[VIP] What Shutting Down Climb Says About Realogy, Part 1: The Story and Questions

[Warning: this is a very long post, even by my standards. I encourage you to take frequent breaks, brew a fresh pot of coffee, and maybe re-read sections if they interest you.]

Last week, I broke the news that Realogy was going to shut down Climb, the San Francisco-based “youth culture” brokerage, and consolidate it with the NRT-owned Coldwell Banker offices throughout the Bay Area.

Realogy had acquired Climb in 2016, and in 2018, had made a splash by anointing Climb as one of two new franchise brands that it would roll out in 2019. Here’s how the press release read in October of 2018:

Realogy Holdings Corp. (NYSE: RLGY), the largest full-service residential real estate services company in the United States, today announced plans to franchise Corcoran® and Climb Real Estate® for the first time, expanding its portfolio of brand offerings for brokers, agents, and consumers. Both Corcoran and Climb plan to begin selling franchise agreements in early 2019.

Born in New York City, the epicenter of global real estate, Corcoran will leverage its strong brand reputation for highly personalized service and groundbreaking marketing to expand beyond its current East Coast owned offices as it targets franchise opportunities in global megacities and sought-after leisure markets both within the United States and internationally. Climb – born in San Francisco and raised in Silicon Valley – will bring to U.S. urban markets a mobile-first model, appealing to a new generation of brokers, agents, and consumers seeking a more flexible real estate experience.

“Realogy serves more aspects of the real estate transaction than any other entity with an incredible legacy of shepherding and growing some of the most well-known and respected brands in the industry,” said Ryan Schneider, Realogy CEO and president. “The decision to add two new franchise options to our portfolio is critical to Realogy’s long-term organic growth strategy, and we believe demand for Corcoran and Climb will help us unlock additional franchisee opportunities, drive productive agent recruitment, and, ultimately, capture more share of the market.” [Emphasis added]

Given the supposed importance of Climb just in late 2018, the news surprised me as I imagine it surprised many others.

So within hours of breaking that news, I spoke with Ryan Gorman, CEO of Coldwell Banker (under which the company owned stores of the NRT now fall), about the decision.

While Gorman put a spin on the decision I had not considered, one that is considerably more positive than any initial takes might be, I am forced to try and read between the lines, pull threads together, and try to discern what the decision actually says about Realogy.

As is my wont, I actually do a lot of my thinking while writing, so let me do that with you, the VIP audience, the best of the best informed readers in real estate.

The Conversation With Ryan Gorman

Let me begin with what Ryan Gorman told me led to the decision to shut down Climb. I am going from my notes, as I did not record the conversation, so some of the quotes may be inexact.

Gorman said that he had just spent the afternoon at Climb’s main office with the whole team and most of the agents explaining the transition, what it means for people, and what they can expect. He said that he and other leaders explained the enormous value proposition there is in Coldwell Banker for each and every Climb agent, how much Coldwell Banker had evolved and changed over the past couple of years, and how there is a wonderful fit between Climbers (that’s what he calls Climb agents) and Coldwell Banker.

He was extremely upbeat, and said that once they understood all of the value that Coldwell Banker would bring to their businesses, the agents were very positive about the change. He admitted that Climbers had an “antiquated understanding” of Coldwell Banker as a brand, and Coldwell Banker-NRT as a brokerage, and that the afternoon’s education really changed their minds.

I had two major questions about the decision.

What Changed?

First, I asked what had changed between 2016 when Climb was acquired and 2019 when Realogy decided to shut it down. I reminded him that when Realogy acquired Climb in 2016, the press release strongly suggested that innovation and experimentation were at the heart of the reason for the acquisition. From the original press release:

“Innovation is at the core of Climb’s approach to business, whether it is their open office concept, collaborative culture, mobile office, or their leveraging of the latest technology, and we are very drawn to their culture of innovation and eager to gain new insights from their approach to business. For NRT, this adds a unique boutique agency serving diverse consumer segments in the heart of the innovation mecca of San Francisco. We are excited by the broader application of this forward-thinking business model.”  – Bruce Zipf, CEO, NRT [Emphasis added]

The strong implication I draw is that Richard Smith and Bruce Zipf (and the rest of the senior team at Realogy) understood that they were perhaps getting a bit long in the tooth, getting a bit antiquated, and needed an injection of youth, of innovation, and of a “forward-thinking business model.”

