By Daniel J. Sernovitz on August 01, 2014. (Updated on August 18, 2014)
The story of how the CoStar Group Inc. made an eight-figure profit by moving from Bethesda to Washington and then selling its headquarters building to a German investment firm is legendary among D.C.’s commercial real estate circles.
What isn’t so widely known is how CEO Andy Florance made an extra $6 million for CoStar by going on a European vacation while a hedge fund wanted to take over the company’s office in London. The fund was growing rapidly and offered Florance $2 million to buy out the remaining six months on CoStar’s lease.
Florance said no, it’s too much hassle, but how about $3 million? The company said no, and with that, Florance went on vacation for a week with his family in a farmhouse in a remote part of southern France with no cellphone reception.
When he got back to London, Florance had six voicemail messages from the same company, each one offering more and more money. The last message was for $8 million for CoStar’s 10,000 square feet of rented office space.
“I’m like: Done. So I sold our six months remaining on our lease, for $800 a foot. That has to be the record high,” Florance said, choking back laughter as he recounted the coup from CoStar’s headquarters in downtown D.C. “So I think we have the U.S. record for the best return on an office building, and I think we have the highest record paid to buy out a lease on a per-square-foot basis.”
You might be tempted to write off both deals as sheer luck, good timing and some steely nerves — and to be sure, all of those came into play — but both deals illustrate Florance’s drive to make the most, demand the highest and be the best.
Florance has displayed that determination more and more in recent years as he has expanded CoStar’s reach exponentially. If you’ve bought a tube of toothpaste at Walgreens, searched for an apartment in Logan Circle or hired a broker to find office space in Tysons Corner, the odds are pretty good that you’re no more than two degrees removed from Andy Florance and his digital real estate empire.
What’s more, Florance believes the industry that includes popular home sites like Zillow and Trulia — see their $3.5 billion merger deal this week — will eventually boil down to a handful of multinational companies.
If Florance has his way, CoStar will be one of them.
“I’m seeing that, 10 years down the road, there’s going to be two or three companies with billions of dollars in revenue,” Florance said. “It’s like a jigsaw puzzle, and these things will come together. Is CoStar going to be the one that brings it all together? I hope so. Will we be No. 1, No. 2, No. 3? I don’t know, but I think the scale of competition is just going to be much bigger.”
Florance’s performance has led to very loyal investors, enabling CoStar to raise a more-than-expected $529 million from a public offering earlier this year. (Florance boasted that the offering could well have topped $1 billion, given demand from investors.) Since CoStar went public in 1998, its shares have soared from $11 to an all-time high of nearly $212 in March, giving CoStar a market cap of more than $4.5 billion. Florance estimates the company will hit $1 billion in annual revenue come 2018, more than double last year.
But what’s good for shareholders isn’t always good for customers and employees. Commercial real estate brokers routinely chafe at having no choice but to go to CoStar for the building information that is the lifeblood of their industry. Competitors constantly assert, including to federal regulators, that the company is a monopoly. And even some of its current and former employees complain that working conditions are so intense, it leads to burnout and high turnover rates.
Florance makes no apologies. Mediocrity is not in his blood. As the company’s founder and chief executive, he attributes the criticisms less to any problems within CoStar — and more to the notion that his detractors can’t keep up.
“If you don’t love real estate, you don’t like it here,” says the 51-year-old with famously boyish looks that belie his intensity. “So it’s all people who love real estate and we work hard. We’re very determined. We’re not people who like being No. 2 or No. 3. If we ever give up on that, if we ever become complacent, then you’ve got a problem.”
A growing empire
CoStar is best known for its legacy commercial real estate database, which Florance launched from the basement of his father’s Cleveland Park home in 1987. But CoStar’s success on Wall Street has provided the capital to go much bigger, and it has acquired more than 20 companies over the years.
Its products now include data on retail and industrial space, let brokers track when tenants’ leases are coming up for expiration and lay out historical trends so investors can determine whether to buy, hold or sell. There are also tools such as CoStar Risk Analytics, which lets banks minimize the risk in their commercial portfolios to protect them from potential default, and CoStar Real Estate Manager, which lets large retailers such as Walgreens and McDonald’s determine when to open or close stores based on projected sales and market rent trends.
