EXCLUSIVE: CoStar’s Andy Florance on buying Ten-X, the future of office buildings and why brokers don’t need discounts

Commercial real estate is navigating perhaps its greatest challenge in a generation, if not more.

Many of the world’s most prominent companies have indicated that their needs for office space will shrink dramatically, and some analysts have said this could be the end of the office market being a “boring” asset with predictable cash flows. Those shifts have big implications for CoStar Group, the largest data provider in the U.S. commercial real estate market with a market capitalization of nearly $24 billion.

Andy Florance, founder and CEO of the firm, however, is seeing this time as ripe for new deals. CoStar last week finalized the acquisition of commercial real estate transaction platform Ten-X for $190 million, and Florance is eager for more, saying his company can fill the void in commercial real estate technology left by private equity and venture capital.

In an interview with The Real Deal on the day CoStar announced the Ten-X deal, Florance provided some color on the acquisition talks, spoke about how his firm is poised for more consolidation and struck an optimistic tone on the future of the office market. He also had some choice words for his critics.

This interview has been condensed and edited for clarity.

CoStar was in talks to acquire Ten-X last year but the deal fell through. Why?

With any transaction that we do, there’s often a multi-year process and there are any number of reasons why it doesn’t happen. Sometimes people have a value expectation. Sometimes there’s some issues that they’ve got to go through, but Ten-X has accomplished a number of things in the last six months or so. So they’ve actually separated from auction.com — they used to share a common code base, which is a risk in a transaction. They have actually streamlined and consolidated some of their staff since we were last in conversations with them, which makes them closer to a profitable company. Strikingly, they were also sitting here at a time when their services in combination with our services are likely much more relevant. With these improvements in the Ten-X platform and the incoming tsunami of distress, the timing made more sense.

When the talks restarted, who approached who?

I approached Ten-X.

What was your opener?

So the timing is we’re all in quarantine. We know that our industry faces some challenges in the years to come. CoStar Group has operated through several cycles and we have a lot of economists on staff and we do a lot of work looking at loans, mortgages, we do credit, we do risk analytics on commercial mortgages and our sense is just that over the course of the next three to five years there will unfortunately likely be a tsunami of distressed deals. So when that’s the case, you say, what’s the best platform to put together to try to provide service, or to try to help process that? LoopNet, as you know, has a huge audience of people, a lot of properties for sale on there, but it is not a transaction platform. You can’t buy a building on LoopNet. If you can then take a transaction platform that’s really proven and trusted, something that’s done work for the special servicers, something that’s done $24 billion in deals, it’s a known entity. [Ten-X has] done work for JPMorgan, Bank of America, done work for Fannie Mae, they’ve liquidated a lot of business and they know how to do it. It’s all digital. [If] you connect that in with LoopNet, we believe that will give you a pretty good clearing platform for distress. In this time, in this place, when we know what’s about to happen, having a mechanism to clear these distressed properties I think will be very valuable.

Ten-X laid off nearly half of its workforce, 100 employees, shortly after those talks with CoStar in late 2019 fell apart. Were layoffs something that you had raised as something you’d want to see before any acquisition could happen?

No, we had nothing to do with it. The investors in the company made that decision to streamline. I actually agree with what they did but I had nothing to do with it.

We reported on the $745 million line of credit that you drew down and that was for the RentPath acquisition. So is the $190 million for this deal coming out of that line of credit, or how is it being financed?

  There’s some relatively young technology where they aren’t going to have a balance sheet to survive this storm. 

We have $1.9 billion in cash today. We’re profitable and cash flow is solid. In drawing a line of credit, we wanted to have additional funds for acquisitions. There’s some relatively young technology where they aren’t going to have a balance sheet to survive this storm. I’m having a lot of different conversations with people in all kinds of different areas, who need to do something pretty quickly. A lot of the private equity funds or venture funds that were funding these things have just stepped out and they’re gone. We also wanted to be able to extend credit to any of our customers that get in trouble. We want to make sure that we’re not part of blowing any company up because they have a short-term liquidity crisis.

