Urban Compass bets big on NYC real estate

Tech startup aims to succeed where others have failed
By Katherine Clarke | June 03, 2013 01:04PM
From left: Kyle Kimball, executive vice president and executive director of the New York City Economic Development Corporation;  Urban Compass co-founder Robert Reffkin; Mayor Michael Bloomberg; Urban Compass cofounder Ori Allon; and Rachel Haot, the city’s chief digital officer.

From left: Kyle Kimball, executive vice president and executive director of the New York City Economic Development Corporation; Urban Compass co-founder Robert Reffkin; Mayor Michael Bloomberg; Urban Compass cofounder Ori Allon; and Rachel Haot, the city’s chief digital officer.

As New Yorkers know all too well, finding a rental apartment often means scoping out listings on Craigslist and StreetEasy, trudging through any number of places — many that look nothing like they did in photos online — and then paying a hefty fee to a broker.

But a much-hyped Manhattan startup, Urban Compass, wants to make it both cheaper and easier to rent an apartment.

Founders Ori Allon, the serial tech entrepreneur, and Goldman Sachs alum Robert Reffkin officially launched the beta version of the Urban Compass website last month — Mayor Michael Bloomberg even showed up for the occasion — after months of secrecy about their project. In what it calls “an end-to-end solution,” the company combines a StreetEasy-style listings website with a team of in-house “neighborhood specialists,” who function much like real estate brokers. Clients pay a commission of 7.5 percent of a year’s rent, less than the standard New York City broker’s fee of up to 15 percent.

Urban Compass has already raised $8 million in seed funding from venture capital backers such as Goldman Sachs, Founders Fund and .406 Ventures, as well as CEOs such as Kenneth Chenault of American Express and Cyrus Massoumi of ZocDoc. Other investors include real estate personalities such as Bill Rudin of Rudin Management and Joshua Kushner, the younger brother of landlord and developer Jared Kushner, whose company Thrive Capital has thrown its weight behind the company.

The company’s technology “will make us incredibly efficient,” said Gordon Golub, a longtime top executive at the real estate brokerage Citi Habitats, who surprised the industry in January by decamping for Urban Compass. “The consumer search should be much more painless.”

But Urban Compass isn’t the first tech startup to tackle the high-priced, competitive world of New York City real estate. StreetEasy and Craigslist currently serve as consumers’ first stop for online apartment searches here. Sites such as Zillow and Trulia, while popular throughout the country, haven’t taken off the same way in New York City, where they’ve been criticized for having stale listings. Urban Edge, a rentals website that launched in 2010, lets consumers browse listings and contact landlords directly, while Naked Apartments charges brokers and landlords to post their listings and lets renters search for free.

Discount brokerages have also tried — and largely failed — to gain a foothold here. Foxtons North America famously filed for bankruptcy in 2007 after making a splashy entrance into the New York metro area in the early 2000s.

New York City real estate is “a shark tank,” said Don Tallerman, founder of Urban Edge. “There’s so much money at stake with the commissions that there’s much more competition here.”

Urban Compass is well aware of the challenges it faces, Golub told The Real Deal.

“There have been many different attempts from many different angles,” he acknowledged. “There are a lot of people out there who think you can’t change the consumer’s experience.”

Still, he said, “looking at the landscape and seeing what [other] organizations have tried to do has allowed us to come up with a model that we believe will be successful.”

Unique New York

The New York City rental market is unique for its low vacancy rates and high prices. The latest Citi Habitats market report showed April’s Manhattan rental vacancy at 1.28 percent, and the average monthly rent for a one-bedroom at $2,733.

The market is also unusual because the renter, rather than the landlord, pays the broker’s fee, said StreetEasy’s Sofia Song. She noted that commissions here are much higher than in other cities.

All add up to a major hassle for renters.

According to Golub, the major “pain points” that a customer experiences when looking for a New York City apartment are the time it takes, the lack of accurate information on real estate websites, and the broker’s fee.

