CoStar Acquires Homesnap: Welcome to the Black Parade!

A couple of nights ago, I saw this news come across my feeds… but it was Sunday evening, and I needed to think about this a bit. The headline alone should give us all an idea of what’s what:

CoStar Group Agrees to Acquire Homesnap, a Digital Residential Real Estate Solutions Provider Used by 300,000 Agents Responsible for More Than Half of All US Residential Real Estate Sales

I have many thoughts here, but I had to contend with the fact that I have some serious biases when it comes to CoStar… and I haven’t really followed CoStar or developments in commercial real estate in over 10 years. I last did any serious writing about CoStar back in 2008, during the earliest days of this blog, when I was fresh from commercial real estate at Coldwell Banker Commercial.

Nonetheless, I don’t think CoStar as a company or as a culture has changed all that much over the dozen years, unlike say Zillow. Andy Florance remains CEO, and their core business and core competency have gotten stronger, not weaker. They haven’t expanded into a whole new business model, and they haven’t gone too far afield from what they have always been good at doing. So I think there’s some relevance there, as they enter into the residential real estate space.

So come with me as I think out loud about what CoStar may be up to here. This is all speculation, of course, but hey, it will be semi-informed speculation.

Briefly, On CoStar

Back in 2008, I wrote the following words:

CoStar is extremely good at what they do.  Really, they are.  Their technology is very good, and their research capabilities (which CoStar has spent hundreds of millions of dollars developing and maintaining) are second to none.  CoStar singlehandedly changed the way that commercial real estate firms conduct business.  But they’re evil.  If you look into their business practices, you realize that you are seeing the wielding of monopoly power the likes of which you haven’t seen since the pre-Google Microsoft days.  That CoStar looks upon litigation as a good competitive weapon says much about how they compete: to win, and to win in Conan-like ways.  Crush your enemies, see them driven before you, and hear the lamentation of their women.  Not that there’s anything wrong with that, but that sort of competitiveness isn’t going to make you a lot of friends.

Loopnet may not be as evil as CoStar, but they’re incompetent.  This is not the place to go into the details of their incompetence, but suffice to say that they remain in business because (1) how much the industry despises CoStar, and (2) their competitors are even more incompetent than they are.  Going out with a 2.5 million registered users claim when even a cursory examination of the numbers based on public records (as CoStar did) shows that claim to be… how shall we put this… marketing fluff is not the height of competence, especially when you’re locked in a death match struggle with the Death Star CoStar.

Since 2008, CoStar has grown significantly… partly by absorbing their once-upon-a-time rival, Loopnet. In fact, here’s CSGP’s chart since 2008:

Wowza, right?

And here’s how CoStar describes its strategy in the 2019 Annual Report:

Our strategy is to provide industry professionals and consumers of commercial real estate and apartments with critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on commercial real estate and apartments and the right tools to be able to effectively utilize that information. Over time, we have expanded, and we continue to expand, our services for commercial real estate information, analytics and online marketplaces in an effort to continue to meet the needs of the industry as it grows and evolves.

Our standardized platform includes the most comprehensive proprietary database in the industry; the largest research department in the industry; proprietary data collection, information management and quality control systems; a large in-house product development team; a broad suite of web-based information, analytics and online marketplace services; a large team of analysts and economists; and a large, diverse base of clients. [Emphasis added]

The bolded portions are going to be important for us going forward.

Part of the reason for the growth is CoStar’s acquisition of Loopnet, which is kinda like Zillow’s acquisition of Trulia… except even more so, since Zillow-Trulia was never close to being a monopoly in residential real estate, whereas CoStar-Loopnet is one for all intents and purposes in commercial real estate.

Why not? It isn’t because Realtor.com or Redfin or Homes.com exist in residential real estate. And it isn’t because there are no other CRE websites out there; there are. So why the difference?

The answer: Multiple Listing Services. They exist in residential real estate; they do not exist in commercial real estate.

CoStar Is the MLS in Commercial Real Estate

For all intents and purposes, CoStar is the MLS for commercial real estate. That’s not an exact comparison, because commercial real estate lacks the key thing that makes residential real estate function: cooperation and compensation. Nonetheless, other than the unilateral offer of cooperation and compensation, CoStar provides everything else that an MLS might provides: critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on commercial real estate and apartments and the right tools to be able to effectively utilize that information.

Why, that language sounds a whole lot like what “Making the Market Work” might mean, doesn’t it?

