines of business such as title insurance, mortgage and escrow.

“[Agents] want to be able to give referrals to each other,” Reffkin said.

Sources said Compass has additional space for the commercial group at its Midtown headquarters at 10 East 53rd Street – where earlier this year it doubled its footprint – and plans to hire more brokers.

As things stand now, Compass doesn’t seem to be a threat to commercial brokerages with large, institutional sales or leasing practices: the CBREs, JLLs or Cushman & Wakefields of the industry.

Instead, the company now appears to be targeting the middle market, which is already a crowded space at a time when the brokerage landscape is experiencing a shakeup.

But opening a commercial division gives Compass a chance to make money off of deals that would otherwise go out the door.

“A lot of residential agents deal with high net worth individuals, deal with commercial investors,” Nazarian said.

Residential brokers at firms across the city often have wealthy clients looking to do commercial real estate deals, and commercial brokers have clients looking to buy high-priced homes. And Compass is not the only residential brokerage in the city to realize this and try to grab a share of that market.

Douglas Elliman has long had a retail division, and made a Compass-like move in 2005 when it hired big-name broker Faith Hope Consolo from Garrick-Aug Worldwide, which at the time was one of the top retail brokerages in the city.

And while Elliman has made a dent in retail leasing, it hasn’t grabbed market share from the biggest companies. Douglas Elliman last year ranked No. 15 last year on The Real Deal’s annual ranking of the top retail brokerages in Manhattan with 89,294 square feet worth of leases.

That’s just shy of 2 percent of the 4.7 million square feet of deals the top 15 firms in Manhattan inked last year.

On the sales side, townhouse specialist Leslie J. Garfield was the largest residential firm among among the city’s top investment-sales firms with $135.3 million worth of deals, followed just a few spots behind by Corcoran Group with a pair of deals totaling $109.5 million.

Like Consolo, Corcoran’s Paul Wexler has carved out a niche brokering deals for medical use. He said he’s well-connected to major landlords and developers as a result.

For example, Corcoran worked with the developer of 381-383 Carlton Road in Brooklyn to sell 27 residential condos and nine commercial units, Wexler said. “We have the benefits of our market research and we have data that’s sometimes relevant.”

But even those firms appear to be doing commercial deals that mostly intersect with their core residential business, rather than concerted efforts to do commercial deals.

Berkshire Hathaway HomeServices New York, which launched in early 2017, started a commercial division last summer though it has yet to make a splash. And Town Residential had the aforementioned commercial division, which essentially fell apart when the brokerage shut down its residential resales and leasing business in April.

It’s a small, but core business for most residential firms, said Elliman chairman Howard Lorber. Often, it happens almost by accident. “You’re selling a CEO’s big apartment and you find out he’s looking for office space. Or you’re working with developers looking for land,” he said.

Town’s Heiberger said his agents were once working with a CEO who let them know he wanted to relocate his office. The agents made a referral to commercial brokers at Newmark Knight Frank, who leased the CEO 80,000 square feet. Town pocketed a $230,000 referral fee, Heiberger said.

But neglecting commercial isn’t prudent, either, since it often overlaps with new development.

“If you have a new development division where you’re capable of handling a $200 million to $1 billion sellout, or a rental building with 800 units that’s 70 stories high, at the base of all those buildings is retail,” Heiberger said. “A lot of times the retail is the tail that wags the dog.”

But the commercial brokerage side of the business is experiencing a wave of disruption, and firms are trying new things.

Lee & Associates in June announced it was launching a residential division. Lee’s predecessor in New York City, Sierra Real Estate, had long had a property management arm.

Joel Herskowitz, Lee’s chief operating officer, said it was clear that residential was the one component missing from the business.

“It was glaring to us in a sense that we manage properties that have apartments, so it made sense from a rental standpoint,” he said. “And that pretty naturally led to the apartment sales endeavor.”

Herskowitz acknowledged the challenges of breaking into a side of the business that’s not the company’s core competency.

“Let’s call a spade a spade: If you go out and get a listing for a sale carrying a card of an unknown in the business, it’s a harder sell because no one identifies your name with the sales business, as of yet,” he said.

“Look, seven years ago nobody knew who Lee was,” Herskowitz added. “Now nobody says, ‘Lee who?’”