Is Urban Compass really the future?

<em>TRD</em> takes a critical look at startup’s tech, sales and business model

From left: Ori Allon, Leonard Steinberg, Kyle Blackmon and Robert Reffkin
From left: Ori Allon, Leonard Steinberg, Kyle Blackmon and Robert Reffkin

Brown Harris Stevens’ Twitter handle reads, simply, “@Established1873.” The brokerage trades upon its distinguished lineage and generally manages to keep its white-gloved hands out of industry drama. But when real estate startup Urban Compass poached elite broker Kyle Blackmon last week, BHS president Hall Willkie decided it was time for those gloves to come off.

“Kyle has made the decision that the equity proposition offered to him trumps a singular focus on brokerage,” Willkie said in a statement to The Real Deal. He questioned the wisdom of that decision in an internal BHS memo that stated: “The value of Kyle’s or anyone’s equity will be dependent on the success of Urban Compass’ founders implementing their vision of selling their company for substantially more than many industry experts believe is possible.”

Willkie’s statement echoed what many in the industry have whispered – or shouted under the cloak of anonymity – for months. Urban Compass, these sources say, is merely an idea – albeit a well-choreographed, Ivy League and McKinsey-branded one. But even with a $360 million valuation, they ask, is it really the future?

Tech leg up? 

A screenshot of the Urban Compass app

A screenshot of the Urban Compass app

Urban Compass has always stressed that its competitive advantage is superior technology, both for the consumer and the broker. “Just the way Apple made buying and listening to music significantly different, I think this company can have the same effect on real estate,” Urban Compass president and top-ranked broker Leonard Steinberg told TRD in June. But it’s still unclear to many in the industry, including former employees, what exactly that advantage is.

“Urban Compass likes to think that from Day One their technology was really differentiated,” said a former broker who left the company earlier this month. “The reality is their technology looked better but was actually behind and they were piecing it together from scratch.”

“It wasn’t a game-changer by any means,” the agent added.

Robert Reffkin, CEO of Urban Compass, acknowledged the difficulty he’s faced in creating believers out of those who haven’t seen the technology first-hand. “It’s hard,” he said during an interview Tuesday night at the startup’s Union Square headquarters. “How would you explain why the iPhone is better than the Samsung? Your users have to feel it and see it.”

While the existence of the technology in of itself isn’t novel, the intuitiveness of its design is — something that even the firm’s skeptics acknowledge. An agent using the mobile app who wants to send feedback to the firm’s engineers, for example, simply has to shake her mobile phone and a portal will pop up. Also via the app, clients who receive a listing from an agent can click to see a street view of the property, courtesy of Urban Compass’ own mapping technology that is similar to Google Street View.

Saving time is at the crux of Reffkin’s agenda. The average New York City agent spends 89 percent of their time performing administrative tasks, he said, citing the firm’s data. He wants his agents to have more time to spend with clients.

Sources said Urban Compass agents purchased up to 15 licenses to Real Plus’ electronic listing exchange. As recently as August, brokers were using popular listing databases like StreetEasy, On-Line Residential and Realty MX in lieu of the company’s own search engine.

Adam Fleming, who was Urban Compass’ head of engineering until he moved to real estate startup Honest Buildings in June, said that Urban Compass’ thesis “is empowering customers and agents to find each other in the right way and right time.”

Fleming, who declined to say why he left Urban Compass, said that the firm had a “pretty nice algorithm” that matches customers with appropriate agents. “Agents receive tremendous support inside Urban Compass,” he said, “that they don’t get anywhere else.”

Cherry picking

From left: Julia Hoagland, Timothy Rothman and Howard Spiegelman

From left: Julia Hoagland, Timothy Rothman and Howard Spiegelman

Blackmon is the latest in a long line of big names to join the firm since ex-Elliman stalwart Steinberg came over in June. These include Julia Hoagland from BHS, Timothy Rothman and Howard Spiegelman from the Corcoran Group, Eugene Litvak from Citi Habitats, Roy Kim from Extell Development and Jay Glazer from Warburg Realty.