I wrote about this a couple of years ago, talking about the future of the MLS:

Something to keep in mind: Commercial real estate has been chugging along for decades without an MLS. Commercial brokers and agents have never had a common database with all of the properties, never mind one that is checked for accuracy. They have never had unilateral offers of cooperation and compensation. They negotiate compensation on a case-by-case basis, or get together at the end of the deal and fight over the pot of money. It might be annoying, but it happens, and nobody dies.

Commercial folks don’t have an MLS (except in some areas where the local residential MLS offers out a commercial version, but even then, not everybody participates so it’s of limited value). They have private companies – well, one private company, if we’re gonna get real about it, in CoStar/Loopnet — that provide some listing data and some comps.

Somehow, buildings get bought and sold, leases get signed, people get paid, and life goes on.

Buildings get bought and sold, leases get signed, people get paid and life goes on in commercial real estate in large part because CoStar exists. It serves the same data/information function for CRE that the MLS serves in residential. You can do commercial deals without CoStar, I suppose, in much the same way that you can buy and sell homes without the MLS… with extreme difficulty.

Plus, as it comes to CRE, CoStar/Loopnet also serves the aggregation function that Zillow-Trulia serves.

As it happens, now is an extremely interesting time for CoStar to get into residential real estate, seeing as how the key underpinning of the MLS — cooperation and compensation — is under serious and sustained assault both by high-powered lawyers, and by the Federal Government. I’ve been writing about that for a while now, so go re-read those articles if needed.

What Is CoStar Thinking?

So naturally, we might wonder… what is CoStar thinking? Why are they entering residential real estate now?

Obviously, I have no idea — I did not and do not speak to CoStar executives, and the relevance of the opinions of CRE executives on why CoStar is getting into residential is likely nil. So I have to speculate and make informed guesses.

Well, here is, I think, the logic of CoStar’s move into residential real estate:

• Residential is the obvious adjacent market given CoStar’s core competency;
• CoStar now has a good deal of experience with the residential rentals space;
• CoStar has beaten and is beating the scariest contender in rentals: Zillow;
• Zillow has pivoted away from being a portal and towards being a market maker;
• The door is now wide open for CoStar to get into the residential portal business.

However, being the dominant portal for commercial real estate helps with rentals, since a great deal (if not most?) of rental properties are owned and managed by commercial multifamily REITS and such. It’s a whole different game to try to become the dominant portal for residential real estate.

So let’s say that Florance and team have decided that they want to be the dominant portal for residential real estate. How do you get there, when Zillow exists? It’s not going to be by spending billions in consumer marketing. That’s trying to out-Walmart Walmart, which is principle #1 of what not to do in business.

It has to be something else, something orthogonal, something that Zillow does not and will not do.

The answer, then, by the process of elimination can only be one thing: CoStar must become the MLS for residential real estate, as it is the MLS for commercial real estate.

Now the Homesnap Acquisition Makes Perfect Sense

If that is the hypothesis, then the Homesnap acquisition suddenly makes perfect sense. From the press release:

“The acquisition of Homesnap will enable us to enter a new space and expand the total addressable markets in which we can compete,” said CoStar Group founder and CEO, Andy Florance. “The estimated value of commercial real estate assets in the U.S. is $16 trillion. With the new addition of clients and information covering 90% of the estimated $27 trillion dollar U.S. residential real estate market we are almost tripling the size of our addressable markets. Over the past thirty years, CoStar has become the leading real estate technology platform by working in partnership with commercial real estate brokers to serve their needs for data, analytics and advertising exposure for their property listings. Similarly, Homesnap works in very close partnership with residential agents to serve their needs for data, analytics and advertising exposure for their property listings. We will continue to differentiate our residential real estate portal and solutions by working solely to help agents market their listings and their brands, which is in sharp contrast to other portals that increasingly advertise on top of agent listings and offer brokerage services directly.”

That’s a direct slap at Zillow, Trulia, and Realtor.com, obviously, but it is also an appeal to the industry that has so long feared and hated Zillow.

The addition of Homesnap’s complementary offerings will quadruple the number of professional, paying brokers and active agent users on the CoStar Group U.S. platforms from approximately 100,000 today to over 400,000. The number of U.S. property listings available across CoStar’s brands will double from approximately 1.35 million today to over 2.6 million.

“Homesnap has great relationships, data, software, and tools for residential real estate professionals that are complementary to our existing offerings,” continued Florance. “The tools and functionality developed by Homesnap for residential property agents, such as lead generation, client collaboration, and digital advertising, have direct applicability to commercial brokers. Our goal is to make these enhanced capabilities available to all of our audiences. Combining forces with Homesnap is also expected to enable us to expand and deepen our collaboration with MLSs nationwide. A very large percentage of CoStar’s clients such as investors, banks, government agencies, appraisers, suppliers, and brokerage firms are active in both commercial and residential real estate, so we believe that they would welcome a more comprehensive solution for their needs across all real estate segments.”