Urban Compass hopes to get rid of the headaches. Here’s how it works: Homeseekers search for rental apartments on the Urban Compass website using several criteria, such as location, size and price. They don’t have to pay to look at the listings but they do have to register and input basic personal information. For now at least, the website lists only rentals, Golub said.

As of last month, Urban Compass had more than 5,000 Manhattan and Brooklyn listings, all from landlords and management companies, as well as some exclusives. The company declined to comment on whether it is listing properties owned by Rudin Management, which has a large rental portfolio and is headed by one of its investors.

When a user finds an apartment, he schedules an appointment online to see it with a “neighborhood specialist.” The specialist has a real estate license and operates much like an agent, showing apartments and negotiating deals — on the client’s behalf, Golub said. There are two significant differences: They are salaried staff members of Urban Compass, not independent contractors, and they do deals in one neighborhood, not all over the city.

Once the consumer finds an apartment to rent, the neighborhood specialist uses the Urban Compass iPhone app to alert the company’s closing department, which confirms the deal with the building’s landlord. The lease is executed online, and the company prefers payment by credit card.

“The goal is to have everything online and as seamless as possible,” Golub said.

One thing that sets Urban Compass apart from the many other New York real estate startups, industry insiders said, is Allon’s track record of Silicon Valley success. Allon is the entrepreneur 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.

And the involvement of Golub and Rudin has offered the same credibility in the real estate world, sources said.

“Hiring Gordon was definitely key,” Song said. “You need someone who really understands New York City.”

Ilana Schwartz, Tallerman’s partner at Urban Edge, agreed.

“The companies that start in other cities and come to New York second have a difficult time,” she said. “But these guys know New York. That gives them an advantage over other tech companies.”

Urban Compass has assembled “a very bright group of people,” agreed Larry Friedman of the Manhattan-based rental brokerage A.C. Lawrence. “It’s a new competitor and we welcome that.”

One major challenge Urban Compass will have to overcome, however, is keeping the website updated fast enough to keep up with New York’s fast-moving rental market, Schwartz said.

When it comes to New York City rentals, she noted, “what was available this morning at 10 a.m. might be gone by 2 p.m. or 3 p.m.”

A tough way to live

Another thing that may work in Urban Compass’s favor, brokers said, is its decision to pay salaries, which theoretically should make specialists more focused on clients than commission-compensated counterparts.

That setup could “help elevate the reputation and perception of rental brokers,” who have traditionally been viewed as hyper-aggressive, said Tallerman.

“If I’m a consumer and I get better service for half the price, all day long I’ll go there,” he added.

Urban Compass declined to say how much its specialists are paid, but said they all also receive equity in the company, as well as benefits such as health insurance and a discounted gym membership. They also can receive additional compensation for exceptional customer service, much like the bonuses paid by the online brokerage Redfin.

The Urban Compass client pays the 7.5 percent of a year’s rent to the company, not the neighborhood specialist. On a deal cobrokered with an agent from another firm, the Urban Compass agent receives a 5 percent commission and the other agent gets 7.5 percent, half of a standard commission.

Urban Compass has hired 34 specialists throughout Manhattan and Brooklyn. Most have worked as real estate agents, but some have backgrounds in the performing arts, hospitality or other fields, Golub said.

From a real estate agent’s perspective, the Urban Compass model may be an appealing alternative to the ups and downs of the traditional commission model, especially during slower rental seasons.

Working in a traditional real estate firm “can be a tough way to live, especially in the first year or two,” said Sandra Sugata, an Urban Compass neighborhood specialist and a former agent at Town Residential. The Urban Compass model, by contrast, “takes the pressure off.”

Golub said he expects to see hundreds of employees join Urban Compass if the startup is successful. After that, the company may expand into other cities.

Urban Compass doesn’t expect to remain a real estate–focused company for long, though. Company executives confirmed that the second and third phases of the startup’s strategy — after the rollout of the rental platform —would not be real estate–specific. They declined to give details but did say the stages would involve connecting New Yorkers more intimately with their neighborhoods and local businesses.