CoStar Group, Inc.

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CoStar Group, Inc.

2 Bethesda Metro Center, 10th Floor
Bethesda, Maryland 20814-5388
U.S.A.
Telephone: (301) 215-8300
Toll Free: (800) 204-5960
Fax: (301) 718-2444
Web site: http://www.costar.com

Public Company
Incorporated: 1998 as Realty Information Group, Inc.
Employees: 1,038
Sales: $112.1 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CSGP
NAIC: 518210 Data Processing, Hosting, and Related Services

Maintaining its headquarters in Bethesda, Maryland, CoStar Group, Inc. is a national provider of commercial real estate information services, relying on a massive proprietary database delivered through the Internet. Coverage includes 1.14 million properties in the top 50 markets in the United States, as well as London and portions of the United Kingdom. All told, some 30 billion square feet of real estate is covered, supplemented by 2.2 million high-resolution digital images of buildings, floor plans, and maps. Information is updated on a daily basis by a staff of more than 700 researchers, analysts, and photographers. Customers—which include brokers, owners, investors, and appraisers—are able to list properties and to manipulate the data in order to find properties that meet certain criteria or to conduct market analysis and other research. Through an acquisition in 2005, CoStar also offers a database of U.S. shopping centers. After fending off the challenges of numerous rivals, CoStar is the undisputed leader in its field. It is a public company, listed on the NASDAQ.

Launching the Company in the Late 1980s

CoStar was founded by its chief executive officer, Andrew C. Florance, who grew up in the real estate industry. His father was a top Washington, D.C. architect and other relatives were brokers. While earning an economics degree at Princeton University in the mid-1980s, he got his real estate license. He also made money writing software, experience that he would soon put to use while casting about for a business to start during his final months at Princeton. Florance considered launching a video delivery service, but abandoned the idea, afraid that any success he might achieve would only attract the notice of a larger competitor. He then decided to return home to Washington, after graduating from Princeton in 1987, to use the money he made writing software to buy and renovate abandoned buildings. "I was going to become a real estate tycoon," he told the Washington Post in a 1994 profile. He quickly grew frustrated with the quality of real estate information that was available, and realized that he could use his knowledge of computers to develop a commercial multiple-listing database service. At the time, real estate brokers compiled their own information, at great cost, essentially calling one another to share information. Florance's concept was to centralize the process, to call all of the brokers, then make the information available to subscribers, putting economies of scale to work so that brokers could eliminate their research staffs and obtain more accurate and comprehensive information at less expense. To start out, Florance, who set up shop in his parents' basement laundry room, inputted information that could be gleaned from sources such as Dunn & Bradstreet and government economic development publications. According to the Washington Post, "He proceeded to write software programs that could handle and sort the reams of data he collected…. 'I did it for a year, and I was broke,' he said."

Florance worked nights as a freelance computer consultant to support his daytime work of compressing the real estate assessment data from a mainframe computer into a personal computer. His first company was called Real Estate Infonet, geared toward publishing real estate public records. He printed ten copies of the 1,200 pages of information he had compiled, using a rented laser printer, and then sold them for $800 a piece. The algorithms he had devised to compress the information proved attractive to a number of companies and he was on the verge of selling his software to Planning Research Corp. when he found a backer in Washington lawyer Michael Klein, who assembled an investment group, allowing Florance to start a new company, Realty Information Group (RIG).

Late 1980s Real Estate Crash a Boon to CoStar

While Florance developed software to make use of the data, his researchers began to contact brokers for current information about what local properties were available. A number of brokers were suspicious of Florance's intentions, and some even tried to drive him out of the field. Attitudes changed during the real estate market crash of the late 1980s, however. Brokers were less guarded about their listings, since the information had always been an open secret. Under pressure to cut costs, it now made sense for brokers to eliminate their research staffs and essentially outsource the work at much less expense to RIG and its main competitor at the time, Cor/Net, which published Black's Office Leasing guide. RIG's competing print product was called Cornerstone, a quarterly leasing guide first published in 1989. For the next few years, RIG offered both the guide and its evolving electronic product, sold under the CoStar name. Revenues were meager at this stage, totaling just $30,000 in 1989, while expenses ran $1 million. But sales began to accelerate in 1990, reaching well more than $500,000.