Gorman’s answer was, “We’ve done it; Climb’s DNA and innovation is all over Coldwell Banker and Realogy.”

As an example, Gorman mentioned Climb’s culture of experimentation: try something quickly, and fail fast so you can move on. He said that Realogy’s recent rollout of RealSure, of RealVitalize, of Turnkey (the Amazon partnership), are examples of how Realogy is moving much faster, experimenting, and willing to fail fast. He said “We’re innovating more quickly.”

The implication here is that Realogy learned all it needed to learn from Climb, from Climb leadership (Chris Lim, Mark Choey, Christine Kim, and others) and no longer needed to keep Climb around.

That leads to a followup question, however….

Why Shut It Down?

Even if Realogy had absorbed all of the lessons from Climb and the culture of innovation at Climb, and no longer needed to keep it around, why shut it down?

I asked Gorman whether this was a cost-cutting move, and he flatly denied it. Instead, he said the reason to shut it down was for the benefit of Climb agents. Going forward, Climb agents who affiliate with Coldwell Banker would get all of the tools, training, support, value, brand presence, etc. that Climb could not provide.

Since that didn’t make sense to me, as Climb was an NRT company like Coldwell Banker and could get the full range of tools, training, support, whatever that the NRT and Realogy could provide, I asked about that. Gorman’s response was that there are many tools that Climb couldn’t get because they (and the value they provide) are so deeply integrated with the brand. For example, Listing Concierge is a tool that Climb couldn’t get, because of how tightly integrated it is with the Coldwell Banker brand.

So the reason to shut it down is to help Climb agents be more successful. Quoting from my notes, Gorman said:

Truth is, every individual agent [at Climb] left today knowing that the actual conversation they can have with their listing client is so substantially improved from this morning. They will be more successful. It is NOT a cost saving initiative. It really is a benefit of scale.

I asked him about the question of scale, wondering if scale was so important, why ERA and BHG are not also folded into Coldwell Banker or Century 21. Gorman replied that it’s different at the franchisor level. Then he said that individual brokerages, or smaller brokerage operations with but a few offices and a couple of hundred agents (like Climb) are going to have to make some very difficult decisions in the next few years.

What Happened to the Franchising Play?

While this is part of the “What changed?” question, I thought it deserved its own section as it is important.

Gorman first pointed out that while Realogy shut down Climb the company-owned brokerage, they didn’t get rid of the Climb brand as a franchise asset. So there is a chance that Climb could survive as a brand.

What he said was that while Climb could have grown to be a major national brand under Realogy, it would have taken years to get there. He said that Realogy felt waiting those years is bad for Climb agents who could have access to all the value that Coldwell Banker provided to its agents.

“Today was about these agents and their businesses,” he said.

The Narrative

So if we pull all of the strands together, the narrative goes something like this:

We bought Climb in 2016 to learn all we can about the culture of innovation, about experimentation, about failing fast to drive ultimate success. We learned all of that, have deployed it across Realogy, and no longer needed Climb for that. Franchising the Climb brand would have taken years to get to scale, and we didn’t want to hurt the Climb agents who didn’t have access to the full range of value that Coldwell Banker could provide. So we shut down Climb the brokerage in order to give those agents all of the wonderful tools at Coldwell Banker. And now that those agents know just how much we have changed, and just how awesome our value proposition is, they’re excited and positive about the future.

Sounds pretty good. Gorman does a very good job of shining an optimistic light on the situation.

Unfortunately, once you’re out from under the light, the narrative is about as convincing as that $100 Rolex you bought in Times Square.

Climb Agents Are Not Happy

I have spoken to several agents, managers, and others (such as technology vendors) who are in positions to know what happened. They have all asked for anonymity, except one (which we’ll get to below).

Let’s start with the fact that according to multiple sources who were in the room as Gorman delivered the news to Climbers, there were (allegedly) people openly weeping during the announcement and discussion. That does not sound like a positive and upbeat reception.