Despite the PR spin, Homesnap is hardly an “industry-leading” anything… except in one thing: relationships with MLSs and large brokerages. From earlier in the press release:

Over 300,000 agents nationwide use the application an average of 30 times each month. Those 300,000 agents are also the nation’s most productive, selling the majority of homes in the US. The platform enjoys high growth and engagement as the number of active monthly users has grown at a compounded annual growth rate of over 40% since 2016, while marketing product sales have risen over 75% per year over that same period. Supported by a consortium of hundreds of the country’s largest multiple listing services (MLSs), over 1.1 million real estate agents have access to Homesnap Pro. These agents represent over 90% of the residential real estate agents and listings in the United States. With the support of this impressive consortium, Homesnap’s public residential real estate portal showcases 1.3 million active property listings.

And there it is: what CoStar is actually buying. Without that consortium of “hundreds” of the largest MLSs in the country, there’s no way that CoStar pays $250 million for a company doing $40 million in annual revenue.

Now, I do not have (and if I did, I could not reveal) any MLS data agreements with Homesnap. But I have heard from pretty good sources that Homesnap’s data agreements are not your typical syndication agreements, like the kind that Zillow and Trulia used to have. They are more like the old Realtor.com agreements, which provides the entire MLS’s database with few (if any) restrictions on usage.

What CoStar is buying, then, is access to the entire database of hundreds of the country’s largest MLSs with over 1.1 million agent subscribers. That’s 90% or more of all of the listings in the United States.

Now the Homesnap acquisition makes sense. Now, the acquisition talk between CoStar and Corelogic makes sense.

With those two pieces, CoStar has all of the infrastructure and all of the data required to create the national MLS for residential real estate. It already has that in commercial real estate, and decades of experience in running it. And the one thing that Zillow has long said it has zero interest in doing is operating an MLS.

Timing Makes Sense

What is kinda brilliant is how CoStar is wading into residential real estate now. You can’t tell me that Florance and crew have not long thought about residential real estate; how could you not? I mean, MLSs and residential companies have long thought about commercial real estate. HAR has been trying for years and years to get a commercial MLS going, and a lot of other MLSs have tried to do the same as well. There is absolutely no way that CoStar, which owns and operates the CRE MLS, has not thought about residential MLS.

But they haven’t made a move, because residential MLS is… a crazy industry with hundreds of local monopolies, all under the national monopoly known as NAR.

So why now?

One, Moehrl v. NAR was filed in March of 2019. It not only survived dismissal, but the judge strongly signaled that the plaintiffs are likely to win at trial… in October of 2020. Several weeks later, CoStar is acquiring Homesnap….

Two, the DOJ sued NAR, and settled. I wrote about that already, but didn’t realize just how it fits in with everything. If the settlement was filed at the same time that the lawsuit was filed, you can’t tell me that lawyers were not negotiating that whole deal for weeks and months. Guess where CoStar Group’s headquarters are. You think some of the rich and powerful people at CoStar know one or two people in the Department of Justice? In a town that is centered around politics?

Those things combined means that cooperation and compensation — the one thing that truly differentiates residential and commercial real estate — may not be long for this world.

Now… ask yourself this question: What is the value of the MLS without cooperation and compensation?

You probably answered, “Data” and “Technology.”

And if that’s your answer, would you rather get your data and technology from the small business that is the MLS (even the largest MLSs in the country are small businesses), or from a multinational public company that provides, and I quote:

Our strategy is to provide industry professionals and consumers of commercial real estate and apartments with critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on commercial real estate and apartments and the right tools to be able to effectively utilize that information. Over time, we have expanded, and we continue to expand, our services for commercial real estate information, analytics and online marketplaces in an effort to continue to meet the needs of the industry as it grows and evolves.

CoStar vs. Zillow

The most fun part of this speculation is the inevitable clash of the titans that this sets up between CoStar and Zillow. And the two companies have a rather interesting trajectory, relative to one another:

For what it’s worth, Zillow as of this writing has a market cap of $26.7 billion. CoStar has a market cap of $35 billion.