“At almost every board meeting, we have some substantial portion of the company that is being rethought or reinvented, and 90 percent of that comes from Andy,” said CoStar Chairman and co-founder Michael Klein. “He is the model of a fully engaged, completely innovative personality, with huge people skills.”
CoStar’s $585 million acquisition in March of Apartments.com, one of the nation’s largest online apartment marketing sites, sets the stage for CoStar to become a dominant player in the multifamily business. Florance gets downright giddy and bubbly when describing how the multifamily industry is worth an estimated $2.2 trillion worldwide, significantly larger than the office market.
Here’s why: Tenants who rent apartments tend to move to new space much more frequently than companies lease new offices. Florance estimates there are 43 million renting households in the U.S., and the typical renter moves once every 18 months. That’s a lot of volatility, and Florance believes landlords will pay to fill up their empty units as quickly as possible.
But Ian Corydon, an analyst with B. Riley & Co., expects there to be more competition in the apartment market, adding that CoStar faces challenges establishing the same kind of dominance in the field as it enjoys in commercial real estate.
“CoStar has proven over the years that they’re a very aggressive competitor, they’ve got a lot of resources, and I think they’ve got a shot at being one of the players who ends up winning in the online apartment listing market,” Corydon said.
Hunt or be hunted
CoStar spends hundreds of millions of dollars developing new products and populating them with data — and a seemingly equal investment in time and money to protect that information from theft.
It has developed an aggressive antipiracy campaign and sophisticated search software designed to detect theft. At any moment, Florance can pull up a program that tracks its users’ activity and flags questionable actions. If a user logs in from D.C. at 1:30 p.m. and then from Philadelphia at 2:15 p.m., that’s an indication a customer is sharing his or her password in violation of the company’s usage terms.
A team of employees monitors that. When employees detect something’s amiss, they call the user and tell him or her to stop. Many times the user does, but when he or she doesn’t, CoStar sues.
That has earned the company a reputation for being extremely litigious, an allegation highlighted earlier this year when it sued in federal court in New York to force rival data firm CompStak to turn over the identities of people CoStar claimed had stolen its data and given it to CompStak. In all, Florance claims, users took CoStar’s entire Washington database of 58,000 properties and posted it to CompStak.
Florance claims CompStak encourages theft by allowing its users to be anonymous. CompStak denies the allegation and responded by filing a complaint against CoStar with the Federal Trade Commission. CoStar eventually dropped the suit, but not before CompStak turned over the names of its users for fear of not responding in time to meet a court-imposed deadline to do so.
“What do they do? They immediately go to the FTC and complain that we’re a monopoly,” Florance said. “No, we’re not, we just aren’t going to watch while someone steals all the TVs from our store. And if I did, I should be fired, because it’s not fair to my shareholders, it’s not fair to my employees, it’s not fair to my customers.”
CompStak CEO Michael Mandel maintains that the vast majority of information his company and CoStar collect is widely distributed in the commercial real estate industry and that his members are asked upfront not to provide any information that is not theirs to share.
Mandel claims the bigger issue is that CompStak has come up with a way to get people to give it information that CoStar spends a considerable amount of time and money collecting. And that model could undercut CoStar.
“We have created a model that’s far more efficient, that allows people to give us information out of their own choice rather than having to call them and beg for it,” Mandel said. “It costs us a lot less money to do it, and it’s a whole lot more efficient, so I can see why he feels threatened by us.”
Florance said CoStar has to continually evolve based on the competition and their products. He once added up how much money companies like General Electric, Goldman Sachs and Bloomberg spent on products that could eat away at CoStar’s market share. The figure: $85 million.
The Glassdoor effect
The sheer volume of knowledge CoStar researchers now generate is almost beyond comprehension, even for the company’s roughly 2,500 employees. The company monitors more than 4.2 million properties; more than 1,200 researchers constantly gather data, make cold calls to landlords and brokers, and check the electronic traps, known in the IT industry as robots, for even slight changes that could impact the profitability of an individual building, industry sector or geographic market.
