The Pandemic Isn’t Slowing Andy Florance Down
Andy Florance, the founder and CEO of CoStar, has built an empire by digitizing the world of commercial real estate.
Now, with brokers, business leaders and apartment renters stuck at home, online searches for apartments and office space are through the roof. The digital transformation that Florance has been betting on for decades is only accelerating.
The coronavirus pandemic has also not slowed CoStar’s litany of acquisitions. Having acquired hospitality data analytics giant STR for $450M in October 2019, CoStar purchased Ten-X, a digital auction platform specializing in selling distressed assets, in mid-May.
On his weekly webcast, Walker & Dunlop CEO Willy Walker got Florance’s take on various commercial real estate asset classes and spared some time for personal anecdotes, including working with Jeff Goldblum on the rebranding of Apartments.com and the time that Jeff Bezos tossed him in the air.
Here are some of the highlights from the two CEOs’ conversation.
Walker: Are you bullish or bearish on the future of office?
Florance: When the pandemic really hit, around March 20, search activity on LoopNet dropped about 20%, which is equivalent to the drop we see every Thanksgiving and Christmas, but it had a longer duration.
But just a few weeks later, it shot up to all-time highs, people started searching for office and investment opportunities, and that’s for one simple reason: Even though transactions may have dropped, leases keep expiring. No one wants to pile into a building elevator with 12 other brokers to go tour a space, so they’re all shopping for space online.
A lease expires in the U.S. every seven minutes. Companies can have a lot of pontification about, ‘Will we need more space or less space when this is over,’ but no one wants to end up evicted, so they have to sign a new lease.
Walker: Is apartment search volume just as high?
Florance: On a typical day, 1.4 million renters will search Apartments.com. For the first three weeks of quarantine, that dropped to 1 million per day, which is a significant drop-off. As of the most current month, though, we’re seeing 2 million people per day, so about 40% above the highest level it had ever been. Forty-five million people in the last four weeks have searched for apartments, up from about 10 million from the same time period last year.
There’s going to be a ton of churn going forward. Maybe you’re thinking of moving out of Washington to Richmond, because you can’t stand being with your roommate 24/7. Maybe your economic outlook changed and you need to scale back and be closer to family. It’s a high velocity of change happening that’s reflected in the searches.
Walker: Collections have been holding fairly steady so far, but does your data tell a different story about what the future might hold for multifamily rents?
Florance: We’re going to be facing down a quadruple ‘witching hour’ in August. A lot of unemployment benefits and supplemental benefits will be expiring then. That $1,200 stimulus check is a memory. The PPP has been safekeeping about 30 million jobs. When those companies achieve loan forgiveness, you have to expect some layoffs from that group. Unless we have a ‘CARES Act 2’ that deals with that reality, we’re going to have a hard drop.
If the programs are extended, we should probably see vacancy rates go from 7% to 8.5% over five or six quarters, and average rents go from $1,375 to $1,200. Without those programs, it might look more like 11.5% vacancy and $1,050. Rents are only down 0.5%, which is not a material change, but this is the time of year you expect rents to rise 2%, so it’s a cyclical issue.
Walker: You just acquired Ten-X, which is an online platform for property sales, and I’m wondering whether I should be looking over my shoulder, because Walker & Dunlop has a multifamily investment sales platform. Are you competing with your customers?
Florance: Absolutely not. If you look at the Ten-X acquisition, it’s similar to what we’ve already done, which is to bring in a huge internet-connected community with data analytics software. It also has the benefit of being a strong countercyclical play. In the last recession, Ten-X helped dispose of $25B of distressed assets at auction.
One of the critical elements of having an arm’s-length bid process for distressed assets is just the number of people that show up to the event. On other platforms, I’ve watched triple-net properties with 20-year leases from Grade-A tenants trade at an 8-cap, just because there were only two people bidding. What we have in spades is a community where over half of people are looking to buy something.
Walker: So you were a pretty talented kid, and I’ve heard that when you were in an honors physics class at Princeton, your lab partner was Jeff Bezos. Did you ever plan out the fact that both of you would go on to build these multibillion-dollar enterprises?
Florance: It was much simpler than that. We were wondering, “Can we scrape enough money together for beer and pizza tonight.” I was at a Princeton reunion a few years ago, and he saw me, and Jeff, who is really quite buff now, picks me up and lifts me into the air. My family and kids looked on in disbelief. It’s hard to explain to your kids why the richest man in the world just threw Dad up in the air like a baby.
Walker: Is Jeff Goldblum really as eccentric as he seems? [Goldblum has become the consumer face for Apartments.com, which was acquired by CoStar in 2014.]
Florance: If you look at multifamily, it’s a $750B per year industry in terms of consumer spending. That dwarfs beer and cars, but there’s no consumer branding at all. We’ve spent probably half a billion dollars in branding to drive multifamily apartment living as a lifestyle.
The No. 1 issue with renters who are looking online is trust, so for Apartments.com, we needed a spokesperson that would convey trust. Jeff tested very highly in that regard. His roles, like Jurassic Park, with ‘Life finds a way,’ he’s always giving advice or warnings.
Jeff is exactly the way that you see on the screen, that’s Jeff 24/7. He’s brilliant. His brain is wired differently than the rest of ours. He’ll glance at a paper and have the whole thing memorized instantly. And he really loves the Apartments gig.
Next week, the Walker Webcast will host a discussion with Related Cos. CEO Jeff Blau.
This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.