Without a concrete advantage early on, Urban Compass offered equity to lure top producers to its ranks. “The only differentiating factor they could offer was equity,” said a former broker. And as the startup continued its phenomenal fundraising run, the appeal of that equity stake kept rising.

Reffkin confirmed to TRD that the firm has offered equity to top brokers.

“Every advisory business I know gives equity to the people that help build it,” he said. “A real estate brokerage should do the same. Some of these agents have built their companies with the brand they [help to] create.”

The head of a rival brokerage cited the equity as Urban Compass’ main draw. “Aside from the ones they [Urban Compass] bought – Julia Hoagland, Kyle Blackmon, Leonard Steinberg – they haven’t attracted any top brokers,” the brokerage head said.

Another former agent who was among Urban Compass’ first hires said that when she left the firm after 18 months, she walked away from an equity stake. “I didn’t believe it was worth anything at the end of the day,” she said. “The idea was that they were going to be different from other brokerages and that was always the plan. Then every time we executed one of the ideas that they had, they realized this doesn’t work.” In May, for example, the startup shifted from a neighborhood specialist-driven model to one more in line with a traditional brokerage’s, and pivoted from rentals to sales, which also put the firm on a mission to recruit top agents.

Beyond the commissions that these top agents bring, Urban Compass relies on them to provide feedback and help it build cutting-edge products that can upend the industry. And brokers who’ve left bigger firms for Urban Compass said they’re eager to be part of a brokerage with an empathetic ear.

“I didn’t want to leave Brown Harris but I did want to come to Urban Compass and one or the other had to win,” said Hoagland, “You have to take some risks and hopefully they’re very calculated. It’s a leap of faith at the end of the day.”

Investors come knockin’

From left: Bill Rudin, Jared Kushner, Josh Kushner and Marc Benioff

From left: Bill Rudin, Jared Kushner, Josh Kushner and Marc Benioff

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To say Urban Compass had a meteoric rise is almost an understatement. To date, the startup has raised more than $70 million, including a $40 million Series B round in July that doubled its valuation to more than $360 million – a staggering amount, according to tech industry sources.

Among its investors are Founders Fund, Goldman Sachs, Joshua Kushner’s Thrive Capital, Advance Publications, Marc Benioff, and New York real estate names like Bill Rudin and Jared Kushner.

Flush with funding, Urban Compass has been able to act on its ambitions. In March, it took 9,000 square feet of space at 19 Union Square West, paying rents in the mid-$60s per square foot, according to CompStak data. It then doubled its space at Aby Rosen’s 90 Fifth Avenue to 50,000 square feet, paying rents in the mid-$70s per square foot, CompStak data show. And in September, it expanded to Rosen’s trophy Lever House at 390 Park Avenue, signing a lease for 10,700 square feet.

And its resources are being used not only on agents, but on engineers, too – it now has 21 of them working full time.

“You were really working at the speed of thought,” Fleming, the former head engineer, said. “If there was operational appetite to execute it, there were not any other barriers.”

But Urban Compass may have raced out of the gate too fast. “They’re sprinting a marathon, but so far it seems to be working,” said Dan Miller, president and co-founder of real estate crowd-funding platform Fundrise.

Miller, whose firm also raised a healthy chunk of change recently, said Urban Compass’ founders attracted high-caliber backers, and are simultaneously benefitting from broader investor excitement about real estate tech. “I wouldn’t bet against their founding team,” he said. (Executive chairman Ori Allon sold his last two companies to Google and Twitter, and Reffkin’s pedigree includes Goldman Sachs, McKinsey & Company and financial services firm Lazard.)