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A lot of different companies [such as Zillow and Redfin] have offered breaks on subscription fees. Has CoStar done anything like that or do you have plans to?

We’re more focused on helping people through liquidity. We’ve worked with a bunch of companies on helping them through liquidity issues, so there are obviously hotel companies right now that cannot pay their bill for good reason until things open up again. We’re dealing with those on a case-by-case basis as opposed to just going out and sort of blanket ‘we’re giving you half a month free.’ We think it’s better to focus on the people that really need help than just to do a blanket, knee-jerk. In commercial real estate, there are people who, often on the brokerage side, are being paid for transactions they did six months ago. People forget this, but if you’re in the leasing business, deal flow just dries up for about three months and then what happens? The vast majority of tenants who are still going to be in operation after this is all said and done have leases expiring. In every single downturn in the last 30 years, leasing volume remained the same over a 12-month period despite a big disruption. I believe that will happen here too. So people in the brokerage business will likely be okay.

There is this debate about whether working from home is going to become more common. Will the demand for office space go down? Some argue it could actually go up. Are you seeing a drop-off in demand or usage of your core office leasing products?

We are actually seeing the highest search volume ever on LoopNet. The highest number of searches ever. We’re also seeing the highest number of searches ever on apartments.com, and it’s almost like we have 20 different websites all around the world, it’s almost universal – the search activity is the highest it’s ever been. We’re seeing Fortune 500 companies on LoopNet. We’re seeing major players. The reason is what I said to you earlier which is, people at any given point, one fifth of the leases, one quarter of the leases are about to expire, and you have a window, you’ve got to get it done.

Do you think working from home will become the new norm?

These stories have come out where people are saying, ‘will people always work from home?’ [But] one of the things that’s important for reporters to remember, reporters are not normal. Reporters tend to be intrinsically motivated. They tend to be individuals that love what they do and they would do it for free and they do it because they love being reporters — they can work at home, they can work in the field, they can work anywhere. It doesn’t matter where they are. But I think that for someone like a bank with 100,000 employees, actually having an organizational structure [and building] to facilitate that [work] is pretty important. I think when your unemployment rate moves up to 15 percent, 20 percent, people will go where the job is, and the job will be where the organization needs it to be. I actually believe there’s a solid argument to be made that the amount of space that will be consumed will go up dramatically.

As in more square footage per person?

One hundred percent. So if you go look at — and I will not use a name but it begins with a ‘W’ — if I go to a coworking facility and I look at the square feet per person, what they would call a 20-person office is 30 [square] feet per person. No one wants to be in any room 30 [square] feet per person ever again. I’ve seen designs for Salesforce’s new layout for their new space and they’ve designed it so no one’s within six feet of anyone else. I think you’re actually going to push up to 275 to 300 square feet per person. So there might be some movement to working from home but there’s going to be also movement to spread people out.

My final question, Andy, is about your critics. How do you deal with concerns from users who say this acquisition further cement’s CoStar monopoly on the real estate data space and, from a pricing perspective, gives you even more control over the market?

  We are never going to pursue a path where we try to get smaller and smaller, and become less effective and provide less solutions.

We are never going to pursue a path where we try to get smaller and smaller, and become less effective and provide less solutions. [laughs] There are critics who, anything we would do to grow, would say we shouldn’t grow. This is not a data company, this is not a marketplace. This is a software technology and auction platform technology that we’re not currently doing. I think that ultimately it will provide a lot of value. There’s no question that our products have provided an awful lot of value to the industry. If you go back and try to talk to someone who today uses these products every day and relies on them and makes a living off them and you say, “Before CoStar invented and provided these things, what was life like?” Well, they made about a third as much money and they worked four times as hard. We’re never going to listen to a small minority, and often competitors, and say ‘yeah no we’re going to stop innovating,’ or ‘we’re going to stop building new things.’

Write to Erin at ekh@therealdeal.com and Hiten at hs@therealdeal.com