My Way Or The Highway
Last Thursday, April 19, at around 4 PM, an e-mail went out to the 300+ real estate agents of Town Residential Group that the company was, for all practical purposes, ceasing operations as of that day. These agents, some unsurprised and some utterly blindsided, were thrown into a marketplace which had never dealt with such a surge of unaffiliated talent before. How the drama has played out over the past ten days opens a window into the way our industry, like many others, has changed in recent years.
In a very significant way, Town was an architect of its own destruction. When it opened in 2010, with a bold vision for creating a marketing-heavy, broker-centric organization, the company immediately began to recruit agents heavily, more heavily than the industry had ever witnessed before. Agents were offered lavish marketing budgets and very generous splits to leave their current companies and go to work for Town. Many did. The company grew fast, adding offices, staff, and agents with great rapidity and a seeming lack of concern for expenses. So began the age of aggressive recruiting in New York real estate.
When, a number of years later, fissures began to appear in the Town story, all the competitors from whom Town had so aggressively recruited agents smelled blood in the water and began to use the same aggressive recruiting tactics to strike back. First a trickle, then a stream, then a flood of the top performing agents left for other companies, rapidly undermining the earnings base on which the company depended. The coup de grace was delivered by two concurrent events: a slowdown in both the luxury property market and the new development market, in which Town has been very active, and the arrival on the scene of the new brokerage called Compass. Compass has become the great white shark of agent recruiting nationwide, offering packages which dwarf even those held out during the early days of Town. The intent, it seems, is to build a company which will become either a lucrative takeover target or big enough to go public. With a VC-funded war chest deep into the hundreds of millions of dollars, the company has invested heavily in technology and has no immediate need for profitability. Its stable of recruiters calls and calls and calls, offering agents 70%, 75%, 80% splits along with generous marketing budgets and assistant support. Many agents respond.
Cut to April 20th, the day after the Town announcement. All their strongly performing agents had barely gotten the news when the calls started coming. I know, because I made some of those calls, and so did all my competitors. The deals became more and more dizzying: $50,000 or more in signing bonuses, splits at 95% of earnings on the first half million dollars of commission income guaranteed for three years, $30,000 or $40,000 in marketing budgets. The bidding war had ceased being enacted to obtain a property; now the industry had entered an escalating bidding war for agents.
By the middle of this week it should all be over; the top former Town agents will all be settling into their new companies. But what’s the message for the industry? My daughter Clelia, Warburg Realty’s President and a brilliant business thinker, describes the phenomenon as resembling the airline industry’s race to the bottom, which resulted in many of airlines going into bankruptcy as they fought one another to slash fares and entice customers with rewards. Ours has always been a narrow margin business. While most of the rest of us are not in danger of going out of business, a slower market, larger agent splits, and a greater focus by both brokerages and agents on corporate and personal branding slice that narrow margin ever finer.
What is happening to real estate brokerages today has been happening for years in the finance industry. For those of us who provide a high-touch service to mostly affluent buyers of mostly expensive homes, disintermediation by technology, widely touted as the imminent threat to real estate brokerage as an industry, is NOT the real danger. It’s margin erosion. Every company owner with whom I speak, be they big or small, says the same thing.
I am pleased to say that Warburg hired a number of terrific Town agents without offering signing bonuses or irrational splits. We hired, as we always have, based on affinity. Those agents who see that our values reflect theirs, that our technology looks forward and incorporates the newest tools, and that our size and focus will enable them to grow their businesses, join us. We pride ourselves on the office culture we have created, and the stability and longevity in our agent population which that culture has engendered. We wouldn’t have it any other way.