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CoStar Sharpens Residential Focus After Strong Quarter

Commercial real estate data giant the CoStar Group has posted strong performance numbers throughout 2022 and its most recent earnings report shows that trend continuing. The company’s third quarter numbers show revenue is up 12 percent year-over-year, increasing to $557 million. Full-year guidance for 2022 was raised by $5 million to a range of $2.175 to $2.18 billion, a modest bump but one that shows the company is optimistic in its performance, despite rising interest rates and a slumping housing market. Just a few days after the earnings announcement Oct. 25, the company’s stock value shot up 16 percent. “Our balance sheet has never been stronger, and we view a downturn as the perfect time to go shopping,” CoStar’s Founder & CEO Andrew Florance said in the call, hinting that more acquisitions are in the future for the Washington, D.C.-based firm. 

Growth mindset

Since early spring, the company has been focusing on expanding its residential investments, which have been paying off lately. In the third quarter of this year, CoStar’s residential businesses made $19 million in revenue, according to the company. CoStar made its first foray into residential real estate in 2014, when it acquired for $585 million. Since then, the firm has been steadily acquiring more platforms, including, Apartment Finder, Realla, and most recently, Homesnap. The company’s attempt at acquiring media company RentPath fell through at the end of 2020 when the Federal Trade Commission sued to block the sale and RentPath subsequently backed out of the deal. CoStar has been growing its office footprint too. Late last year, the company announced it was building a $460 million corporate office campus in Richmond, Virginia. 

CoStar, which as of November has a market cap of $33.7 billion, has invested more than $2 billion in the residential sector over the past six years. The company first took aim at the residential market in the fall of 2020, when Florance said in the third quarter earnings call that there was significant room for growth in residential marketplaces in the U.S. Now, the company is again hinting at more to come in the residential sector, after cementing its dominance in the commercial sector. CoStar currently has $750 million in equity raised and is approaching $5 billion in cash on its balance sheet. Florance said they will be looking thoroughly at opportunities within the residential space over the next five years but are taking a cautious approach, given rapidly shifting market conditions. “If we can’t find the right company at the right price, we could achieve our goals organically,” he said.

Perhaps the biggest challenge facing the company’s push into the residential sector is contending with the segment’s biggest players, like Zillow. The national online listings platform has grown even more popular throughout the COVID-19 pandemic, spawning fan accounts on social media like “Zillow Gone Wild,” which has 1.5 million followers on Instagram, and even a sketch on Saturday Night Live.

Over the summer, CoStar teamed up with New York City’s largest real estate industry group, the Real Estate Board of New York (REBNY), to roll out Citysnap, the NYC version of Homesnap, a real estate listing platform CoStar bought for $250 million in 2020. By partnering with REBNY, CoStar is aiming to unseat the city’s leading listing site, the Zillow-owned Streeteasy, by promising lower fees and free leads. It won’t be easy for CoStar. Streeteasy has been around since 2006 and has become the go-to site for listing and finding residential real estate in the Big Apple. But the site is making some big progress so far. Florance said in the earnings call that around 70 percent of NYC real estate agents licensed with REBNY have registered to use Citysnap, just over three months since the product launched.

Florance, citing data from ComScore, said that between September 2021 and September 2022, visits to CoStar-owned grew 27 percent while visits to Zillow and Realtor fell 30 percent. “With rising interest rates and a rapidly cooling residential property market, I believe now is the perfect time to invest in a marketplace that’s designed to help consumers and their agents advertise and sell properties faster and at a higher price,” Florance said. “Deteriorating market conditions may well create a tailwind for our business model.”

Next up, CoStar has several things in the works, including international expansion. The company is planning to launch one of its online marketplaces, LoopNet, in the U.K. soon, and will then look to do the same in France, Spain and Germany in 2023. Florance and the firm are confident it will be a success in Europe, calling it the first multinational commercial real estate marketplace. “We believe that the LoopNet opportunity is in excess of $1 billion as we extend across Europe,” Florance said. The European residential sector has been a magnet for investment recently from U.S.-based firms like Greystar, Hines, and Blackstone, with the strong dollar helping bolster more deals. 

