Too big to fail or just too big?

Months after news broke of Compass’ bombshell acquisition of Pacific Union, the resultant shock waves are still hitting all corners of the market.

With Pacific Union’s 1,700 agents and 54 offices under the Compass banner, Robert Reffkin’s tech unicorn is now the largest independent brokerage in California, according to Real Trends.

The Pacific Union acquisition comes exactly one year after another New York residential giant, Douglas Elliman, gained a bigger foothold on the West Coast by acquiring Teles, a brokerage with 600 agents in California.

Since December 2016, at least five independent brokerages in L.A. have become extinct. Compass has gobbled up four of them.

Owners of the few boutique brokerages that remain largely welcomed the consolidation, predicting that they can hire away talented agents looking to flee these growing corporate behemoths. But many brokers now at the larger conglomerates are still waiting to see how the chips fall. Experts say that with fewer brokerages in the mix and increased competition among the big firms, margins may shrink even further as the market nears a correction.

Through interviews with brokerage owners, executives and agents, The Real Deal took a closer look at the consolidation that’s taken a hold of L.A., how that’s shaping the market and why — even with most of the boutiques gone — many anticipate there is even more consolidation to come.

PacU’s acquisition spree

Before it became a part of Compass, San Francisco-based Pacific Union made a number of acquisitions itself.

Ranked at the time as the ninth-largest brokerage in the country by sales volume, with 28 offices and 700 agents, Pacific Union acquired the John Aaroe Group (JAG) in December 2016. With JAG, the firm added nine offices and roughly 400 associates to its roster. Eight months later, the firm closed a deal to buy Partners Trust, another boutique brokerage, which had seven offices and 240 associates. Shortly after that, Pacific Union acquired a greater stake in Gibson International, which it already owned 35 percent of.

It wasn’t until January 2018, however, that agents at the newly acquired firms truly felt the impact of the merger. In a departure from its initial plans, Pacific Union announced in late December 2017 that it would be rebranding the three companies under the same banner on January 1, 2018.

“Companies that are acquiring other companies know not to make changes in the short run,” said Paul Stukin, a former JAG agent who joined Hilton & Hyland shortly after the merger. “It’s like changing the temperature of water on a frog in a boiling pot — you slowly, methodically make those changes because if they’re not sudden, more people will stay in place.”

Mark McLaughlin, CEO of Pacific Union International, admitted to some difficulty with retention in the wake of the acquisitions. “We had a bit more of a fallout in Southern California than we expected,” he said.

For boutique firms, the Pacific Union consolidation meant a flood of new agents wanting to join their teams. “Anytime there is consolidation and an agent feels like they are forced to do something against their will, there’s always going to be some havoc and people who want to leave,” said Mauricio Umansky, co-founder of the brokerage The Agency. He said he especially noticed agents flocking to his firm when Pacific Union purchased JAG.

Jeff Hyland, the eponymous co-founder of Hilton & Hyland, also said his firm recruited many agents after the mergers, though his shop is now “full.”

Ironically, the Pacific Union shopping spree also paved the way for Compass to add new agents.

Just one month after the rebranding, star broker Sally Forster Jones and her team of 25 agents — originally part of JAG — joined Compass. At the time, Jones called the move a “strategic one.”

The other New York giant

Before Compass made headlines with the news that it would be acquiring Pacific Union, another New York firm had made a similar play in L.A.

Douglas Elliman had roughly 65 local agents when it opened shop on El Camino Drive in Beverly Hills in March 2014. The New York firm had a well-established presence on the East Coast, and it was hoping to gain a similar foothold in the West.

But it wasn’t until August 2017, when Elliman acquired Teles, that the New York powerhouse became a force on the West Coast. With 500 additional associates and 19 new offices, the firm was suddenly a heavy hitter on the Pacific.

The acquisition did not come without its challenges. Sharran Srivatsaa, a former executive at Teles who left Elliman nine months after the merger, said the hardest part of the acquisition was “absorbing” into Elliman culture, considering Teles was 10 times bigger than Elliman in California.

“If you have 600 agents that are integrating 50 agents, it’s easier because you’re looking around and getting the bear hug of the culture,” Srivatsaa said. “But if you have 50 agents trying to integrate 500, there’s a cultural overwhelm there.”

The biggest challenge with acquisitions is, “if you don’t do it right, you end up with a lot of breakage,” Stephen Kotler, CEO of Elliman’s Western Region, said, describing a potential exodus of agents. “We didn’t have any.”