CoStar hires around 500 fresh college graduates a year. Only about half of those new employees stay on, as the rest either move to other positions in real estate, go back to school for more education or get out of the real estate business entirely. That might seem like a high turnover rate, but Florance notes that, on average, fresh college grads hold onto their first jobs for only about 18 months before jumping. What’s more, research is a demanding field, both in general and at CoStar.
“We have a lot of people who will come here for a year or two and then go back for their master’s or to work for Hines or someone else,” Florance said. “Researching for CoStar requires bright people who are willing to work hard, and it’s not for everyone.”
There are plenty of practicing real estate brokers and developers who started out as CoStar researchers and credit the firm with giving them the industry knowledge and contacts to be able to move on in their fields. At the same time, one former CoStar researcher who is now a real estate broker in the Washington area went so far as to describe it as a “sweat shop.”
Both the company and Florance score low ratings on Glassdoor, a website that lets employees anonymously rank their workplaces and bosses. As of July 21, just 32 percent of 203 respondents approve of Florance, while CoStar rated 2.2 stars out of five based on 295 reviews.
Florance said he questions the methodology Glassdoor uses to come up with its rankings and believes some companies plant fake reviews to make themselves look better.
But he is clearly bothered by the publicity, and he was upset that the Washington Business Journal published the rankings last year.
“We have 80 locations around the world, and 85 percent of all negative comments in Glassdoor comes from one group of people in one location, so the overall majority of those complaints came from one research department under one manager,” he said.
“That manager’s no longer here.”
Florance said he worries about the effect the negative reviews have on his family, but he acknowledged that his role as a leading CEO makes him a high-profile business figure.
“As you can imagine, the job comes with a heavy price, right?” he said. “You travel way too much, you spend too much time away from your family, you work too hard, and then running a U.S. business, you get all the bad things — the frivolous lawsuits, the regulations, the CompStaks of the world and the Glassdoors. But the creative side makes up for it.”
Real estate plays a big part of Florance’s life outside the office. He spends at least a couple hours every week surfing one of CoStar’s businesses, LandsofAmerica.com, “just looking at ranches and farms that I don’t ever buy. My wife would kill me if I ever bought one.”
He spends much of his spare time fixing up homes, including his current one in Cleveland Park that he souped up to meet the U.S. Green Building Council’s LEED standards for energy efficiency.
“I added all kinds of cool things to it and completely transformed the house,” he said. “My pattern is, once I finish it and it’s all perfect, I’m like, ‘I’ve got to get something else that we can work on.’”
Indeed, he has the magic touch when it comes to his homes as well: He bought his last one in Chevy Chase for $760,000 in 2001 and sold it nine years later for $1.8 million.
A closer look
Andy Florance, CEO, CoStar Group Inc.
Residence: Cleveland Park
Family: Married, two children
Education: Bachelor's in economics, Princeton University
Expanding the CoStar brand
After making more than 20 acquisitions since it was founded in the late 1980s, CoStar Group abandoned its recognizable black-and-gold logo earlier this year as part of a firm-wide rebranding. The idea behind the change was to let users know that whether they were shopping for an apartment, a small business or a working farm, CoStar was powering the search. Here is a look at some of the major brands CoStar has acquired over the years:
- Acquired: 2014
- Price:$585 million
- What it does: One of the nation’s largest online marketplaces for apartments, drawing more than 100 million visitors last year to its site and its sister sites, ApartmentHomeLiving.com and RentalHomesPlus.com. CoStar hopes to use the marketing site to become a dominant player in the multifamily arena.
- Acquired: 2012
- Price:$860 million
- What it does: An online marketing site for commercial real estate properties for sale or lease. The acquisition enabled CoStar to combine its database of commercial real estate properties with online listings submitted by brokers and landlords.
- Acquired: 2012 as part of the LoopNet acquisition
- Price: N/A
- What it does: Online marketplace for people seeking to buy or sell small businesses, such as restaurants or hardware stores. BizBuySell was a natural extension for CoStar as, often, those small businesses own their own properties.
- Acquired: 2012 as part of the LoopNet acquisition
- Price: N/A
- What it does: Online marketplace specializing in land for sale across the U.S. Its addition to CoStar’s portfolio made sense as most of those properties operate as active farms and businesses.