CoStar is also planning to roll out new data on more than 12,000 commercial property investment funds that together, hold more than 70,000 commercial properties around the world. The new data will provide fund investors with detailed analytics on their real estate portfolios that will include things like historic sales comps, leasing history, vacancy rates and more. That new tool is expected to be released in the first quarter of 2023. Along with its new product capabilities, the company has beefed up its sales team, adding 50 new staffers, to help grow its sales in the U.S. and internationally. Despite the exodus of employees last year, Florance said CoStar’s retention rates were some of the best the company’s ever had. “We have a loyal and exceptional team of leaders and employees working together in our offices, resulting in the best employee retention rates we’ve seen in years, if not decades,” Florance said during the earnings call. 

Growth has been a major theme for CoStar throughout 2022 and it looks like that will continue in 2023. The data firm made the S&P 500 this quarter and Florance said they are “single-mindedly focused” on reaching the S&P 100 going forward. The company’s total number of salespeople surpassed 1,000 for the first time in its history, and now has 1,090 as of the end of the third quarter, during which 115 more reps were added. Teams that grew the most were those on the, LoopNet and CoStar sales teams. In total, CoStar is looking to have added a total of 300 new sales reps to the company in 2022. 

An industry giant

It’s been quite a ride in 2022 for CoStar. In February, CoStar reported strong performance numbers from the fourth quarter of 2021, but a lackluster outlook for the year led to its stock value plummeting 15 percent. Meanwhile, just before the company released its fourth quarter earnings report, an Instagram account run by a former staffer appeared, hosting memes about the company and its culture. Then a bombshell report from Insider was published that detailed complaints about the company and CEO from former employees who said, among other things, that they were overzealously monitored while working from home. The report also said that more than a third of the company’s employees left the firm in 2021. 

While Florance dismissed the social media call-out as ‘neither credible nor informed,’ the company also took legal action against the former employee and his Instagram account. Amid the scandal, Florance firmly defended his firm’s practices, saying “We will not apologize for these standards, nor will we compromise them to accommodate a vocal few who decide that this level of expectation is not for them.” The saga was widely reported on in real estate trade publications and beyond. But by the company’s next earnings report in April, revenue and profits were up, Florance deemed it the best sales quarter in the company’s history, and the whole episode seemed to be behind the CEO and his firm. 

While CoStar has been eager to move on from the scandal, the industry’s perception of the firm has never exactly been great. Many in the industry have a ‘love-hate’ relationship with the data juggernaut, which has made a practice of gobbling up its competition and charging steep prices for its listings, leading some to describe the firm as having a monopoly over the industry. Florance said in last week’s earnings call that while his company’s data comes at a cost, it’s worth it. “At the end of the day, the price for our products, while they’re not cheap, are not the primary factor,” Florance said. “Most successful commercial real estate players can afford the product, and it’s a very small percentage of their expense structure.” 

There have even been calls to break up CoStar. Two years ago, an industry broker launched a petition on to ask the FTC to re-examine CoStar’s $860 million acquisition of LoopNet in 2012. Currently, the petition has 459 signatures. In an August update, the petition’s author said the FTC had launched an investigation into CoStar’s alleged anti-competition practices. 

With the scandal that played out earlier this year seemingly in the rearview mirror for CoStar and continued strong fundamentals in the U.S. rental market, we can expect to see the company continue its focus on the residential sector and more acquisitions going forward. While CoStar is undoubtedly the biggest player in the commercial data arena, taking on powerful residential brands like Zillow and Redfin won’t be easy for the firm and will take time. The progress made in the New York City residential market is promising, but if the firm is looking to have the kind of grasp on residential real estate like it does on commercial real estate, they still have a long way to go.

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