Last year couldn’t end soon enough for most residential real estate brokers.
Existing home sales nationwide in September hit their lowest level since 2010, thanks to scant inventory and mortgage rates of nearly 7%. Also in 2024, the National Association of Realtors agreed to pay $418 million and change members’ compensation practices after a jury found that brokers had unfairly forced customers to pay artificially inflated commissions when selling their home.
But 2024 was also when one long-struggling real estate broker, Compass, finally turned profitable in the second quarter, seven years after the Japan-based SoftBank Vision Fund showered it with venture funding. On Wednesday, Flatiron District-based Compass said it would report record annual earnings on an “adjusted” basis and free cash flow – thanks in large part to years of painful cost-cutting. Its stock price leaped by more than 20%.
Compass says its 33,000 brokers have a hand in 4.8% of all U.S. home sales. Its sales force is about a tenth that of industry giant Anywhere Real Estate Group, owner of Century 21, Better Homes & Gardens Real Estate, Coldwell Banker, Corcoran, and Sotheby’s International Realty. But Compass brokers are strong at the high end of the market and home sales they had a hand in averaged $1 million in the third quarter, double that of Anywhere franchisees.
Getting to profitability has been a long, arduous voyage for Compass, which CEO Robert Reffkin co-founded in 2012 and five years later raised $450 million from SoftBank, the same firm that famously backed another Manhattan real estate startup, WeWork. SoftBank’s strategy, described by executives as “blitzscaling,” was to give startups enormous sums to turbocharge growth and knock out competitors, with profits to be worried about later. Over 2018, 2019, and 2020 Compass piled up nearly $1 billion in operating losses.
The brokerage firm went public in 2021 at $18 a share and a $8.2 billion valuation, or about $2 billion less than SoftBank had been aiming for. A year later the Federal Reserve started raising interest rates and the housing market started to cool off after more than a decade of non-stop growth. Reffkin hunkered down and slashed costs.
He replaced much of top management and eliminated other roles, including chief business officer and chief product officer. Unprofitable ventures were wound down, including a title and escrow startup acquired in 2020, and headquarters were scaled back, with the firm moving out of 100,000 square feet at 90 Fifth Ave. for about 80,000 square feet two blocks away at 110 Fifth, a building designed by the architects McKim Mead & White. Since the year it went public Compass has lopped off $700 million in annual operating expenses, or 14% of overhead.
All the cuts started showing dividends last summer when Compass posted $20.7 million in second-quarter net income. The firm had a net loss of $1.7 million in the third quarter, but reported $52 million in “adjusted” earnings for the quarter and $109 million for the first nine months of last year. Costs excluded from adjusted earnings include its $57.5 million settlement over broker commissions.
Now that Compass is getting its house in order, the question is whether home sales will cooperate. Economists have their doubts because mortgage rates remain uncomfortably high for many would-be home buyers.
“Unless rates fall significantly—something in the order of a full percentage point or more—we do not expect inventory of existing homes to come on the market in large numbers, limiting supply,” Freddie Mac said last fall. “We expect home sales to remain muted in…2025.”
Such uncertainty explains why Compass stock still trades for less than $7 a share even after today’s rally. But executives are confident they’re positioned for whatever the market may bring.
“We worked hard and never gave up,” Rory Golod, the firm’s president of growth and communications, recently told Crain’s. “And now we’ve got a company that will be around for decades.”
