The Persian Gulf is the most explosive geo-political region in the world, always a hotbed of conflict with an array of oil producing giants bordering this toxic part of the Indian Ocean. Nearly, 100,000 square miles, the Gulf is hugged by Iran, Iraq, Kuwait, Saudi Arabia, Qatar, Bahrain, United Arab Emirates and Oman.
Suddenly like the Persian Gulf, the U.S. real estate scene has become antagonistic and fiercely competitive with forces colliding and jockeying to reshape the real estate landscape.
I was on the road the past two weeks talking to broker owners on the West Coast. Their Persian Gulf moment was when the Compass acquisition of Pacific Union was reported. Few saw it coming and most are still shell shocked.
The Compass effect
“Will we all work for Compass someday?” asked one large San Francisco broker. He was not being facetious, lamenting how Compass took $300 million out of his sales volume two years ago and another $200 million this year by recruiting top producing agents.
Jim Walberg, an agent with Pacific Union, soon to be Compass, spoke about the confusion with Compass consolidating three brands in his market.
“Three different cultures, three different attitudes and three different approaches to the business,” he said.
And if you consider the supply of oil is like the limited supply of real estate listings, the business gets messier.
“When the pie gets smaller, table manners get sloppy,” said Zephyr Real Estate CEO Randall Kostick.
A San Francisco-based indie brokerage, Zephyr was granted a temporary restraining order from Compass last month. The charge; an aggressive recruiting effort by Compass – while the two were in the midst of acquisition talks. However, the order was recently overturned.
Despite the outright hostility, Walberg encourages his peers to “embrace change.” He has respect for Reffkin and confidence that Compass is good for the industry, pushing everyone “to up their game.”
Walberg has also seen some of the technology that Compass is rolling out, which he says “is real.”
“Running for the hills”
One consequence of the Compass effect is industry consolidation.
Last week, Howard Hanna Real Estate Services is acquiring Allen Tate Companies with a combined 119,000 home sale transactions in 2017, $24 billion in sales volume and 11,000 agents in total. And Alain Pinel Realtors (APR) just announced that it will acquire Hill & Co, which will give APR control of Hill & Co.’s offices in the San Francisco area.
Months ago when I asked Pacific Union CEO Mark McLaughlin about businesses eager to sell their enterprises, he said lots of companies are “running for the hills”.
Go bigger, go away
Many broker-owners will exit the business in the next few years, if they don’t grab a seat in this real-life version of musical chairs.
At the center is Compass, real estate’s version of Saudi Arabia, with Robert Reffkin playing the crown prince. With enough money to fill the Persian Gulf, he’s upsetting the status quo. A huge round of funding in the coming weeks, if not sooner, seems probable.
His stated ambitions were to achieve 20 percent market share, but as one broker said, it is becoming more like 35 percent in the hot Northern California real estate market, even 50 percent in markets like Danville, California, where Walberg operates.
This is not the first time that an 8.1 earthquake rattled the industry. More than 20 years ago, Realogy (formerly Cendant) with a $1 billion war chest gobbled up 26 percent market share of the real estate business in just three years.
But the Compass model is different because it radically alters how agents are compensated with six-figure signing bonuses and sky high splits. Realogy did not change much of anything except who owned the enterprise.
Sorting through the noise
Nina Dosanjh, the director of strategic alliances with hot San Francisco indie broker Vanguard Properties, said people were rattled when she first shared the breaking Inman story about Pacific Union being acquired.
But her company sent a loud and clear message: “Move forward,” she said.
Update: This story was updated after publication to include new information about the status of Zephyr’s restraining order.