CoStar comes home to play
The commercial data giant is going all in on residential, with entrenched rivals Zillow and Redfin in its crosshairs
For CoStar, 2021 has been a wild ride.
The commercial real estate data giant kicked off the year by aggressively pursuing, then abandoning, a bid to acquire residential property intelligence firm CoreLogic for over $7 billion.
“Now is not the time for us to aggressively buy into the residential mortgage market,” CoStar CEO Andy Florance said at the time, citing rising interest rates.
Notwithstanding that failed attempt, CoStar is determined to parlay its dominant position in commercial real estate intelligence into the residential sector.
“Instead of being looked at as just a commercial real estate company, [CoStar] should be looked at as a real estate software company,” said JPMorgan analyst Sterling Auty. “Any time you move into a different segment of an industry, there’s going to be some time to learn, to figure out some of the systems integration and technologies that perhaps are not part of the original core capabilities of the company.”
That can mean CoStar has to play catch-up to competitors like Zillow, which, despite taking a major hit with the shuttering of its iBuying division, has spent years building a powerful position in the space.
“This is really a very large visible moment of spreading beyond commercial into residential,” said Jonathan Miller of the appraisal firm Miller Samuel. “I think the world is going to be watching.”
CoStar declined to comment for this story.
After nearly three decades focused mostly on industrial, office and retail property data, CoStar dove into the multifamily space in 2014 with the $585 million purchase of Apartments.com. That deal was followed by acquisitions of online marketplaces Apartment Finder, Westside Rentals and ForRent.com between 2015 and 2018.
While competitors’ websites were typically cluttered with ads and other marketing strategies, CoStar applied its expertise in software development to build a unified product with an interface focused on the end user. It didn’t take long for the firm to become the market leader in rental listings, Auty said.
“That capability of development has really permeated everything that they’ve done from commercial real estate, and I think it’ll end up benefiting them with what they’re doing on the residential side,” Auty said.
It’s that expertise that caught the attention of the Real Estate Board of New York, which tapped the company to build its long-awaited, consumer-facing multiple listing service, Citysnap, set to launch in the coming months.
“We see clear opportunities to provide value in the residential industry that’s not there right now,” Florance said at Inman Connect Las Vegas in November.
Success will mean unseating Zillow-owned StreetEasy, which has established primacy as New York City’s de facto listings platform. Some analysts cast their doubts on the model at hand, citing CoStar’s strong emphasis on embracing agents — whom Florance deemed “Zillow’s competitor” earlier this year — as part of the homebuying process.
“In order for Citysnap to succeed, it’s more about the consumer finding this [to be] a useful tool than it is the brokerage community,” Miller said.
Ultimately, Miller believes, agents will follow consumer preferences when determining where to place their listings.
“That might be some evidence of their lack of understanding about the residential world,” he added. “It’s going to be a learning process, but they need to learn it or this is not going to win the day.”
As CoStar navigates how to extend its commercial expertise in the residential space, it must also determine whether now is the right time to double down.
Its $250 million acquisition of Homesnap last year and its $156 million deal for Homes.com this spring pushed its overall investment in the sector across the $2 billion mark.
“We are almost tripling the size of our addressable markets,” Florance said of the Homesnap acquisition, noting that the estimated value of residential property in the U.S. was $27 trillion, compared to commercial assets’ $16 trillion.
The deals, which came five months apart, established CoStar’s first major foothold in residential sales and placed residential data firms like Zillow, Realtor.com and Redfin directly in its crosshairs.
But the back-to-back major expansions put CoStar at risk of falling into a trap that might not sit well with investors.
“When you look at software companies, as they expand, when they get beyond a certain number of core competencies, they can lose focus,” according to Auty.
Investors have three things on their mind, he said: how big the opportunity in residential real estate is for CoStar, what level of investment is necessary and whether the risks are worth it.
“[Investors] understand that there is no free lunch,” Auty said. “Nothing is risk-free; they want to analyze and contextualize what is the risk-reward ratio for the company moving into another segment.”
Florance has repeatedly acquired assets in need of tune-ups that CoStar can deliver.
“He’s not buying finished solutions,” Auty said. “He’s buying things that he can piece together and plug into the CoStar platform and enhance the good market opportunity for the company as a whole.”
The company is already butting heads with those more established in the space.
“I’m aware that folks are pretty annoyed with StreetEasy and the fact that the prices are going up so rapidly,” Florance told investors on an October earnings call. “Blackmail’s too strong a word for it, but it’s Zillow-mail or something. It’s a little offensive to the industry.”
A week later, on the Inman panel, Florance accused a hypothetical competitor called “Ziltor” of “hijacking” online sales listings.
Zillow contends that it is simply serving the consumer.
“The increasing interest and investment in transforming the real estate industry underscores the incredible customer demand for an easier, tech-enabled transaction,” said Zillow spokesperson Viet Shelton.
But there may be enough room for two elephants.
“This does not have to be a winner-take-all,” Auty said.