February 28, 2023

Overview

I have been wanting to look at CoStar’s progress in the Rental Marketplace for quite some time.  I spent nearly 15 years of my career helping to transform companies (marketplaces, DaaS businesses, and other property tech) providing services to owners and managers of rental properties.  Most of it was spent at RentPath which is now Rent. and used to be part of Primedia’s Consumer Source Division.  I have seen Rental Marketplaces evolve from generating leads from print books picked up outside of Blockbuster and Kroger to Apartments.com spending $100M annually to build a brand kicked off with a Super Bowl commercial.  I understood fully that the long game would be won by focusing on the consumer and becoming the go-to branded site in the space.  This is easier said than done.  This article reviews what CoStar has done over the past eight years looking at acquisitions, incubated businesses, and some other key announcements.  It provides a baseline of where they began, what they did, where they are now, and some thoughts about what may happen next.           

Select Acquisitions/Key Announcements

1. Apartments.com Acquisition, March 2014
2. Apartments.com Release of New Site, February 2015
3. Apartment Finder Acquisition, April 2015
4. New Ad Campaign (Super Bowl commercial), February 2016 
5. Westside Rentals Acquisition, February 2017
6. Apartamentos Launch, February 2017
7. ForRent Acquisition, September 2017
8. OffCampus Partners Acquisition, June 2019
9. CitySnap Launch, June 2022
10. Listing of the Future Announcement, June 2022
11. Entering Canada ($600M TAM)*, February 2023

*Not covered in this article

Not all of the numbers are public, but my estimate is they acquired approximately $300M in revenue and $75M in EBITDA with the above acquisitions.  Where are they now?  In 2022, the Multifamily segment generated over $745M in revenue which is 2.5x the estimated acquired revenue.  My EBITDA estimate is $224M based on an assumed margin of 30%.  This is my best guess given it is not public.  This is 3x the estimated acquired EBITDA. They likely also spent approximately $1.2B on all these acquisitions (smaller transaction values aren’t public, but the vast majority was shared).  

The Multifamily business is over ⅓ of their revenue and was the fastest growing segment in 4Q2022 (~16.5%) with vacancy rates and resulting budgets increasing. Multifamily revenue was 745M (~10% YoY growth) for CYE 2022.  Multifamily is also expected to be the fastest-growing segment in 2023.  CoStar trades right now at approximately 12x forward revenue and 14x LTM revenue.   To keep it simple, at 10X LTM revenue the Multifamily segment would be worth $7.5B.  We can debate the stand-alone value and related multiple, but it has had the fastest growth recently and the highest projected revenue growth rate for 2023.  

Overall, CoStar has sustained growth, they execute and they are or often become the leader in their segments.  Stated simply, they have more than recouped their acquisition cost, brand spend, and content investment for Apartments.com and in the Multifamily segment. 

Some applicable topics to the Multifamily segment and Apartments.com’s growth that seem obvious now: 

1. Win the consumer and win the long game 
2. If you do what is best for the consumer the advertiser/customer benefits too
3. Acquirors learn much from due diligence and the acquisitions get cheaper as the sellers see the wave coming
4. Bet big on one site unless the sites serve different segments.  This doesn’t mean you immediately have to get rid of/redirect other sites.  SEO shelf space is important. 
5. Don’t let concerns about Google SEO penalties, specifically duplicate content, stop you from doing what is best for the consumer  
6. Branding campaigns are expensive and require a long-term commitment
7. A long-term view with short-term financial pain while investing in branding and content is much more palatable when you are well-capitalized

Let’s review these acquisitions/key announcements.  The first four are covered more in-depth. 