Then there’s the social media reaction from Climb agents, like Jing Fang, named to NAR’s 30-under-30:

That doesn’t sound like someone who is thrilled that she will get access to all the wonderful tools of Coldwell Banker that Climb was unable to provide.

Add on the reports that competitors are banging the phones of Climb agents left, right and center. One agent I spoke to who is friends with a Climb top producer, said that the Climber had received (and responded to) text messages and phone calls from no fewer than six competing brokerages, including Compass. Said Climber is apparently not considering moving to Coldwell Banker.

That sentiment was echoed throughout my conversations since last week with people in the industry from the Bay Area: not a single agent at Climb today would have ever considered Coldwell Banker as an alternative. It isn’t as if Coldwell Banker was not an option for Climb agents back when they were joining Climb. Why would that change now?

Various people from the Bay Area thought that Climb would lose at least 50% and potentially all of the Climb agents to boutiques, to Compass, or to higher end luxury brands, such as Sotheby’s. One manager, who was in the midst of trying to recruit Climb agents, told me that Climb is an urban Millennial brand; nothing about Coldwell Banker in his/her mind said urban or Millennial, while his/her company’s brand did. That manager was very confident in his/her chances picking up Climb agents.

None of that is hard evidence; most of it is anecdotal and much of it second-hand. But it’s hard to think that this change was done so that Realogy can hold on to Climb agents and make them more productive. It does seem like a long shot that the young, urban, hipster agents of color would go join a Coldwell Banker office that is overwhelmingly old, suburban, and white. (The diversity issue was brought up by at two people I spoke to; I’m not surprised given that Climb is based in San Francisco.)

Having said that, this Facebook response to me by Lindsay Listanski, who was Climb’s Head of National Marketing and has been with Coldwell Banker for almost seven years prior, is worth considering. She is in a position to know the culture of both brands, both organizations:

Again, to be fair to Ryan Gorman, he did say that Climb agents were pleasantly surprised at the evolution of Coldwell Banker and all the changes that had happened in the august 100-plus year old brand. But no one I spoke to personally who is in a position to know agreed.

That doesn’t mean some Climb agents were not pleasantly surprised; merely that I did not speak to any who were. Consider this an open invitation for Climb agents to leave comments below letting us all know the truth.

The Mark Choey Conversation

There was one person willing to speak on the record. And he is someone who ought to know about the Climb brand and culture: Mark Choey, co-founder of Climb. Although he has been out of Climb and Realogy since the end of 2018, Mark was obviously present at the sale of Climb to Realogy and was with the company until he left. If anybody knows what Climb is all about, it’s him, and he is also a bit of a Realogy insider to boot, at least for a short period of time.

Choey said (I’m quoting from notes here), “Climb is diametrically opposed to Coldwell Banker, Century 21, ERA, BHG, even Sotheby’s; the brand couldn’t be more different.” He did not say so outright, but did not appear to be sanguine about Coldwell Banker’s chances of picking up a whole lot of Climb agents.

There were incredibly interesting nuggets from that conversation. I’ll pick the most interesting and/or important. Do keep in mind that this was Choey’s personal take on things, and we do not know Realogy’s side of the story.

Climb Was Always Intended to be a National Brand

According to Mark Choey, Realogy acquired Climb back in 2016 intending from the start to have it be a national franchise brand that appealed to a younger, more urban, and more tech-savvy audience of agents and consumers.

Choey says that the very first time he met Richard Smith, then-CEO of Realogy, Smith told him, “We had our legal team look at the Climb trademark in all 50 states. It was available, so we reserved it. Nice to meet you.”

If that story is true, one really has to wonder what changed between 2016 and 2019.

Did the Climb Brand Have a Different Business Model?

One intriguing observation that Mark made, which he did not elaborate on, comes from his take on why Realogy shut down Climb.

He said that he was disappointed at the end of Climb, but wasn’t surprised. Quoting from notes:

At the 10,000-foot level, when you’re running the largest brokerage, with many brands, and you are under attack by a tech-enabled brokerage with a billion dollars in funding, iBuyers, Zillow, Redfin, and all of your other competitors, and your stock is getting hammered and your financials are not strong, you need an answer. Realogy hasn’t had a significant or meaningful answer to any of these. They can’t answer with a boutique cool hip Millennial franchise brand as their answer.

