Age of empires: Why Moody’s is ready to take on CoStar

Analytics giant sees CRE data becoming a mainstream line of business

(Illustration by Adria Fruitos)
(Illustration by Adria Fruitos)

When commercial real estate data company Reis began looking for buyers this spring, CoStar Group was among the first to show interest. But there was an issue: with a market cap of nearly $14 billion at the time, CoStar was already the industry’s biggest player by a distance. An acquisition by the CRE tech giant could set off alarm bells with antitrust regulators.

Reis had some precedent for its concerns. In 2011, when CoStar moved to acquire Loopnet, its biggest rival at the time, the Federal Trade Commission spent months scrutinizing the deal. During an April 30 meeting, Reis’ lawyers laid out the risks of an FTC investigation, which could delay a sale by nine to 12 months, if not scuttle it altogether. Although CoStar had indicated it would be willing to pay $330 million for the company, Reis’ board decided to end the talks, the company’s SEC filings show.

About a month later, David Platt, the head of corporate development at Moody’s Corporation, put in a call to Mark Cantaluppi, Reis’ CFO. Platt said the financial-analytics giant was interested in Reis, and with CoStar out of the running, talks progressed smoothly. In late August, Moody’s agreed to acquire Reis for $278 million.

It was the clearest sign yet of Moody’s ambitions in commercial real estate, where so far it has been a bit player. The deal, Moody’s Analytics president Mark Almeida said at the time, would give its clients “a powerful 360-degree view of the economics of CRE lending and investment.”

Over the past year, the company’s analytics division (which runs independent of its bond-ratings business) invested in and partnered with the property-data firms CompStak and Rockport VAL. Its executives have also held talks with other players about potential partnerships, including Doug Curry, the founder of CoStar’s former biggest rival, Xceligent.

Moody’s moves, observers say, could challenge CoStar’s dominant position in the market, a near-monopolistic position solidified through two decades of acquisitions and what critics describe as aggressive litigation against competitors. Xceligent, backed by Britain’s Daily Mail Group, tried to challenge the behemoth, but went bankrupt last December. Moody’s, with a market cap more than twice CoStar’s, may face better odds.

“It’s not going to be earth-shattering to CoStar right away, but I think they’ll be able to chip away market share over time,” said Craig Huber, an analyst at Huber Research Partners who covers Moody’s. The price paid for REIS, he added, is a “rounding error” for a company of Moody’s size.

CoStar, led by Andrew Florance, declined to comment for this article.

Pump up the volume

Moody’s isn’t quite a rookie in the commercial real estate data business. The company has provided research on commercial mortgage backed securities for years and offers Commercial Mortgage Metrics, a tool which helps lenders figure out the default risk on loans. But real estate had long been somewhat of an afterthought for the firm.

Andrew Florance (Illustration by
Chris Koehler)

That started to change two years ago, when Moody’s launched an accelerator program to invest in new research technologies and tapped Keith Berry, a veteran Moody’s executive, to head it.

The venture, now dubbed Moody’s Analytics Accelerator, aims to find and invest in new technologies and partner with companies. As Berry talked to customers about where they struggled to find good data analysis, commercial real estate kept coming up.

“Banks tend to be our largest customer segment, and commercial real estate is a very important asset class to them,” he said.

Moody’s Keith Berry

Eric Frank, who headed the Daily Mail Group’s U.S. commercial real estate data business and sat on Xceligent’s board, said real estate “is moving from an ‘alternative’ asset to being more mainstream,” because of the growing share of institutional money flowing into the property market. Institutional investors plan to have 10.6 percent of their funds invested in real estate in 2019 on average — up from 8.9 percent in 2013 — according to a recent survey by Cornell University and advisory firm Hodes Weill & Associates. At Blackstone Group, for example, real estate has eclipsed private equity to become the company’s biggest division, holding nearly $120 billion in assets under management in the third quarter of 2018. Other blue-chip firms are embracing commercial real estate technology; Goldman Sachs, for one, committed $250 million to the Kushner brothers’ real estate crowdfunding startup Cadre last year.

But while the finance industry is spoiled for choice when it comes to analytics providers, “in the real estate world you just don’t see that,” Frank said – “it’s very fragmented.”

In October 2017, Moody’s bought a minority stake in CompStak, a crowdsourced database for leasing and sales comps. A month later, it bought a stake in Rockport VAL, which sells software to appraise properties.

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In the year since, Berry has been actively sourcing further partnerships. He’s also held discussions about a potential investment with Curry, who was pushed out of Xceligent in 2017 and has been working on launching a commercial data company in Australia, according to four sources familiar with the discussions.

“I don’t think their [Moody’s] approach is going to be to reinvent the wheel from scratch,” said Richard Sarkis, CEO of the property data company Reonomy, who has also met with Moody’s team. “They’re looking to partner with companies.”

Berry said he wants to create a “network of tools that work together” and allow users to link their accounts. Think of how Instagram users can simultaneously post an image to their Facebook account.

“The network we’re creating is essentially giving you the ability to take data out of CompStak, pull that data into Rockport VAL, run a valuation, then take that valuation and put it into our commercial mortgage metrics tool, which would give you a probability of default,” he said.

Coming at the king

When Moody’s announced its acquisition of Reis, CoStar’s market cap was nearing a record $16 billion. One reason for the surge in its share price, analysts said, is that after Xceligent’s shutdown, CoStar no longer had any serious rivals.

In a report earlier this year, research firm Morningstar argued that the company is a “borderline monopoly” with “no true threats in terms of competition.” Following a string of acquisitions, the company was on track to generate over $1 billion in revenue for 2018.

Its share price reached $446 in the first week of September, an increase of 54 percent from December of the previous year, the month in which Xceligent filed for bankruptcy.

But since then, the company’s share price has dropped 27 percent to $327 a share as of Jan. 3, which analysts who cover the company attribute to broader investor concerns about tech stocks and the commercial real estate sector. CoStar’s market cap is now below $12 billion. (The S&P 500 and Dow Jones Industrial Average have fallen 13 percent and 10 percent respectively over the same period.)

Now, some observers wonder whether Moody’s could emerge as another headache for CoStar.

While Xceligent competed with CoStar head-on by trying to essentially replicate its core business — a massive office listing database — Moody’s challenge to CoStar is more nuanced. To date, there is no indication that Moody’s plans to build an office leasing database of its own.

“It would be extremely costly and impossible to replicate CoStar’s database,” said one industry analyst. “There’s a very deep moat around CoStar’s business.”

But its investments in REIS and CompStak mean Moody’s can now offer its customers two things CoStar also sells: leasing comps and market research reports. And its plan to create a network that includes all available commercial real estate data could clash with CoStar’s ambition to become the Bloomberg of commercial real estate.

Analysts who cover CoStar say that Moody’s hasn’t impacted the company to-date.

“The Reis acquisition by Moody’s has been a non-event for CoStar,” said William Blair & Company’s Stephen Sheldon. “It certainly isn’t a positive, but I don’t think it’s a meaningful negative either; I think there is significant greenspace for multiple data providers in commercial real estate, and CoStar is the clear leader.”

CompStak’s CEO Michael Mandel said that while Moody’s real estate network is a potential competitor to CoStar, “at the same time, it can live alongside CoStar.”

Asked whether Moody’s considers itself a competitor to CoStar, Berry said: “our focus is on helping our customers, not on the competition.”