Will Compass’ Chicago ambitions send its rivals spinning?

“We are not some evil empire trying to take over the world.”

In Chicago, Compass and its CEO Robert Reffkin (pictured) will find a market dominated by local names
In Chicago, Compass and its CEO Robert Reffkin (pictured) will find a market dominated by local names

In early March, a 25-foot-wide billboard went up at 3033 North Clark Street in Lakeview. On it was a cartoon of a mustachioed, fedora-clad old-timer with Groucho Marx eyebrows, clasping a giant compass. Splashed next to him, right above an @properties logo, were the ominous words: “Don’t ask for directions from a tourist.”

It was a quintessentially Chicago welcome for Compass, the venture-backed residential brokerage that expanded here in November with temporary digs at the Lakeview property and lofty plans to transform the city’s $15 billion residential market. Armed with a $775 million war chest, the firm has already poached some of Chicago’s top agents and is talking a big game about using technology to change how brokerage is done. It’s a playbook that Compass has applied in New York, Los Angeles, Miami and other major U.S. markets. But the pecking order here, established players say, won’t be easily upended: It’s one thing to throw cash around, another to actually move product and build a sustainable business.

“Everyone has a plan,” @properties co-founder Thaddeus Wong told The Real Deal, channeling Mike Tyson, “’till they get punched in the mouth.”

Space invaders

Leonard Steinberg is used to the barbs. After a 13-year tenure as a top-ranked broker at Douglas Elliman in Manhattan, he joined Compass as its president in the summer of 2014 and functions as its chief evangelist of sorts in the brokerage community. He was the hire that gave the firm legitimacy in New York, and he’s seen it go from an object of ridicule for its rivals to, after every successive venture round, an object of fear. But that’s not the way he’d like it to be.

“I don’t think [our competition] should have to be scared at all,” Steinberg said. “I think they need to focus on their businesses. They need to innovate, improve what they do, focus on the needs of the consumer and not just on lining their pocketbooks.”

“We are not some evil empire trying to take over the world,” he added.

The evil or benevolent debate is for another time, but it’s clear that Compass is rapidly putting together a national behemoth: CEO Robert Reffkin’s goal is to hold a 20 percent market share in the 20 top U.S. markets by 2020. The firm has about 2,700 agents at the moment, according to Steinberg, across 13 regions and 60 offices.

In Chicago, the firm expects to quickly outgrow its current digs, and a representative said it’s looking at a new 12,000-square-foot office in River North and another 3,000-square-foot office in Bucktown. The market here is changing quickly, posting extravagant numbers more commonly associated with cities like New York: In January, Citadel chief Ken Griffin paid $58.8 million for a four-floor raw-space spread at No. 9 Walton. The city’s total residential sales volume nearly doubled from $7.9 billion in 2014 to $14.9 billion in 2017, according to Crain’s.

Compass wants a big piece of that action, and seems willing to spend money to make money.

@properties’ billboard at 3033 North Clark Street

Its latest cash infusion, a record for a residential brokerage, was a $450 million investment from Softbank , the giant Japanese conglomerate that is a major backer of Uber and co-working space giant WeWork. That money propelled Compass to a $2.2 billion valuation – it remains the only brokerage to be valued at north of $1 billion – and further fueled talk of it going public. If that happens, Compass agents, who have the ability to convert a portion of their commission payments into stock options, could see a hefty payday.

Both through organic growth and firm acquisitions, Compass is now the sixth-largest brokerage in the country by sales volume, according to the latest ranking from Real Trends. It did about $14 billion in closed sales nationwide, according to the ranking, which has been criticized for relying in part on self-reported numbers.

Berkshire Hathaway Home Services placed second on that national ranking, with over $125 billion in closed deals. The firm recently opened offices in Naperville and Bucktown. It burst onto the Chicago scene in 2014 after absorbing Koenig & Strey and Prudential Rubloff and is now the second-largest firm in city, with about 10 percent market share, according to Crain’s. Other big local players include Coldwell Banker NRT, Baird & Warner and Jameson Sotheby’s International Realty.

What Berkshire Hathaway did in three years may give other national contenders hope, but Wong, whose @properties did $9 billion in deals according to Real Trends and has twice the market share of its nearest competitor, says Compass is coming in cold.

“I don’t think this is parallel to anything we’ve seen,” said Wong, who noted Compass hasn’t yet managed to poach anyone from his shop. “This is something brand new that has no history here.”

Search and employ

When it moved into Chicago, Compass opted to replicate a strategy that’s worked for it on both coasts: find out who the biggest producers are in town, establish a rapport with them, maintain regular contact, convince them to join, rinse, repeat.  The bet is that the stars will serve as a magnet for the rest.

