Why Compass isn’t closing offices

Less than 1% of brokerage's’ $320M cost-cutting will come from shuttering locations

Compass' Neda Navab, Rob Lehman and some of their marquee locations: 90 Fifth Avenue, 2405 Main Street & 605 Lincoln Rd. (Loopnet, Google Maps, RFR Realty, Compass, Getty)
Compass' Neda Navab, Rob Lehman and some of the firm's notable locations: 90 Fifth Avenue, 2405 Main Street & 605 Lincoln Rd. (Loopnet, Google Maps, RFR Realty, Compass, Getty)

When Compass announced an aggressive cost-cutting strategy, one of the places expected to get a hard look was its office footprint.

After all, closing an office doesn’t require many layoffs, and in some regions, the firm has several prime locations within minutes of each other. Some of those leases were signed when rents were at a premium.

But sources said the company isn’t reducing its physical footprint, despite looking to cut roughly $320 million from its budget after a quarter in which it announced losses of $101 million.

“One, we don’t need to because we have other levers we’re focused on, and two, it’s not what agents want,” said a company executive. “We’ve worked backwards and said to agents, ‘What’s ideal for you?’ Most of them have said, ‘We want to be in the office.’”

According to Compass, closing offices doesn’t necessarily save money up front, as there are termination fees for long-term leases.

“We have other cost centers that yield a lot more savings and don’t materially affect the experience of our agents,” said the executive.

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Up until this year, Compass had been aggressively expanding, a strategy that entailed opening up its SoftBank-funded checkbook to poach top brokers and acquire smaller competitors. At the end of 2019, it had 15,500 brokers nationally across 325 offices.

The number of offices has since grown to 427 staffed full-time, according to Compass’ website, and another 85 satellite offices staffed part-time that aren’t listed on the site, according to data provided by a company representative. The company now has nearly 13,000 “principal agents,” defined by the company as team leaders or individual agents operating independently on the Compass platform, up 22 percent year-over-year. Overall, the company has about 28,000 agents.

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As the number of spaces has grown, so has the cost to keep them open. According to Compass’ 2021 annual filing, it spent $135 million on office leases last year, up from $122 million in 2020. Its future lease liabilities at the end of last year totaled more than $564 million.

Those numbers could increase if Compass continues to open offices across the country. It recently opened a second location in St. Louis, where it plans to recruit another 200 agents, according to Inman.

And it doesn’t plan on closing many offices. Compass said it closed a net of eight offices this year, and that plans for those closures date back to last year, before the market shifted and cost-cutting was announced.

“In some cases maybe we closed two locations but opened a larger location,” said a company spokesperson.

The brokerage’s office footprint is heavily concentrated in three states: California (140), Florida (62) and New York (57). In California, its offices are mostly in and around San Francisco and Los Angeles, both cities with rents far exceeding the national average. Its New York offices are clustered in and around New York City, with a strong presence out to the Hamptons on Long Island. It also has a sizable foothold in secondary markets like Rhode Island, where it has 12 offices, and Cape Cod, Massachusetts, where it has more than 20.

Many of those locations came by way of acquisitions. Between 2018 and 2021, Compass spent $300 million acquiring at least 14 brokerages, leaving it with a cluster of locations in some markets.

For example, the office it inherited when it acquired Stribling & Associates gave it three locations within six blocks on New York’s Upper East Side. In San Francisco, it has three offices on 24th Street and all of its offices are within a 10-minute drive of another office, according to Mapbox, a location data provider. Similar situations have played out on Cape Cod and Rhode Island.

An executive said the company did away with its redundant locations and those that remain are profitable.

“Take Rhode Island and Cape Cod, where we acquired multiple companies,” the executive said. “They’re smaller towns and they’re more confined to the geography of that actual town. So you end up having a lot of offices, but they’re smaller.”

“That business model worked really well for those acquired companies,” the executive added. “They were strong businesses, they were profitable. That’s why we don’t have plans to change that.”