Miller pointed out that Urban Compass is under pressure to sustain its pace. If it does, the company could go public in two years and make a killing, but a key question is whether the company can deploy its technology in new markets and scale quickly enough. “I’m not yet convinced their platform is not just a brokerage business that uses a better technology,” Miller said. “That’s the thing with tech companies. It’s hard to know what’s smoke, what’s reality and who’s having really explosive growth or who’s buying growth.”

Selling New York

As Urban Compass’ roster of A-list agents has swelled, so have its listings. As of November 24, the firm had $494.9 million in listings, according to data provided by On-Line Residential – a figure that makes it the ninth-largest brokerage in the city by dollar volume of listings. That’s remarkable for a company that hasn’t yet turned two.

In comparison, Halstead Property has $674.3 million in listings as of the same date, OLR data show. Town Residential has $457.9 million and Nest Seekers International has $415.5 million. The Corcoran Group had $4.1 billion in listings – the most in the city – followed by Douglas Elliman with $4 billion and Brown Harris Stevens with $2.5 billion. Urban Compass’ number is likely to jump when Blackmon’s listings are reflected.

What’s less clear, however, is how many sales Urban Compass has closed this year. Steinberg, for example, is marketing several trophy listings, including a $37.5 million penthouse at 158 Mercer Street that’s been on the market 160 days, according to StreetEasy. But the site’s data show that his recent closings are for apartments with much more modest price tags. Reffkin declined to comment about the startup’s sales, but he did say the firm has about $2 billion in its new development pipeline.

Critics of the firm noted that several of Urban Compass’ investors, including the Rudin family and Jared Kushner, don’t use the firm to market their properties. Corcoran Sunshine Marketing Group is handling sales for Rudin’s Greenwich Lane project, and Sotheby’s International Realty is handling sales for Kushner’s Puck penthouses. Reffkin countered that most of this product was being marketed before Urban Compass even came into being.

So sue me

Gary Malin

Gary Malin

The startup’s ascent hasn’t come without legal challenges. In July, tech entrepreneur Avi Dorfman accused Reffkin of using his product and business model to build Urban Compass and then cutting him out of the action. “This is a company that thinks it can take from people without compensating them,” Dorfman’s attorney Adam Ford told TRD.

A month later, rival brokerage Citi Habitats sued the startup, alleging that Urban Compass breached its proprietary listing database. Citi Habitats president Gary Malin alleged the firm was using information from Citi’s LEAR database to lure agents to Urban Compass.

But in an October 1 letter to Judge Jeffrey Oing, attorney Eric Leon described Citi Habitats’ accusations this way: “Despite Citi Habitats’ alarmist rhetoric, this case involves, at most, a garden variety claim for trade secret misappropriation spanning a few months in 2014, and even that claim seems to suffer some serious defects.”

Urban Legend

Robert Reffkin

Robert Reffkin

If there’s something Urban Compass does unequivocally well, it is telling their story. The company has skillfully shaped its own brand, starting with a press conference to launch the company in May 2013 headlined by former Mayor Michael Bloomberg. This savvy has extended to damage control, too – when Citi Habitats sued Urban Compass, Urban Compass sponsored a Facebook ad to combat the negative press.

The startup has successfully carved a niche for itself as a thought leader in the real estate technology space. In July, it hosted a standing-room-only conference titled the “Future of Real Estate.” There’s even an Urban Compass University channel on YouTube. This fall, the company rolled out an elegant market report chock-full of data and analysis presented in a fresh way.

The firm’s offices have all the trappings of a tech startup – pool tables, free catered lunches and other perks such as rooftop yoga. Reffkin, a longtime marathoner, leads a running club. “We have the luxury to build a great culture,” he said.

But that culture, and everything else about the company, is constantly subjected to a harsh spotlight. It’s part and parcel of being the industry’s most hyped startup in a city where real estate rules the roost.  A quote from Gandhi that Reffkin shared soon after Willkie’s comments may reveal how he feels about his perch. “First they ignore you,” he tweeted, “then they laugh at you, then they fight you, then you win.”