But there was some reshuffling in upper management positions. In January, just one month after Teles was rebranded under the Elliman banner, Evan Ageloff left his position as chief operating officer of Teles and was replaced by New York transplant Bill Begert.

A few months later, Srivatsaa left his post as president of the Western Region for Elliman to become CEO of a real estate startup he’d been investing in. Peter Loewy, ex-CEO for California and chairman of the board at Teles, left in July to become chairman of Portfolio Escrow, a Beverly Hills-based firm.

“People forget that we are an operationally sensitive business where margins are really low,” Srivatsaa said. “Even one brand like Elliman acquiring one brand like Teles was hard enough. I think one brand acquiring multiple brands is going to be operationally very difficult.”

To stay or not to stay

As Compass finalizes its deal to acquire Pacific Union, agents will have to make a tough choice as to whether they want to stay in a big conglomerate or head to the few boutiques that remain. Some may not have a choice.

“If anyone proves not to be aligned with our culture or the values that Compass agents embody, we will ask them to leave,” said Reffkin, Compass CEO and founder, in an emailed statement. He declined several requests for a phone interview.

So far, Michael Nourmand, president of Nourmand & Associates, said he recruited two Pacific Union agents after the Compass deal.

One former Pacific Union agent, speaking on the condition of anonymity, said she’s interviewed at four places already. “It’s a no-brainer,” she said. “I’m definitely not staying at Compass.” Once a shareholder at Partners Trust, the agent said she prefers boutique firms and fears the service at Compass will be “watered down” with the sudden influx of agents. “When you become one of 7,000, you are literally nobody,” she said.

Compass has taken steps to mitigate some of those concerns. Rather than running a combined California operation, as some industry folks predicted, McLaughlin will oversee only Pacific Union offices “to ensure [agents] are fully supported,” Reffkin said.

Tami Pardee, the owner of boutique firm Halton Pardee + Partners, said that the consolidation has given her agents a leg up on the competition. “My agents think it’s great,” she said. Buyers and sellers rarely reach out to multiple brokers at one firm, but they’ll call multiple brokerages. With more brokers at Compass, the odds increase for someone at a smaller firm to compete, Pardee said. “I’m much better off when my competitor is a huge firm,” Hyland said. “Eighty-five percent of all luxury sellers want a local broker with boots on the ground.”

Jones, a star agent at Compass, said she welcomes the consolidation because it means her team has an expanded network. “A high-net-worth seller wants to know where’s the reach throughout the country,” Jones said, adding that she expects the Pacific Union merger will make for an “easier conversation with sellers,” considering Pacific Union is an established company in California.

The next acquisition

Although only a handful of boutiques remain, many suspect there will be more consolidation in the next few years.

“When margins get tighter, people look for ways to adjust,” said Nourmand. For brokerage owners, that could mean cutting back on expenses, or simply selling a firm outright.

In August, the number of closed sales in L.A. County dropped 8.9 percent year-over-year, according to a report from the California Association of Realtors. Homes on the market also took an average of 19 days to sell, reflecting a 5.6 percent increase from last year.

“If you’re a seller of a real estate company right now, it’s a little bit of a challenging time in that the markets overall are taking a bit of a pause,” Kotler said. “You may not see as much for your company as you would have seen a year or two ago.”

Regardless, the consolidation continues. In September, Deasy Penner announced it would be buying Pasadena-based Podley Properties. Together, the combined 300-agent firm expects estimated annual sales of more than $1.6 billion, according to a company statement.

Many have speculated that The Agency or Rodeo Realty might be next boutique brokerages to be scooped up by a larger national firm.

“Whenever you see a company that’s opening up branches, it’s usually a sign that they’re expanding to sell at some point,” said Nourmand. Since 2011, The Agency has grown to 18 offices, with plans to open at outpost in Miami in the near future.

Umansky expects there will be more consolidation over the next six months to a year. “After that, when there are even fewer choices, smaller mom- and-pop shops will break off and open up at some point,” he said.

However, Umansky added that rumors of his firm being for sale are “absolutely not true,” and were started by competitors.

But, as history demonstrates, most companies aren’t “for sale” when they are finally sold. Srivatsaa said that when Howard Lorber, chairman of Elliman, first approached Teles executives with the intention to acquire the firm, it was not looking to sell. Likewise, when McLaughlin and Reffkin met in April in Newport Beach for a “casual conversation,” Pacific Union wasn’t for sale, McLaughlin said.

When asked about possible future acquisitions, Reffkin replied by stating that he is “always exploring great partners for Compass.”