Unless that brand has a different business model, you’re just another brand.

In my Seven Predictions for 2017 post (on Inman), my #2 prediction was, “Realogy launches low-cost brokerage and franchise operations.” In that post, I wrote:

Similarly, on the franchise side, there are some amazing Realogy franchisees who are successful, dominate their markets and are killing it.

But they’re doing all of that with a headwind of a franchise model that can be as high as 8 percent of gross commission income (6 percent as royalty, 2 percent as National Advertising Fund). And again, changes in technology and agent behavior mean that those headwinds get stronger, not weaker, by the day.

I have some ideas on what/how/where Realogy might do such a thing…but for now, let’s just keep it with predicting that Realogy will either launch test models or buy existing low-cost models (for example, Realty One, HomeSmart, Nexthome, United Real Estate and so on) to diversify its offerings not only to agents and agent teams, but to brokerages who are or could be their franchisees.

Is it too much speculation to think that perhaps Climb from the very beginning was intended to be this low-cost brand with a “different business model” as Choey hinted? He did not elaborate, but I do wonder.

Internal Politics & Stock Price

Mark Choey said that even after the new management team under Ryan Schneider came in, the plan was to franchise Climb as a national brand. But here’s what Mark Choey said about that:

At some point, the decision was made not to go forward with it. Right after October of 2018 [when Realogy announced the two new brands], they looked into it, and they weren’t excited about what they were going to launch.

If you want a leadership role in a brand, you need to play politics. [You need to] get to Peyton, Schneider, Gorman. And the issue is going to be, how are you going to move the needle? And what I mean by moving the needle is stock price. No one says that, but ultimately that’s what everyone cares about. You move it by improving financials in a significant way.

It’s a long journey to build a franchise brand; it’s a 5-10 year journey. You need someone to push, and that wasn’t gonna be me. It had to be Sherry Chris who did the pushing, and she did. She was great. But it’s not her baby. There was a lack of strong leadership, a flag bearer, to push Climb through.

For one thing, that confirms what I had heard for a while: that Sherry Chris was effectively the CEO of the Climb brand even before her being named as CEO of the Emerging Brands in 2019.

For another, my biggest takeaway was that Choey felt that even under the new leadership of Schneider who came in vowing to change the culture at Realogy, you had to play politics. Furthermore, the basis of playing politics was improving the stock price of Realogy.

Was It A Cost-Cutting Move?

Although he is not in a position to know, Choey thought the closing of Climb was in large part a cost cutting move. As he put it:

The dialogue [about Climb] changed from October of 2018 to today. Realogy did not do well during that time. You can imagine people are trying to save the company and trying to divest divisions, shore up balance sheets, stop the hemorrhaging.

I had to ask him whether he knew that Climb was in fact hemorrhaging money. If Climb’s San Francisco operations were losing millions every year, that would make perfect sense why it was getting shut down. He did not know what Climb’s financials were since 2018, although allowed that Climb got “hammered” by Compass in 2018 and 2019. However, Choey observed that everybody in San Francisco got hammered by Compass then as well. It wasn’t as if Climb was especially vulnerable to competition from Compass.

When I asked whether the move by Realogy could mean that current Climb management had mismanaged things to a point where they had to shut it down, Choey vehemently disagreed. Much of that centered around Christine Kim, the President of Climb’s brokerage operations. I wondered to Mark that maybe this was a situation of local mismanagement that forced Realogy’s hand. He said in response:

Not true. Absolutely false. Christine [Kim, President of Climb] was the one bringing it back from the brink. She’s a superstar. She was absolutely the right person to be in that position. I’ve known her for over ten years and worked with her in a management capacity for us. She was the one bringing us back.

The “bringing it back from the brink” refers to the pounding that Climb (and everyone else in San Francisco) took from Compass in 2018.

The Email Answers from Realogy

As I was thinking through all of this, I sent an email to Trey Sarten, VP of Communications for Realogy, who was my designated go-to. Here are my questions and his answers, unedited so you can see for yourself:

1. Ryan mentioned that it would take years for Climb to get to scale as a franchise brand, and that it wasn’t fair to the Climb agents to make them wait that long to get their hands on all of the tools and resources of a much larger Coldwell Banker.

