Database strategy propels CoStar Group
Monday, February 15, 2010
Not long ago, in what now seems like the technological Dark Ages, data on commercial properties were scattered among guidebooks on sales and leasing activity, myriad public records and real estate listings.
Back in 1986, while a senior economics student at Princeton University, Andrew Florance saw the potential of aggregating Washington-region data for building owners, real estate agents and banks. His software reduced research time from hours to seconds. Over time, his databases expanded to include details on properties in all 50 states, making his company, CoStar Group, the largest commercial real estate information firm in the United States.
Even in a down economy, with commercial real estate taking a beating, CoStar is pushing to grow. The company expanded into Europe and plans to open more offices overseas. It is looking to hire more than 3,000 employees around the world over the next decade, up from the roughly 1,500 now on the payroll. And it just closed a deal to move its headquarters from leased space in Bethesda into its own building in downtown Washington, snagging the Mortgage Bankers Association's three-year-old, $90 million corporate office for $41 million in cash.
In buying the Mortgage Bankers Association building at 1331 L St. NW earlier this month, CoStar said it took advantage of its expertise, finding a deeply discounted, state-of-the-art, energy-efficient "green" building in a distress sale.
"We've got 1,000 people whose job it is to ask, 'Is your building for sale?' " Florance said. "It was a pretty darn crazy low price."
A Mortgage Bankers Association official said the organization decided to sell after its membership dropped to about 2,500 from 3,000 and revenue fell. The official said that the purchase price was less than the mortgage and that the association would have to make up the difference. The official, who was not authorized to comment publicly, spoke on the condition of anonymity and referred questions to chief executive John A. Courson, who did not return several phone messages.
CoStar's core business is to gather and compile reams of on-the-ground data on commercial buildings around the world. By subscribing to the service, the company's more than 80,000 clients can obtain such information as the vacancy rate in St. Louis, the demographics of a neighborhood in Atlanta that a retailer might be eyeing, and rental rates for small buildings in Scotland.
"CoStar has done a terrific job of creating a national database that gives you a comprehensive look at revenues of buildings as well as asset values," said Henry H. Chamberlain, president and chief operating officer of the Building Owners and Managers Association International, which represents 17,000 industry professionals. "That didn't exist before."
The treasure trove of data proved to be especially useful after the real estate market collapsed and owners were desperate to sell or refinance their buildings.
"When disaster strikes, people say, 'Gee, I need to understand what's going on,' " Florance said. "We've had a surge in purchasing from big banks, the federal government and institutional investors."
The company has not been immune to the economic slump, said Ian Corydon, director of research at B. Riley and Co. in Los Angeles, who follows CoStar's stock. The company lost 10 percent of its subscribers, dropping to 83,620 in the third quarter of 2009 from 92,199 during the corresponding period the year before, he said.
"So many firms [that were customers] went out of business, merged or had layoffs," Corydon said.
An early start
Florance, 46, was exposed to the industry at a young age by his father, Colden Florance, an architect who designed more than 100 commercial buildings in the Washington region, including Verizon Center. While at Princeton, the younger Florance started the Realty Information Group. Florance, whose older sister Susanna was his first employee, created software that allowed him to produce spreadsheets analyzing cash flow from commercial buildings, work that until then had been done by hand.
He faced pushback from the real estate community in the Washington area, and in every city he set up shop. "People didn't want [the process] to be transparent," Florance said.
But brokers learned that the data could help them get better deals, and the service caught on. Because so few firms in the 1980s had personal computers, CoStar compiled its data into a huge Yellow Pages-like book called Cornerstone. The company sold Cornerstone in 1992 for nearly $1 million, using the proceeds to acquire a data-gathering firm in New York.
Florance expanded into other cities, gobbling up 20 information-gathering businesses and taking the company public in 1998. A year later, he renamed the company CoStar, after its wildly popular software.
In recent years, CoStar researchers have been steeped in the green-building movement. In one research paper, the company concluded that those properties -- such as the Mortgage Bankers Association offices, with lights that automatically shut off when people leave the room and highly efficient heating and cooling systems -- retain their value much more than conventional ones.
That conclusion may need some rethinking: In buying the Mortgage Bankers Association building for less than half of its construction cost, Florance joked, "We screwed up the premise of our paper."