CoStar Shifts Strategy With Job Relocations, Sales Focus And Researcher Layoffs

CoStar Group, the commercial real estate data leader that has more than doubled its market value in the last two years, just unveiled a major shift in its research and sales efforts. 

The D.C.-based company is relocating 145 positions from D.C., Atlanta and other East Coast offices to Richmond, Virginia, CEO Andy Florance said on CoStar's earnings call Tuesday. 

In addition, CoStar is eliminating 120 researcher positions from Atlanta this month and hiring 100 sales people in the Richmond office, a research hub it opened in 2016. Following the consolidation, CoStar's Richmond office will have 950 people, compared to 750 in its Downtown D.C. headquarters. 

Florance, in a Wednesday interview with Bisnow, said CoStar is growing its Richmond office because it has had success hiring and retaining employees in the city, the office has the space to accommodate growth and the shift makes the company more efficient. 

"There's a real benefit to having people together who are working on similar things," Florance said. "There's no reason to have them split into two places. They're much more efficient if they're in one place."

The geographic shift comes as CoStar is making a larger shift in the way it approaches its research and sales efforts. 

The positions CoStar is eliminating were researchers for its rental listing website, Apartments.com, whose job it was to find information on apartments and post it on the platform without charging the building owners for the placement. CoStar is now moving away from offering that type of free exposure and is instead hiring sales people who will sell advertisements on Apartments.com, with rates as high as $7,500/month for the best placement on the website. 

"When we first relaunched Apartments.com, we needed to include this free content to draw renters in," Florance said on the earnings call. "But at this point, we have grown our content and traffic many times over and now no longer need to spend so much money giving valuable advertising away."

Illustrating this shift in focus, Florance said on the earnings call CoStar is changing the official titles of employees formerly known as "researchers." He said the job title is now "marketing research adviser."

The change is a reflection of how CoStar's position in the industry has transformed over the years, Florance told Bisnow. He said it began primarily as a source for information on properties at a time when that information was hard to find. But as the internet made information more widely accessible, he said CoStar's advantage has become its marketing distribution channel, offering advertisers the ability to reach hundreds of millions of industry participants. 

"The single most important thing the researcher does for clients, or equal in importance to collecting data, is helping them market listings," Florance told Bisnow. "People don't always recognize these shifts right away, but that shift has definitely happened."

A similar trend is happening with CoStar's listing platform for commercial properties, LoopNet. Florance said it used to rely on reaching out to brokers to collect information, but now more often brokers will submit listings to LoopNet. He said it hasn't monetized the LoopNet listing platform with advertisements as much as it has on Apartments.com, but it is beginning to move in that direction and thinks it could lead to significant revenue growth. 

"While the data we gather is still the foundation of our business, the marketing opportunities our platform affords is becoming the prime value proposition we offer industry professionals," Florance said on the call.

The shift toward more revenue-generating sales efforts comes as CoStar has significantly boosted its income and its market value. After the market closed Tuesday, CoStar reported Q2 revenue of $344M and net income of $63M, a 44% year-over-year increase.

CoStar's stock price soared Wednesday following the earnings release. It ended Wednesday trading around $628/share, up 47 points and 8% on the day. At this level, CoStar has a market cap of over $22B. The company traded at around $279/share July 24, 2017, making CoStar's current market value more than double its value two years ago.

B. Riley FBR Equity Research Analyst Scott Buck, who covers CoStar, said in a report Wednesday the company's Q2 earnings beat his forecast and he continues to recommend investors buy the stock. 

"Longer-term, we continue to see multiple avenues for growth across the platform and recommend investors take advantage of any short-term pull-back in [CoStar] shares," Buck wrote in the report, which he shared with Bisnow. 

The growth has come both from CoStar's online marketplaces and its subscription-based suite of information services.

Apartments.com's revenue has grown from $86M when CoStar acquired it in 2014 to an expected $500M this year. The amount of revenue coming from the CoStar suite increased from $134M in Q2 2018 to $153M last quarter, according to its earnings report. 

That windfall has come from a mix of adding new subscribers and increasing prices for existing users, Florance said. In response to a question on the earnings call, Florance said CoStar has recently increased prices for some users by 6% or 7%, compared to average price increases of 3% in the past. 

Florance told Bisnow CoStar has to raise prices to keep up with inflation and the rising salaries of its research team. 

"If you never raise prices, you're effectively lowering prices," Florance said. 

Berkshire Hathaway Commercial Real Estate's Brent Hoffman, a Georgia-based CoStar subscriber, said CoStar is a valuable tool for finding property data and presenting it to his clients, but he lamented the price.

"It's awfully expensive to be a subscriber to these systems," Hoffman said. "They do a relatively good job. There's frustration at times when they make a mistake and you have to call them. But I've got to have the data. I simply have to have it."

CoStar's expansion to become a $22B company has been driven in large part by acquisitions. It has made about 30 acquisitions during its 32-year history, including platforms such as LoopNet and Apartments.com that now make up a significant portion of its revenue. But Florance said these platforms are unrecognizable from how they looked before the acquisitions, and CoStar has greatly increased their profitability. 

"Acquisitions have been very important," Florance said. "A lot of these acquisitions we've made, we've acquired them and used them as a catalyst to launch new products."

He said industry observers should expect CoStar to continue its pattern of making two or three acquisitions every year, but some of them will be smaller companies like Off Campus Partners, a deal it announced in June and Tuesday revealed the acquisition price of $16M. Florance said it will make a "big" acquisition every two or three years. 

"We'll continue to do that," Florance said. "We'll look for interesting companies in some space and say we're not interested in what the company can do this year, we're interested in what that company can become 10 years out."