Does that imply that Corcoran too would be shut down soon?

If not, could you explain what the difference is between Climb and Corcoran from Realogy’s take on things, especially as it comes to the issue of tools and resources and scale? What tools and resources do Corcoran agents have, that obviates the need to ensure that they get their hands on Coldwell Banker’s far larger scale tools, which Climb agents did not have?

Trey: Corcoran’s legendary agent support, leadership position in New York City and other strategically important markets, and its international reputation provide a robust platform for the more than 2,300 of the industry’s finest real estate professionals.

2. Ryan also said that the Climb brand is not dead; there’s a chance that you’ll go forward with the Climb franchise brand even if the Climb brokerage is rolled into CB. Since Sherry Chris is the CEO of Emerging Brands, of which Climb is/was one, what does she think of the prospect of marketing a brand to potential franchisees that the owner of said brand declined to continue for offices that it owned itself? Wouldn’t that be a tough row to hoe?

Trey: Franchising of the Climb brand is on hold for now.

3. I can’t seem to get an answer to this simple question from my other sources, so I’m going directly to you: Is Chris Lim still employed at Realogy? If so, what is his title/position? If not, when did that parting of ways happen?

Is Christine Kim still employed at Realogy? If so, what is her title/position now that the company she was President over is no more? If not, when did that termination happen?

Trey: Both Chris and Christine are still with the company.

4. How many Climb and Corcoran franchises were sold? How many were/are in the pipeline of being sold?

Trey: We always said we were focused on selling Corcoran before Climb. Stay tuned for Corcoran news coming soon.

In search for the “we always said we were focused on selling Corcoran before Climb,” I went over the earnings calls for Realogy from Q3/2018 to the latest available from Q3/2019.

I found that Ryan Schneider, during his Q4/2018 earnings conference call, said:

So on Climb, Climb really hasn’t launched. We didn’t even file the FDDs [Franchise Disclosure Documents]. So the question you’re asking there isn’t public, we can’t really talk about it yet. So we’ll hold up on that. Climb’s always been planned to launch later. Corcoran’s where kind of the most interest in the — is more ready to launch given the massive brand name and success that it has as a company. Look, our franchise fees kind of start out there — kind of 35,000 kind of initial franchise fee, 10,000 per branch and a couple grand for a limited purpose kind of thing. And then we have a royalty scale that’s public. This is a more premium brand. And so its royalty rate, even at the top end is kind of north of 4%. So those are some of the economics around that kind of franchise. [Emphasis added]

There is no further mention of either Corcoran or Climb appears in the any of the event transcripts from Q4/18 onward.

On Corcoran, there is a press release dated January 9, 2019 that says that it has filed all of its Franchise Disclosure Documents. There is no announcement of any Corcoran franchise sale that I have been able to locate.

Questions… So Many Questions….

It is unclear where the truth lies between the story that Gorman told and the story that Choey tells. Likely, it is somewhere in between the two, and there is a lot that none of us on the outside know. I’m also fairly certain that there is a lot that those inside Realogy cannot talk about given that Realogy is a public company subject to all manner of regulations.

I’ll have to think more about the implications, which I will write as Part 2. But in thinking about that, I end up with more questions than I started with. I do not expect answers to them (see above about Realogy being a publicly traded company) but I do expect these questions to help guide the analysis by me, by Wall Street, and by the industry.

Did the culture at Realogy really change under Ryan Schneider?

I remember Realogy being a place where yes, corporate politics was rampant. I had heard from friends and contacts in that building that the Schneider era brought a fresh new energy, a very different corporate culture, and one that was focused on competing against external threats instead of corporate politics. The Mark Choey interview suggests otherwise.

Was Climb hemorrhaging money? How much? So much that a $4 billion a year brokerage had to shutter them?

Reading through old comments, trying to parse things out, it seems odd to me that the NRT — a $4 billion a year brokerage — had to shutter Climb instead of just letting it do its own thing for a while. I mean, at least until the office leases run out, no?

What did “they” see in 2018, after the announcement of Climb and Corcoran as the two new franchise brands, that soured “them” on Climb?

First of all, I wonder who the “they” in question is here. Did “they” include Chris Lim, Mark Choey, and Christine Kim?