“It’s a protocol unto itself,” one former staffer at the firm recently said about the method, noting that the business development team studies published rankings of top agents to figure out their next targets. “They treated it like an equation almost.”

Jeff Lowe

Jeff Lowe came first. The city’s top agent by sales volume, Lowe brought with him a 14-person team from Berkshire Hathaway that together did over $250 million in transactions in 2017, according to Chicago Agent magazine.

“It wasn’t as swift as you might think,” Lowe said.

He estimates it took between nine and 12 months from Compass’ initial contact to his decision to move to the brokerage from Berkshire Hathaway, along with his team. By his guess, about 50 listings came along, too.

Lowe reached out to colleagues he knew in the Boston, the Hamptons and Orange County, CA to get a sense of their experience switching to Compass.

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“I specifically talked to agents Compass didn’t tell me to talk to,” he said. “I wanted to talk to brokers who didn’t even know I’d be calling.”

Thaddeus Wong

Other notable rainmakers from the firm, such as Joanne Nemerovski, followed soon after. Her courtship also took a while to stick.

After about the 10th phone call with the firm, she was hit up by Reffkin, who laid it out plainly: “You really need to meet with me,” Nemerovksi recalled him saying.

“I met kind of reluctantly,” she added. “I brought my assistant along and I said, ‘alright, in 20 minutes we’re going to leave.’”

In a statement, Berkshire Hathaway said: “There are some new local players who are taking extraordinary steps to grow their market share. This might give them short-term gains, but it is probably not profitable and sustainable, and only time will tell whether it leads to long-term success.”

That perception – that all Compass has to attract talent is money – is one shared by many of its critics. The perks offered can be unrealistic, they claim, including 100-percent commission splits for an agent’s first year, signing bonuses that can climb into the seven figures, and marketing budgets approaching $100,000 per year.

“In New York, they claim to have close to 1,000 brokers right now. I think it’s safe to say 600-700 of them are making below $25,000 a year,” said Andrew Heiberger, founder and CEO of Town Residential, which is affiliated with Chicago-based Dreamtown Realty.

“It makes you wonder: what is their real business plan?” he added. “They’ve got to be running at massive losses.”

But Rob Lehman, Compass’ chief growth officer, said that fewer than 3 percent of agents who have joined the firm nationwide received any kind of cash signing bonus.

Wong said that when he learned Compass was coming to Chicago, he urged his agents to connect with their recruiters.

“I encouraged agents to ask specific questions and really look under the hood,” he said. “I think it would be irresponsible for us not to know every single thing about them. We’ve interviewed agents that work for them, we’ve interviewed agents that went there and have since left.”

Compass declined to discuss who else it’s courting. But assuming it tries to get the city’s top players, potential targets could include Berkshire Hathaway’s Mario Greco and Coldwell Banker’s Dawn McKenna, who each closed about $175 million in total sales in 2017, Emily Sachs Wong of @properties, who did about $170 million, and Coldwell Banker’s Jennifer Ames, who did about $116 million.

Jennifer Mills Klatt, whose Home Discovery Team operates under the Jameson Sotheby’s brand, said she was approached by Compass but declined.

“My first struggle with Compass is I don’t know anybody there,” Klatt said. “They don’t know me, they don’t know our city enough to know what the buyers and sellers are thinking.”

Compass’ relations with the competition in other cities have sometimes gotten testy.

In 2015, one of New York’s biggest players, the Corcoran Group, took Compass to court, accusing it of “brazenly and intentionally” raiding its offices there. That case was ultimately settled.

This February, another New York firm, Modern Spaces, sued the company alleging that it preyed on its agents and stole confidential data. Compass said it “has never been found liable by court of any of the allegations set forth.”

But others said that there can be an upside to having the firm around.

“As outspoken as I have been in terms of their poor business ethics and strategies, I’m a fan,” said Mauricio Umansky, founder and CEO of Los Angeles-based luxury brokerage The Agency. Umansky, who has previously described Compass’ recruiting tactics as “horrendous and disgusting” and predicted it would flame out in five years, said that when Compass dials up the recruitment, opportunities to grab top talent open up.

“As soon as they [top agents] start looking elsewhere, I start getting calls,” Umansky said.

Michael Nourmand, president of L.A-based Nourmand & Associates, noted that having Compass as a rival has forced his firm to expand its marketing operation, increase its staff, and encourage a more collaborative approach to sharing business.

He acknowledged that Compass’ venture dollars give it a definite leg up in the recruitment game. Whether it can keep and nurture that talent, however, is another matter.

“The best analogy I can think of is that it’s like steroids for baseball players,” Nourmand said. “In the long term, all that money is not good. But in the short-term, it’s got its advantages.”