CoStar's Revenue Jumps 16%, Fueled By Digital CRE Marketing Platforms, Acquisitions
Even as commercial real estate owners, investors and brokers report declines in second-quarter earnings, the company that supplies them with the data they need to stay afloat saw revenue climb, driven largely by its acquisitions of digital platforms to buy, sell, market and lease properties. And it is open about its intention to add to its stable.
“As we move forward to grow this business aggressively, we're positioned with a phenomenal balance sheet and are well-prepared to take advantage of what we expect could be significant opportunities in the coming years,” CoStar Group CEO Andy Florance said Tuesday during the company’s quarterly investor call.
CoStar reported 16% year-over-year revenue growth, although its profits declined slightly, from $63M in Q2 2019 to $60M this year.
CoStar’s marketplace platforms were the stars of the proptech giant’s Q2 revenues, with Apartments.com and LoopNet both reaching record traffic levels as virtual showings and transactions of real estate have grown out of necessity.
It helps that CoStar, with its 30-plus acquisitions since its inception, has no true peers for its clients to turn to. Despite some CoStar Suite services costing tens of thousands of dollars per broker, Florance projected far higher renewal rates during the fallout of the coronavirus pandemic than during the Great Financial Crisis.
"In the Great Recession we had two super low-cost competitors," Florance said. "We were competing against a very well-funded Xceligent. ... They were probably charging 15%, 20% of what we charge for a service. So we saw people shifting down to the lower-cost product. We also were competing against LoopNet at that time, who is offering a product at 5% of the cost of our product. So those two things are no longer a factor."
Even after the $860M acquisition of LoopNet in 2012, the 2014 purchase of Apartments.com, the ApartmentFinder.com buy in 2015, the $385M ForRent acquisition in 2017, the Off Campus Partners grab in 2019, the $450M purchase of STR in 2019, the Federal Trade Commission-pending $588M bankruptcy play for RentPath and the $190M May acquisition of digital auction platform Ten-X — not to mention its hand in the demise of Xceligent — CoStar isn’t done elbowing competitors out of its carefully curated space.
Like bigger tech names Amazon, Microsoft and Google, CoStar's tech offerings are countercyclical, even though they are tied to commercial real estate, which more or less reflects the broader economy. Florance noted that, while some platforms may see a drop in deal volumes as market-rate transactions dry up, Ten-X was born during the recession and thrives on distressed assets.
“You can actually pick up that business over in the Ten-X side,” he said. “So you'll pay us differently, but we'll monetize a transaction. Really, the value we're delivering is the digital marketplace, but you're going to monetize it over on Ten-X.”
And as stay-at-home orders limited the ability of renters in the market for a new apartment to see new spaces in person, Apartments.com offered them the chance to search online. With the hospitality industry hit particularly hard by the lack of travel during the pandemic, Florance said STR is as important as ever.
“In a rough environment, STR is your compass,” he said. “When you're lost in the woods, STR is your compass to try to find your way out.”
As for what its next acquisitions might be, Florance said the past will serve as a road map.
“If you look at the things we've done in the past, those are sort of indicative of what we might do in the future,” Florance said. “So we're looking for things that have high overlap of strengths we already have."
Further acquisitions that hew too closely to what CoStar already has could bring with them more accusations of anticompetitive behavior. Xceligent was spun out of LoopNet when CoStar bought it in order to get FTC approval, with the commission at the time declaring CoStar needed a competitor. CoStar successfully sued Xceligent for copyright infringement, winning millions from a company that ceased to exist 22 months earlier.
CoStar's dominance in the commercial real estate data industry is so thorough, Cushman & Wakefield CEO Brett White recently called it "a noncompetitive utility" during a webinar with Walker & Dunlop CEO Willy Walker. The two discussed CoStar's purchase of Ten-X as a sign that the Washington, D.C.-based data giant could be edging dangerously close to competing with brokerages.
"From the earliest days of CoStar, what I've always said to Andy is, 'So long as you are a noncompetitive utility for the industry, we are going to be fervent supporters,'" White said last month. "If you cross a line, either to go to nonutility pricing or to be competitive, you need to know that the industry at some point will respond in one form or another. And I think with the [Ten-X] purchase CoStar has made, it feels like we may be getting closer to that inflection point."
Florance has dismissed monopolistic accusations in the past, pointing out during the STR acquisition, for example, that hospitality was an asset class CoStar didn’t already cover. After White's comments, Florance told Bisnow "What Brett White ought to be feeling here is actually confident" that a partner and client — C&W has represented CoStar in its own office lease deals — was buying Ten-X, formerly known as Auction.com.
"His fear is that CoStar will cross the line and compete with Cushman & Wakefield," Florance told Bisnow at the time. "This is the same anxiety and fear and question that has come up for 35 years. If CoStar's secret plan had ever been to go into brokerage, it would have happened at some point in 35 years. ... CoStar will never, ever, ever, ever go into brokerage."
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