Before a regional banking crisis shook commercial markets back in March, CoStar appeared well-positioned to weather an overall downturn in that sector, balanced on its diversified portfolio of both commercial and residential-focused businesses and portals.
Reporting its Q2 earnings on Tuesday, the company’s balance sheet appears to still be healthy in the short term, even as the potential for a much more painful pullback in CRE real estate looms.
“The office sector continued to weaken in the second quarter and can now be characterized as the worst it’s ever been,” said CoStar CEO Andy Florance on a conference call following the earnings report. “Conditions will likely not improve anytime soon. We expect vacancy rates to continue to rise.”
CoStar stock was down sharply Wednesday morning, losing close to 10% in early trading.
Despite these difficult conditions, the commercial giant posted positive growth in revenue and traffic, along with a strong balance sheet and significant cash on hand. Revenue grew 13% to $606 million, and the company reported over $5.2 billion in cash. CoStar also remained profitable, with a net income of $101 million, up 17%.
But it is the unknowns of a rippling bank crisis and an overall depression in the office sector that might not register for a couple years even, according to Florance, and could have far-reaching effects on the broader real estate economy.
“The debt market has not yet seen a wave of distress, with delinquencies still very low by historical standards, but there has been some movement,” he said. “The next couple of years will bring more clarity to that market as more than $1 trillion in CMBS debt comes due.”
Commercial transactions are down 63% in Q2 year-over-year, according to Florance, and vacancy rates in office are at all-time highs. Citing these headwinds, the company adjusted its guidance down for full year 2023, to $2.45 billion.
Ironically, though, it was CoStar’s residential businesses that saw revenues decline year-over-year, from $20.2 million to $12.7.
After purchasing residential-focused portals Homesnap (in 2020) and Homes.com (in 2021), CoStar has made a concerted push into the housing market, after successfully revolutionizing commercial property data markets in the 1990s. Traffic is up significantly for Homes.com (which CoStar has merged with Homesnap), as that platform recently released the “first installment of proprietary content” including “immersive neighborhood videos” and “the most complete coverage of schools on any residential property website.”
That evolution is currently in the “second inning,” Florance added, as the company aims to begin monetizing the platform in the first half of 2024.
“I’m really pleased with some of the work that’s happening—there are things we could do better but the volume of what we’re doing is enormous. And I think that what we’ll be able to do in the next year or so with that content will be, I think, really quite impressive, and I think will be a really compelling value proposition for our platform,” Florence said.
Residential has remained a primary focus, with CoStar earlier this year flirting with an acquisition of Move.com, the parent company of Realtor®.com. That deal fell apart, but Florance said at the time he was continuing to “have conversations” about acquisition opportunities.
Homes.com is now delivering double the lead flow compared to “some of the well-known residential platforms in the United States,” according to Florance, though he declined to provide specific numbers. The company’s residential portal network, including several rental portals, is now the second-most trafficked residential marketplace in the United States, he added.
“We have a huge engaged group of residential agents who are on our platforms, and they like our message. They like the fact that we are, your listing, your lead,” Florence claimed. “So they’re directing a lot of their clients, I believe, into our platform because they prefer what we’re doing to alternatives…I would just like to double the overall traffic at some point soon.”