1. Apartments.com Acquisition

• Key benefits
  • Nationwide Listings and Branding Foundation – Acquired one of the largest rental marketplaces at the time which provided nationwide property listings and a great domain.  This was important given they needed to acquire the most content possible and an easy-to-brand domain for the looming advertising campaign. 
  • Good Base of Organic Traffic
    • Head terms (broad, high volume, and commonly used earlier in the search process) – Apartments.com was still very competitive in large urban markets given it was previously owned by a newspaper conglomerate with a strong presence in big cities.  Additionally, the domain Apartments.com helped support prominent search results for head terms.    
    • Long-tail terms (more specific, lower volume and commonly used later in the search process) – Apartments.com still had a long-tail presence too.  ApartmentHomeLiving (still maintains a separate domain) and Rental Homes Plus (domain is redirected and single family listing content rolled into Apartments.com) were acquired too. The combination of the sites helped support long-tail SEO searches.
  • First Company Acquired in Roll-Up Process  – Created a foundation of future site bundling, clients, and associated expenses.  This allowed them to realize revenue and expense synergies with future acquisitions.  The diligence and integration process also helped them learn about current competitors as well as the potential future growth strategies in the Industry.  They could see the strengths and weaknesses of the current competitive set and where the consumer experience needed to go in the future.
• Other questions, thoughts, and opportunities
  • Consumer Experience – The overall consumer experience on Apartments.com and in the Industry was still lacking.  It was built more for the advertisers to drive exposure and quantity of leads vs more qualified, higher converting leads (closer to a lease).  The experience had come a long way since the days of print but still needed to be vastly improved.
  • Nationwide Listing Coverage – They had a great start, but there were still gaps in certain large cities (LA + NY) and in mid-sized markets.

2. Apartments.com New Site

• Key benefits
  • Becoming an Industry Leading Site – This had to be a priority with an initial $100M advertising campaign.  You don’t want to spend this type of money and have a poor consumer experience.  The site was built with a quantity and quality of listings focused on generating leads that are better converted to leases.  This started to cement Apartments.com as the industry-leading site with the renter perhaps not having to look for rentals anywhere else.  What was different….
    • Quantity of Listings (more listings all on one site) – Leveraged the CoStar multifamily database and created a site with more than 680,000 rental options.  If your branding campaign is focused on one site you need content.
    • Quality of Listings (actual availability and rents) – Stated 1 million calls made per month to update available units, rents, and other fees, while also checking approximately 40,000 apartment websites each day.  This meant that consumers didn’t have to call or email for actual rents, see what units were open, check on pet policy/fees, etc.  These inquiries in the past and likely even now are counted as leads.  Plus this further-up-the-funnel interaction wastes the time of the already stretched onsite people.   
    • Return the Best Results based on the Search Criteria of the Consumer  
      • Default to Map-Based Search – They led with a map-based site.  This was a simple indicator that they were leaning into a consumer-first philosophy.  The vast majority of sites up to this point gave the option of map-based results but didn’t lead/default to this with some exceptions on mobile.  This made sense given mobile was already the consumer screen of choice (generally ⅔ of traffic is mobile now).
      • Impact on Advertisers – Often, across other sites listings were forced on consumers so the highest paying advertisers/customers received the most exposure and often leads, even if there was a low chance of a lease conversion. In the short term by leaning in on the consumer, Apartments.com had a risk of diluting the leads generated to advertisers especially those in the highest paying tiers.  Long term, Apartments.com paid spend on both their brand and SEM lifted the entire pool of leads which could help offset some quantity dilution to higher paying customers.  Their choice of putting the consumer first benefited the advertiser with better-converting traffic.  By the time an on-site property manager picks up the phone or responds to an email, the prospective renter should be further down the funnel and ultimately more qualified. Renters should not have to call to get current unit availability, parking fees, pet fees, or the actual price of the unit they want.   
• Other questions, thoughts, and opportunities
  • Evolution of the Value Equation – The original advertiser pitch was focused on exposure, it then moved to leads (connected calls and emails) and now it is moving towards leases.  
  • Consumer First – Doing what is best for the consumer ultimately creates more value for the customer (less time spent dealing with unqualified leads).
  • Multiple Sites and Duplicate Content – By investing so much in Apartments.com, what would happen to the other current and yet-to-be-acquired sites?  Would their listings all be put on Apartments.com?  What about duplicate listing content?  Would Google penalize this?  Would this eliminate the value of the SEO shelf space they acquired (fewer products at eye level on the grocery store shelf)?  Hard to guess what Google is going to do. I will touch on this later.

