fasten your seatbelts: If Andy Florance's take on commercial real estate is correct, the industry will soon be transacting at light-speed.
Over the past 10 years, Florance has built CoStar Group into a well-respected Internet information provider. The company has been cited as one of the 500 fastest growing tech firms in the nation. The company recently agreed to acquire COMPS.com, and is poised to become one of only a few key real estate dot.com players.
RETech recently spoke with Florance on how the industry will eventually shed its "informational inefficiencies" by using the Internet's offer of transparent data to closeand increase value across the board.
RETech: We know that the dot.coms are great investment vehicles, but how are they of service to commercial real estate?
Andrew Florance: The press and Wall Street are hyper-focused on the real estate technology sector right now. It's all of a sudden become extraordinarily hot.
We have been involved in two studies conducted by independent third parties, looking at information usage by commercial real estate professionals. One of the studies was conducted by E&Y Kenneth Leventhal, where it surveyed 500 commercial real estateand asked them what percentage of their time was spent collecting information to support transactions. The answer was 40%. We just recently worked with a firm, Market Connections, and conducted a similar study and asked the same question. The answer came back as 33%. So you're talking about a statistically meaningful change.
If you look at a broker today vs. a broker of four or five years ago, today's brokers are clearly producing more sophisticated information packages and better leasing presentations. They are now producing high-end multimedia presentations, and they're spending less time doing it. If you look at a $12 billion brokerage industry, a 7% efficiency gain equates to more than $2 billion in savings a year to the industry.
These information systems - ours and others - are making it possible for brokers to service their clients more efficiently and at a much faster rate.
That form of data presentation allows people to manage inventories more effectively, and it becomes a virtual-reality marketplace - where buyer meets seller in a cyberworld instead of at a BOMA Convention.
No Internet site can provide the full range of value or services that a broker provides in making the right transaction occur. But at the end of the day, brokers are spending less time walking in the field taking pictures of buildings, sorting fliers or finding out what a building sold for. They're getting out of that shoe-leather work, and they're spending more time transacting deals. The value savings, I'm convinced, are in the billions and will actually grow to be more than that.
RETech: Internet companies are getting a lot of capital thrown at them, but they typically don't have a defined bottom line. Conversely, in many cases REITs have proven their ability to manage properties well, yet they are struggling to see gains in stock prices. Is this an inevitable irony, or is it a 'virtual divide' that will eventually correct itself?
Florance: If you look at an Internet company vs. a REIT, REITs as an investment have many attractive features. They have a small internal growth rate and have a high current income return. There's no question that brokerage firms and REITs have been beaten up, and I think harshly and unjustifiably, but there's a big difference between a REIT and an Internet company.
The revenue and growth models are radically different, and that's what investors are responding to. The industry will eventually be a digital marketplace, no question about it. Companies that define that type of marketplace will have tremendous value.
By virtue of the Internet, you get these centralized digital marketplaces where everyone goes to one zone, and you get tremendous value concentrated in one or two companies. That simply does not exist in the bricks-and-mortar world of REITs. I think REITs are a great investment right now, but I think the discrepancies between an Internet valuation and a REIT are not as crazy as they appear on the face of it.
Five years from now, Internet information services will be central to every transaction in commercial real estate. We're at the very beginning of that movement.
RETech: How will your deal with COMPS.com affect the industry, and how will e-services become more sophisticated in the future?
Florance: We've gone from covering one city four or five years ago to now covering close to 50 cities. Over the next two years, as we integrate the operations with COMPS and continue to upgrade our network, it's going to bring tremendous value to the industry.
Also, the industry is going to be at a lower risk level because there will be more transparency and visibility [with building data]. As there is more transparency, that speaks to the earlier issue about REITs: As there is more transparency and faster transactions and greater volume, Wall Street is more likely to step into commercial real estate more aggressively. You'll probably see some of those valuations improve across the industry and in other segments.
Right now, if someone wants to buy a building, there's not one site you can go to and find a list of all the buildings for sale in the United States. There's nothing that's really geared to the buyers of buildings; it is a highly disorganized industry. As transactions go, it's probably one of the most information-inefficient industries. All that is going to change radically in the next 18 months.
For example, we're putting a system up in the first quarter called CoStar Exchange, where we'll put 30,000 buildings for sale up on the Internet. And it's not a system where people post information. We're taking our entire database and reconfiguring it to support the buying and selling of buildings on the Web. We're taking more than 1 trillion bytes of content for that purpose.
This system will allow people to sell buildings faster, and it will allow buyers to find buildings that meet their investment criteria more rapidly. Wall Street would love that. If investors can get in and outof a building investment faster, it's better for everyone in the industry. And that's absolutely going to be the case.
We're doing this in such a fashion that it does not upset the apple cart. We're not trying to shadow the industry, we're trying to facilitate it. And we're doing it in such a way where we assure there's a broker involved in both ends of every transaction, because we believe that's necessary. And we're also trying to protect their confidentiality in the system. If I wanted to sell the building I'm in right now, if I were the owner I could never go up and post it up on a public Internet site that anyone could go to. All of my tenants would see that I was selling the building, and everything would fall apart.
Our system will include security where only relevant, qualified investors will be able to view the information.
We're tracking more than $600 billion in closed building sales, and we interview people right after they buy or sell a building. We know who all the buyers are in the country. So if owners want to sell a building, they can come to our site and match their buildings against the profiles of buyers for that kind of property, and we can tell them exactly who is likely to purchase their building. That never existed before.We are taking something that's always been a murky, opaque process, and making it very clear and very fast. The industry is going to be moving at light-speed as more of these systems come online.
RETech: How would you grade the industry now in its Internet usage and where can the industry improve in the future?
Florance: I see some things that really puzzle me. The commercial real estate industry has historically kept its information very close to the vest and actually thrived on inefficiency. All of a sudden, in the past six months to a year, the industry has woken up.
Still, a lot of people are not adopting strategies based on the realities of the Internet. They're doing reactionary things that may actually be hurting them in an Internet marketplace. In other words, they're trying to do things the way they used to - applying old business models to a new reality.
Just take the concept of the leasing sign on a building when you walk down the street. How often do you see a leasing sign on a building have a Website on it?
There are some leaders in the industry who are getting the picture, and there are others who are probably being a little reactionary or not thoughtful enough, which could take them out of the model.
The industry is a little confused right now, and I think it'll become a lot clearer over the next 12 to 18 months.