Early on, after it became apparent that RIG had great potential, Florance recruited a seasoned executive to serve as president. Florance concentrated on developing the company's technology platform, but he eventually grew disillusioned with the president, despite the man's competence, because of his lack of vision for the company. Realizing that he was the only one possessing such a vision, he reassumed the post and led RIG through a period of tremendous growth during the 1990s. By 1992 RIG was entrenched in Washington, D.C., and now entered the nearby Baltimore market it had been eyeing for some time, again in stiff competition with Cor/Net. The company learned a valuable lesson in the process: The product had to be tailored to individual markets. Because Baltimore had more industrial properties the inclusion of ceiling heights was important. Moreover, terminology varied between markets. Washington's "core factor" (the location of elevators and other mechanical functions) was Baltimore's "public factor." It was a lesson that would soon be applied in other new markets.

After establishing itself in Baltimore, Florance realized the company had reached a turning point in 1992. If he was content just to do business in the Washington-Baltimore region, his success would breed his own destruction, as one day a larger company would come in and use its economies of scale to crush RIG—the very reason he abandoned the idea of a video delivery service. Thus he concluded that he had no choice but to keep expanding into new markets. It was also at this stage, in 1993, that Florance elected to cast his fate with the CoStar product and the electronic delivery of real estate information. He sold the Cornerstone print business to Black's and did not look back.

In an effort to ward off competition from better funded national companies, Florance eschewed secondary markets, electing instead to enter the largest markets, where cost of entry would become cost-prohibitive later on. Hence, his next strike was the largest real estate market of all, the New York City metropolitan area. In 1994 RIG gained a toehold in the market by acquiring Space Data Graphics. RIG did not enter New York unopposed, however. Two years earlier Realty Information Tracking Group began selling an electronic program, the RE/Locate system, which had won the lion's share of the market, and whose partners Michael Sapers and Bruce Weissberg were ready for a fight. Weissberg told the Washington Post at the time, "They'll [RIG] find out it's not quite the opportunity they thought it was." Weissberg was proved wrong, as RIG not only entrenched itself in New York City, it began spreading out across the country, initially entering a market by acquiring a local company and building on its base, but more often than not by starting an operation from scratch. RIG entered the Los Angeles market in 1995, California's Orange County and Chicago in 1996, followed by San Francisco, Philadelphia, and Wilmington, Delaware, by mid-1997. Boston, Atlanta, and Elmhurst, Illinois, were soon to follow.

With so many investors having a piece of RIG, there was talk in the industry that the company would be forced to make an offering of stock. In February Realty Information Group, Inc. was incorporated in Delaware. A month later the company filed for an initial public offering, revealing that its revenues from 1997 totaled $7.9 million, an 82 percent jump over the previous year, and that its accumulated deficit stood at $11.4 million. With the $23 million the July 1998 stock offering raised, plus a secondary offering of $100 million two years later, RIG was well positioned to continue its expansion. The acquisition of Atlanta-based Jamison Research in early 1999 moved the company into the Atlanta and Dallas markets, and later in the year RIG opened offices in south Florida. It was also in 1999 that RIG became more dedicated to the Internet, investing heavily in new online products and services and the development of a new browserbase interface to shift away from the delivery of information by CDs. Already about two-thirds of the company's corporate clients were receiving daily updates over the Internet. Although RIG predated the emergence of the Internet, it benefited from investor enthusiasm over online ventures in the late 1990s. Less than a year after going public, the company's stock grew nearly 400 percent, from its initial $9 price to $44.50 in mid-April 1999. RIG's main competition was now Internet-based, in particular Comps.com, a San Diego company that went public in May 1999, raising $100 million. Comps was devouring local research firms and appeared poised to go head-to-head with RIG, but in a matter of months it was swallowed by RIG in a cash and stock deal that closed in early 2000 and made CoStar the undisputed leader in its field. By this time RIG had taken on a new name, CoStar Group, Inc., which better aligned the company with its brand.

Company Perspectives:

Today, savvy commercial real estate professionals exchange, share and access information like never before. They recognize the advantages of using new information technologies. And tens of thousands of them rely on the nation's leading provider of electronic commercial real estate information: CoStar Group.