At the end of Q3, the two companies looks pretty similar, looking only at Zillow’s online portal business:

In the residential rentals space, CoStar is beating Zillow… though perhaps Zillow hasn’t focused on rentals to the degree that CoStar has. But still, focus or not, CoStar > Zillow in the one space where they compete. From CoStar’s Q3 earnings conference call:

According to comScore, in the third quarter, Apartments.com had 2.3 times as many unique visitors as RentPath, 9 times as many as Zumper, 12 times as many as Apartment List, and 22% more than the Zillow Rental Network.

Strategically, Zillow is becoming part of the MLS system, joining it as a full Broker-Participant. And as I outlined, I believe that CoStar is getting ready to replace the MLS system. It is quite obvious that Zillow simply cannot allow that to happen.

But unlike other opponents it has faced, CoStar is every bit Zillow’s equal… and it has advantages that Zillow simply does not have today. The three most important, in my mind, are:

1. Focus: CoStar is not involved in a pivot away from portal to market making; Zillow is with its transformation into Zillow 2.0.
2. Research: CoStar’s secret to success is its “largest research department in the industry” with “proprietary data collection.” Put simply, CoStar does not rely on brokers and agents entering data; CoStar goes out and gets the data itself. Does that work for individual homes versus large commercial buildings? Who knows? But CoStar has that capability; Zillow does not.
3. Ruthlessness: CoStar has a history of ruthlessness, whether against competitors or vis-a-vis customers, that Zillow simply does not have. Love ’em or hate ’em, Zillow has been a puffball with a soft and gentle touch compared to how CoStar has acted in commercial real estate.

That last piece deserves a comment. For all the complaints that brokers and agents have about Zillow, about the Zestimate, about “they’re coming after us!!!!” paranoia… all I can say is, go ask your commercial friends about CoStar’s business practices. It’s quite something else.

I have some battle scars from back when I worked at Coldwell Banker Commercial and had to “negotiate” against Andy Florance and CoStar. When I say “negotiate against” I really mean, “get our asses kicked by.” I won’t ever forget that lesson.

So suffice to say that if real estate brokers are thrilled to have CoStar in their corner to fight against their hated enemy Zillow… it reminds me of the alliance that the Southern Song Dynasty in medieval China forged against their hated rivals, the Northern Jin Dynasty, with… the Mongols of Genghis Khan. With the Jin out of the way, it was but a matter of time before the Mongols turned their attention to the Song, with predictable results.

The Battlefield Ahead

I realize I have to do a lot more thinking about this and research things a bit more, but I think the battle ahead is going to be about the relationship between the MLS and Homesnap, which is really about the relationship between the MLS and the Broker Public Portal. The battlefield is for the hearts and minds of MLS executives, brokers and agents who sit on MLS Boards, and brokers who control all sorts of institutions in real estate, from local and state REALTOR Associations to NAR to various interest groups.

That’s going to be a tough row to hoe for Zillow, the Public Enemy Number One of real estate for the past dozen years.

What a CoStar Victory Looks Like

If CoStar is able to leverage the long fear and loathing of Zillow on the part of brokers and agents, make all sorts of promises, shower the MLS with gifts, fancy dinners at conferences, revenue sharing for a newly invigorated Homesnap, and lower-cost-and-higher-quality software from Corelogic (or some other vendor CoStar will acquire), then it will solidify its control over MLS data.

I mean, if CoStar owns an MLS vendor… you think other MLS vendors will be around for much longer? If you do, then either CoStar has changed or you don’t know CoStar. I mean, seriously, how many tech vendors can a few hundred MLSs actually support, especially if CoStar decides to take market share by dropping prices to say $0.25 per member?

At that point, we’re down to one MLS vendor (CoStar) with one national mobile platform (Homesnap Pro) that powers the data feeds from the MLSs that provide 90% coverage to a portal (Homesnap.com) which swears up and down to abide by the Fair Display Guidelines. We all know how the brokerage community would simply love to have the new Homesnap.com with its Fair Display Guidelines overtake Zillow, don’t we?

Then CoStar just has to wait for either the Moehrl lawsuit, or the Federal government under Biden and his right-hand man Ben Harris, to eliminate cooperation and compensation as well as remove the power of NAR over listing data.

Once that happens, it is a relatively simple matter to replace 600 random little fiefdoms we know as the MLS community with one dominant technologically advanced real estate data service along with all of the tools for using it. I can picture the conference call now:

“We’re really sorry, but we’ve decided not to renew your Corelogic platform agreement.”

“What do you mean? There’s no other vendor!”

“Oh, is that so? Why, that is so sad…. Maybe we could… acquire you for $1.50 per member? No? Well, your members can join that other MLS which we already own in the next county.”

