CoStar Website Saga – Episode 4

In a post on the CRE blog Agent Genius this past Monday morning, author Duke Long listed what he believes are 32 key commercial real estate sites with which everyone should be familiar.  Notably absent from Duke’s list is CoStar.  No big deal.  Unless you work for CoStar, that is.  A CoStar employee named Scott Meyer took exception to Duke’s omission of CoStar from his list and chimed in with this comment.  Unable to contain himself and just ignore the previously aforementioned spat by taking the high road, John Reeder decided to instigate the situation further by writing his very own thoughts about CoStar.  In his post, John airs some gripes about CoStar’s annoying pricing policy and then goes strong to the hole challenging CoStar’s ability to maintain control of the pricing and dissemination of CRE sale comp data.  Essentially, John sees a future where accurate property sale comp data is maintained in a freely accessible (or fairly priced) online database maintained in a wiki-like fashion.  Deal Junkies posted his thoughts on the matter on Monday as well.  The combination of these three posts (conversation) motivated me to write my long-held thoughts on comps and the business of selling comps.  I have been thinking about this very issue for several years so I do have a thought or two on the subject.  So without further ado…..

During the summer of 2006, I got the itch to learn as much as I could about the online world, the coming technological innovation and start-up culture in general.  My initial interest in learning about the “internet space” has become a journey which I will never abandon.  Lucky for me, I have some very good friends from college who have been totally immersed in the southwestern portion of the SF Bay area since the internet’s infancy.  Many of these guys have done very well and are about as tied in up in Silicon Valley as one can be.  One such person is Dennis Deandre.  Dennis is the founder of LoopNet.  Dennis also happens to be a fraternity brother of mine from Cal.  Naturally, I reached out to Dennis many times during my initial dive into the space.  Dennis and I actually discussed this very same subject contemplated by John in his CoStar post.  As a team member at LoopNet, one should not have to stretch their creative muscle very far to come up with the fact that LoopNet could/should be a player in sale comps.  Obviously, Dennis and his team had discussed this topic ad nauseam over the years.  Dennis’ thoughts to me on the topic:

1) It will be hard to make comps work as a business for LoopNet – hard problem; and

2) Brokers cannot be trusted to create and maintain an accurate and reliable database of comps

The reasoning for item #2 is pretty simple.

1) You cannot assume a broker will have any motivation beyond “self” in contributing to the database;

2) Brokers are lazy and will not create a database at a comprehensive enough level to be considered reliable; and

3) Brokers may maliciously modify or delete information (again, “self”), making version control (the management of each event of data manipulation) a total nightmare (and one that would need to be monitored by humans and therefore an expensive problem to solve)

So here we are today and I think it can be definitively stated that LoopNet has zero presence in the dissemination CRE sale comps.  CoStar is clearly the gold standard in the maintenance of the industry’s CRE sale comp database.  This is the situation now.  Like John, I believe this is going to change.  Here are my thoughts on the hurdles as well as why I think the hurdles will be overcome:

This comment from Duke Long, written in response to John’s CoStar post, is evidence of pending change:

Amazing the e-mails I received for "omitting" certain sites. I stated at the end that there are probably 50 more sites I could add. Your assessment and comments are dead on. I have heard of some "challengers" working on a couple of the things you suggested.

There are a ton of new CRE sites popping up left and right.  I would be willing to bet that there have been more service level CRE sites (meaning sites attempting to be a business – not just a blog) launched in the last 24 months than the total number of all service level CRE sites launched any time prior to the last 24 months all the way back to the inception of the internet.  What I see here is strength in numbers and serious momentum.  With more and more people working to provide online solutions to problems and pain points in the CRE industry, the likelihood of something really good, beneficial and disruptive increases.

Adding to the problem faced by CoStar in attempting to maintain its stranglehold on CRE sale comp data is the fact that there is basically ZERO proprietary data included in a CoStar sale comp.  CoStar does not own one bit of the key data.  They may own their database and the dissemination of said data in their proprietary configuration, manner, etc. but they do not own the information.  The name, address and phone number of a buyer, seller or broker is not information that is “owned” by anyone.  The data describing the physical attributes and characteristics of any single property are not “owned” by CoStar.  The sale price, income information, tenant roster, etc. of any single property is not “owned” by CoStar.  This data is nothing more than fact.  No company owns facts.

It seems to me that CoStar could do nothing at all about someone printing out every single comp in the CoStar database and subsequently reentering the comp information into one’s own database and offering it to the public for a fee or free with zero infringement on CoStar’s IP.  I don’t see how it could be any other way.  (CoStar may own some bits of info in the comps they publish, but its not much.  The notes section, for instance, may contain proprietary “owned” information.  These usually read something like this: “Broker reported that the purchase represented one of four properties acquired in buyer’s 1031 exchange.”  – Not exactly mission critical information.)

I do see many problems with the wiki-like model presented by John (too many to get into in this post – some stated above) but I see just as many holes in the current business model as well.  CoStar does a great job of aggregating, confirming and presenting CRE sale comp data in a timely manner.  Simply put, they are the best at doing so.  They may not go away altogether because their bread is buttered by institutional clients.  You can’t fault them for pricing their products at the the highest price the market will bear.  That’s just business.  The problem I think CoStar will have with their sale comp product in the near future is the drastic reduction in the cost of acquiring the information which makes up a sale comp.  The proliferation of information to or through a cheaper, more accessible and more efficient medium is inevitable.  This means competitors will rise up and CoStar will have to lower the price of the sale comp product or face losing market share to competitors.  Sure institutional-type customers will continue to pay for an information product sold by the gold standard provider, but I don’t think CRE brokerages will because they just won’t need to anymore.

The business model for sale comps is going to change.  Period.