Completely Web-Based in 2000

In 2000 CoStar finished moving all of its information to the Internet, phased out CDs, and became completely web-based. Although the leader in its field, it was not without challengers. Investment banking giant Goldman Sachs launched a web-based service, Zethus Inc., that had the potential to cut out the broker, directly connecting buyers and renters of property, a move that CoStar had assiduously avoided, instead building its business around the broker. CoStar also faced a renewed challenge from an old foe, New York's RE/Locate, which in 2000 bought the in-house database of information in 47 markets from New York brokerage Cushman & Wakefield Inc. With backing from venture capitalist FrontLine Capital Group, Re/Locate transformed itself into RealtyIQ.com. Ceding the high end of the market to CoStar, RealtyIQ.com hoped to price its service to attract small and medium-sized firms. Other online rivals included start-ups LoopNet, PropertyFirst, Commercial Realty Online, and Commercial Real Estate Exchange. Within a short period of time many of these players were struggling and looking to sell out. In January 2001 RealtyIQ.com agreed to sell itself to Zethus, which in turn tried to sell itself to CoStar and others. It eventually filed for Chapter 7 bankruptcy protection and closed its doors, while RealtyIQ.com was sold for less than $4 million after burning through 70 million in seed money. PropertyFirst and LoopNet also merged, bringing together two money-losing ventures.

While the national competition fell by the wayside, CoStar, after more than a decade of establishing itself, neared profitability. Sales grew from $58.5 million in 2000 to more than $95.1 million in 2002. The company's net losses quickly declined, from $49.7 million in 2000 to $20.2 million in 2001 and $4.8 million in 2002. Finally in 2003 the balance sheet produced black numbers, as CoStar earned $100,000. During the year the company also completed another offering of stock, netting $53.5 million. At the end of 2003 the company possessed no long-term debt and had in hand $97.4 million in cash, cash equivalents, and short-term investments. During the course of the year CoStar rolled out its new web-based technology platform, replacing all earlier versions of the company's software, the retirement of which not only saved money but allowed the company to focus its resources on its suite of web-based services. The new platform was appreciated by customers, who used the high-end product, CoStar Property Professional, at a much greater rate than earlier services. The company's renewal rate approached 90 percent and one of the fastest-growing client segments was that of national customers, such as investment and commercial banks, life insurance companies, and institutional investment managers. A "light" version of the product called CoStar Property Express also was unveiled in 2003, targeting smaller real estate brokers and property owners who could either subscribe or use the service on an on-demand basis with a credit card. The year 2004 also marked CoStar's first foray overseas, when in January of that year it acquired London-based Property Intelligence PLC and its FOCUS brand. Because many of CoStar's largest U.S. clients also had operations in the United Kingdom, the company had a ready base of clients to draw upon.

CoStar followed an outstanding 2003 with an even better 2004. Sales increased to $112.1 million and net income soared to almost $25 million, due in large measure to a more mature sales force, which enjoyed the fruits of better retention of personnel. The company was even more flush with cash than in 2004, holding $117.1 million at year's end. The company continued to break into new markets, such as Nashville and Memphis with the acquisition of PeerMark. Also in 2004 it launched field research in the United Kingdom and began upgrading the FOCUS service in London and Manchester. The acquisition of Scottish Property Network in June 2004 allowed the operation to extend its coverage into Scotland as well.

CoStar was expanding on any number of fronts in 2005, entering new U.S. markets but also moving beyond commercial real estate. In early 2005 the company acquired National Research Bureau, the leading provider of shopping center information, opening the way for CoStar to become involved in the retail real estate sector. By the end of the year it planned to add 200,000 properties to its database. With other real estate sectors to tackle in the United States and the vast potential of applying its proven technology platform to the world stage, the future prospects for CoStar appeared bright.

Principal Subsidiaries

CoStar Realty Information, Inc.; CoStar Limited (U.K.); Property Intelligence Limited (U.K.).

Principal Competitors

The First American Corporation; Grubb & Ellis Company.

Key Dates:

1987:: Andrew Florance launches a real estate information company in Washington, D.C.
1989:: The first printed directory is published.
1992:: The company enters the Baltimore market.
1993:: The company sells its printed guide business.
1998:: The company is taken public as Realty Information Group, Inc.
1999:: The name is changed to CoStar Group.
2000:: The company becomes completely Internet-based.
2003:: The U.K. market is entered through the acquisition of Property Intelligence PLC.
2005:: The company enters the retail real estate sector through the acquisition of National Research Bureau.