Control the source of real estate data and CoStar doesn’t really need to engage in a multibillion dollar fight for consumer attention against Zillow. It will have a thousand different ways to make Zillow wither on the vine, and a hundred ways to make Zillow pay through the nose for data. At some point, it will actually be worthwhile for Zillow to think about selling its IMT portal business to CoStar and focus on its market making business.

Of course, this future CoStar MLS will cost far more than any residential agent today can even imagine; again, go ask your commercial friends what they pay for CoStar. But in the meantime, here’s an interesting exchange from the Q3/2020 earnings call of CoStar Group:

Ryan John Tomasello — Keefe, Bruyette — Analyst

Good evening everyone, thanks for taking the question. The for-sale housing market is clearly seeing an acceleration in demand, which I think has a lot of people wondering if this represents a secular shift in homeownership preferences. So, my question, Andy, is with that as a backdrop, is there any desire to expand CoStar’s footprint in housing beyond the rental market? You know, what types of areas of that sector can make more sense and be most complementary, you know, for example, anything on the marketplace side or perhaps on the construction data side, that would be an interesting area for CoStar?

Andrew C. Florance — Founder, Director, President & Chief Executive Officer

Yes, so, I mean there are a lot of different subsectors. Just like there are a lot of different sectors in the commercial real estate information and marketplace area, there are a lot of sectors in the residential side. I think that — it’s good to note that CoStar Group actually began life as a residential information business. So, when I first started up, I was doing assessor or recorder of deeds and downloading MLS data. So actually, we started residential. We focused on commercial, obviously.

The — looking at some of the areas you’re talking about, the construction data area is interesting, historically not terribly interesting, for a number of different reasons. There’s — there are information services, there are lending services, there are marketplaces. I would note one of the things that really stands out for me is that the United States is an oddly underdeveloped country when it comes to residential marketplaces. If I look at a mature residential marketplace provider like REA Group in Australia and I take the relative size of U.S. and Australia on a GDP basis, it would imply that you’d create a market cap of about $200 billion in the U.S. on a residential marketplace.

You’d create $1 billion-plus of EBITDA in that area and yet no one’s really doing a good job, but the same thing with Rightmove in the United Kingdom. If you just take their 50%-plus margins — I think they’re 60%, 70% margins but they’re huge, and you just scale them to the U.S., there’s clearly a lot of opportunities in the U.S. that are underdeveloped while people are moving in — away from really pure digital models and getting into actually becoming players in brokerage and flipping and mortgages, and so I think there’s some big opportunities out there, nothing to talk about today but very focused on it. And it’s an area we feel very comfortable with because we’ve been working with that space for a while. [Emphasis added]

Ask Australians what they pay for REA Group, because for all intents and purposes, the REA Group is the MLS for Australia. Ask UK agents what they pay for Rightmove.

Zillow Has a Fight On Its Hands

Since Zillow can’t let that happen without a fight… I expect a quiet battle to be joined and right soon. I know Zillow is filled with some of the smartest operators and strategists in the industry, but I have a strange feeling that going to war against CoStar for ownership of the MLS space was not a scenario they have a file for in the Emergency Break Glass cabinet. Facebook? Sure. Amazon Real Estate? Probably. Google Marketplace? I think so.

CoStar taking over the MLS? I know I didn’t see it coming; maybe Zillow did. If so, kudos. You guys are far more paranoid than I am, which is really saying something. If not, welcome to the black parade.

Question is, what exactly can Zillow do to fight off CoStar?

This is an adversary with no roots in residential real estate, with the same war chest (over $3.9 billion in cash) and access to capital that Zillow has, bigger market cap, an incredibly accomplished management team with a long history of winning, a long history of total dominance in its chosen areas, and a history of and a reputation for utter ruthlessness. That adversary just acquired one of the most beloved white elephants in real estate: Homesnap, which is Broker Public Portal. It was popular because it was widely seen as the anti-Zillow play by brokerages and MLSs. And that ruthless adversary is bidding $80 per share for Corelogic, the #1 platform for MLS software, which last year announced that they were going to power Upstream, another broker initiative widely seen as an anti-Zillow play.

Zillow has never ever fought an adversary like this. Not ever.

I think the exploration of what Zillow might or can do may need to wait for the next installment; I have to go back through some of the earnings calls transcripts and public statements and see what I can see.

Your thoughts and insights, particularly if you’re active in commercial real estate where I haven’t been for a dozen years, would be welcome.

Welcome to the black parade! 2020 marches on.

-rsh