Because I can’t imagine the people who were closest to Climb would have soured on their own brand. It seems more logical to me that if they were confronted with something that made other senior management sour on Climb as a franchise brand, they would look to change things up, modify things, rather than face getting shut down and rolled into Coldwell Banker.

Nonetheless, whoever the decision makers were (and Choey implies that Sherry Chris would have been the champion for Climb in the “they” circle), what is it that they saw back in 2018 that made them go in such a different direction so soon after the announcement?

When did “they” decide not to franchise Climb, and instead shut the whole thing down?

I can’t imagine that the decision to shut down Climb instead of just waiting for Corcoran to have success was made last week; big publicly traded corporations don’t make such decisions willy-nilly. So that decision was made many moons ago. I’m curious when.

The reason is that I can recall nothing in the earnings calls throughout 2019 that mentioned the possibility. As I’ve written above, the only mention of Climb as a franchise was in Q3 of 2018, and all that was said by Ryan Schneider was that Corcoran would go first as the “premium brand” and that Climb’s FDD’s were not even filed. So when was the decision made to pull the plug?

Did Climb have a different business model than the rest of RFG? Did that contribute to the decision not to go forward? What was the different business model?

I have to think the answer is likely Yes, and that the different business model must have been some kind of a discount model to the “premium” one that Schneider discussed in Q3/2018: $35K startup fee, $10K per branch fee, royalty rates north of 4% (of GCI), etc.

I suppose it’s possible that Climb would have been a super-premium brand that charged $100K startup fees, but here’s how Schneider described Climb in Q3/18:

So Climb is a very different thing than many of our other brands. It’s mobile first. It’s targeted to, frankly, a younger kind of demographic on both the agent and the consumer side. It’s targeted kind of in urban markets. It was kind of — its history starts in kind of downtown San Francisco and kind of was built there in Silicon Valley, and so it targets more those kind of markets. And you see less of our traditional franchisees in those kind of markets.

Younger people typically have less money than older people; that’s been true for all of human history. So a brand targeted to younger brokers and agents is unlikely to have been a super-premium brand, right? That’s why I think Climb must have been planned as a low-cost brand, and maybe that’s why it bit the dust.

Since the rationale for shutting Climb down is that it did not have the scale to provide the kinds of tools and value propositions that Coldwell Banker did, what is the minimum scale for Realogy (and by extension, other brokerages/brands) to provide value?

What we know in the aftermath of this decision is that a brokerage with 5 offices and 200 agents is not one that Realogy believes has enough scale to provide tools and services to agents. We also know from Trey Sarten’s email about Corcoran that 2,300 agents is enough scale.

I don’t quite understand the difference between 200:92,000 (agent count at Coldwell Banker) and 2,300:92,000. They both seem tiny and insignificant in comparison, but that is the answer we have today.

But it does raise the question of how many agents Realogy believes is enough to avoid having to ask difficult questions, as Gorman mentioned above. What is the minimum scale for a company to provide value to agents in 2020?

With the demise of Climb, what is the youth brand at Realogy now? Is it Coldwell Banker?

As noted above, in Q3/18, Ryan Schneider was clear that Climb was intended to target agents and consumers who are younger and more urban — markets where Realogy did not have a strong presence.

With Climb now history, but Ryan Gorman quite insistent that Coldwell Banker had evolved and was different, is Coldwell Banker the “youth brand” at Realogy?

Relatedly, what does it mean to be a “youth brand” at Realogy? Lindsay Listanski’s Facebook comments suggests that diversity, innovation and technology, and giving back might be among the hallmarks of a “youth brand.” Seems to me that every brand at Realogy is concerned with diversity, innovation and technology, and giving back… so… which is the actual youth brand there today?

More to Come

I’m going to end here, simply because I’m over 5,000 words on this small story. I can’t help but shake the feeling that this is not just a small story, however, which is why I’m focusing on it so hard. I think this event is enormously suggestive of what’s going on with Realogy in particular, and potentially with all large real estate companies in general.

I’ll be ruminating on the implications for a couple of days, and I’ll post my (tentative) conclusions in Part 2.

Your take on this is, of course, welcome.

-rsh