3. Apartment Finder Acquisition 

• Key benefits
  • Listing Content – Given their base of listings, there would be an overlap of listing content, but the foundation of ApartmentFinder was as a print publication which had its benefits.  Print publications generally had a good presence in mid-tier markets which likely allowed them to pick up new listing content since Apartments.com generally had more of a historical presence in larger urban areas.
  • Synergies Given Existing Foundation – Apartments.com now had the ability to generate both expense and revenue synergies.  They could eliminate redundant roles and also bundle sites in each sale.  This was most valuable where advertisers didn’t already buy from both sites.  
  • Not as Expensive to Acquire – The overall acquisition was cheaper.  Many secondary sites were already struggling, saw the consolidation coming, and became more motivated to sell.
  • Leverage their Ad Spend – More sites provided Apartments.com the ability to leverage their brand and other paid spend to generate traffic, leads, and ultimately leases given the conversion opportunities a broader base of listings created.
  • SEO Shelf Space – Additional site on the first page of many search results.  More shelf space.
  • Data – I will cover this in the future, but consumer activity/searches in any given defined area (market, city, zip code, etc.) is valuable.  
• Other questions/opportunities
  • Bundling –  What was the result of advertisers that already purchased both sites?  Revenue erosion?  Perhaps in the short term, but given the marketing spend and additional sites yet to be acquired (additional leads/leases + another low-cost competitor eliminated) the value provided could ultimately support price gains.  This could only happen with a longer-term view of becoming the dominant player in the Industry.
  • Duplicate Content – This was always a debate.  Would Google penalize sites for having duplicate listing content?  This kept many companies from consolidating listings onto one site.  It is very difficult to determine what goes into the Google algorithm and how it changes.  Instead of trying to determine this, focus on what you can control.  If you do what is best for the consumer they will engage.  Better engagement should equal better SEO results and also support the ability to build trust with the consumer and build a brand. 
  • Site Investment / SEO Shelf Space
    • A Multiple Site Strategy Creates Questions – Do you keep them?  What is the expense/distraction to maintain them?  Do customers really see the value in bundling them together?  Look at the Vacation Rentals Space.  Austin Ventures rolled up various vacation rental sites (VRBO, Vacation Rentals, etc.) and even ran a super bowl commercial (sound familiar?), but branded it HomeAway instead of picking an acquired domain.  They still kept the distinct sites and maintained SEO shelf space.  Ultimately, they shifted back to VRBO and ran Super Bowl commercials to kick that off too.  The other domains are now all redirected to VRBO.  The SEO shelf space of multiple sites wasn’t worth the expense/distraction given not only the branding but the strength of the VRBO domain.  They focused on consolidating content and branding VRBO to create the go-to-site (besides AirBnB which VRBO is very publically trying to differentiate themselves from in various advertisements).  There are also additional pricing/business model lessons that the Rentals space can learn from the Vacation Rentals Space.  
    • What will CoStar do with all of its Multifamily Sites? They already branded their leading domain, but have yet to redirect all of their various sites to Apartments.com.  They are likely continuously evaluating the value of bundling/related revenue and SEO shelf space vs. the expense/distraction of maintaining multiple sites.  Unless there is a specific targeted segment or geography (think Apartmentos or CitySnap – discussed later) with a unique consumer experience it is more difficult to justify keeping distinct sites especially given the focused investment in a site of choice.  Before they consolidate sites, they also have to consider truly how much they have branded the space and positioned Apartments.com as the only site needed. This leads us to our next topic.  

