The Real Deal Los Angeles

Will Compass tie-up with Pacific Union shake up LA market?

The VC-backed firm gained 20 offices, 2 top-producing teams
By Natalie Hoberman and Alexei Barrionuevo | August 22, 2018 04:26PM

Mark McLaughlin (left) and Robert Reffkin (right) (Credit: iStock)

Only eight months ago, Pacific Union International launched a highly publicized rebranding, assimilating three formerly independent brokerages under the Pacific Union banner.

“This dream team…will provide the absolute best client experience possible,” Nick Segal, the newly appointed company president, said in a statement on Jan. 3. “And we now all proudly share the same company name, Pacific Union International.”

Less than a year later, Segal’s “dream” has a new company name attached to it — Compass.

In a blockbuster deal that has stunned many agents and executives across both coasts, Compass is acquiring Pacific Union, one of the largest brokerages in the country with $14 billion in sales last year. In Los Angeles, executives and star agents say the tie-up likely won’t drastically impact the market because Compass had yet to prove it could hold sway with established players such as Coldwell Banker and Hilton & Hyland.

“I think a lot of agents are confused about what this is,” said Michael Nourmand, president of boutique brokerage Nourmand & Associates. Sally Forster Jones, a former Pacific Union agent who jumped to Compass in February, said she was “surprised” to hear the news.

Compass entered the L.A. market in 2016 and had grown through local acquisitions to six offices in L.A. County and 13 across California. With its latest purchase, Compass will scoop up 1,700 agents and 54 offices from Pacific Union on the West Coast, including 20 in L.A.

Among the agent haul, Compass will be adding Aaron Kirman Partners and Smith & Berg Partners, two top-producing teams within the Pacific Union family. Kirman’s team has more than 40 agents and recently listed a 157-acre property just outside Beverly Hills for $1 billion.

Jason Oppenheim, founder of West Hollywood-based the Oppenheim Group, said that while the acquisition will “inevitably increase” Compass’ market share and revenue in L.A., it’s unclear how much that will affect the firm’s bottom line. The venture capital-backed company has a reputation of offering favorable splits and marketing dollars to agents, which in turn has created a “race to the bottom” where brokerages make less money per agent than they used to, he said.

“The brokerage model has a much more narrow profit margin because they’ve been so aggressively competing with each other to grow,” Oppenheim said. “Once investors stop focusing on revenue, and start focusing on net profit, it will tell whether this method of expanding is viable.”

San Francisco-based Pacific Union is a relatively new player in L.A. Like Compass, it grew by acquiring three brokerages — Partners Trust, John Aaroe Group and Gibson International — since 2016. Up north, it also owns the Mark Company and Empire Realty Associates.

Brokerage executives shrugged off concerns Wednesday that the tie-up would produce a well-funded competitor, with boutique firms largely welcoming the news as a possible boon to their business.

“As these companies get really large, they become more corporate,” Nourmand said. “There’s not as much touching and feeling. When there was a lot of consolidation in the 1990s, a lot of boutiques grew because of that.”

Compass agents will have to work extra hard to “differentiate themselves,” said Mike Deasy, CEO at Deasy/Penner, a boutique brokerage with four offices.

“When you’re going on a listing meeting, the less companies that are out there, the less competition,” said Josh Flagg, a Rodeo Realty agent.

“For my firm this is a win-win,” echoed Jeff Hyland, co-founder of Hilton & Hyland, which has about 150 agents operating from a single office in Beverly Hills, mostly working on properties listed for $10 million or more. “There is no way that they can have the nimbleness that an independent office has.”

Hyland also noted that Compass, since arriving in L.A., has struggled to lure away top-producing agents beyond Tomer Fridman, a former Sotheby’s International Realty agent, and Jones. The firm finally plucked a Hilton & Hyland manager, Charles Black, in May.

“Star agents don’t want to be in an office of 1,000 people,” Hyland added.