4. New Ad Campaign

• Key benefits
  • Branding the Space  – Speaking from experience, Rent. (formerly RentPath) had tried to do this with Rent.com, but with a different budget.  CoStar went two feet into a campaign kicking it off with a Super Bowl commercial and $100M plus in annual spend.  This level of commitment made it very difficult for other competitors to even consider branding their own sites.  It essentially blocked any future attempts. 
  • Lower Reliance on Google – All sites in the Rental Marketplace up to this point were extremely dependent on SEO and SEM both on Google (> 80% share).  Branding a site with a memorable domain is a way to mitigate some of this reliance.  The question remains how to measure the branding impact.  Direct traffic?  Email marketing campaigns create direct traffic and some rental marketplace models rely on this heavily.  How much does branding help with SEO and SEM conversion too?  Hard to measure.  Metrics are convoluted here.  Regardless of these metrics, Apartments.com has created another meaningful source of traffic from TV and streaming video and audio.  They are number one in the space as far as unaided brand awareness.  Plus if you simply look at overall traffic, they are 4 to 5x bigger than everyone else.  This has a long-term value from both a consumer and customer perspective.  It is also much better than spending one-off money on paid spend or relying too much on organic traffic to generate leads/leases for advertisers.  It is difficult to leave the vast majority of your traffic to Google, it hasn’t gotten any cheaper and it doesn’t build a long-term controllable asset.      
  • Created both Consumer and Advertising Value – We have talked about the consumer value created, but this campaign was also about letting property owners and managers know that Apartments.com was going after the space in a big way.  Jeff Goldblum likely initially resonated more with the buyers of advertising vs. the renter population.  They had a new site with a big Superbowl splash.  The salespeople definitely had something to talk about.
• Other questions/opportunities
  • Have they moved the needle? How much more is enough?
    • With their organic revenue growth ($300M acquired revenue to $750M) and overall traffic being 4x to 5x bigger than everyone else, the big picture answer is yes.  They also lead the industry in unaided brand awareness.  They have moved the needle and truly differentiated themselves as the leading player.  Yes, they have paid for it, but the increase in valuation more than covers this expense.
    • How much is enough?  They can only answer this.  With resale home sites and rental sites being purchased by the same company (Rent. and Redfin / CoStar owning Apartments.com, Homes.com, and perhaps Realtor -yes, this is off the table for now), this spend will likely not slow down any time soon.  Pending additional consolidation and individual companies owning both the renter and homeowner experience, the spend could increase.    

5. Westside Rentals Acquisition

• Key benefits
  • Provided Immediate Leading Position in LA to Leverage Ad Spend – With their nationwide advertising campaign, it was key to gain access to the approximately 1M renters in LA plus additional renters close to LA too.
  • Acquired City-Specific Listing Content – In LA, the consumer/prospective renter originally had to pay to gain access to listings.  Now it looks like the Site allows you to see all the listings free of charge.  Additionally, my assumption is that these listings are now on Apartments.com too.
  • Local and National Sales Impact + Expense Synergies – They now had a better product to pitch locally and nationally to large owners/managers of properties that also had an LA presence.

6. Apartmentos Launch

• Key benefits
  • Access to Large/Growing Consumer Segment – Nothing meaningful to acquire so starting their own site was the best option.
  • Leverage Ad Spend – Now they have site experience and listings to leverage a national ad campaign + other paid spend.
  • Local and National Sales Impact – Provided sales teams with a new site to sell.

7. ForRent Acquisition

• Key benefits
  • Listing Content – Definitely hitting overlap in listing content with their 2nd bolt-on acquisition to Apartments.com, but consolidates another long-time industry player.
  • Synergies Given Existing Foundation – Easier to generate both expense and revenue synergies.
  • Not as Expensive to Buy – More pressure on existing players to sell given consolidation in the space and the enormous ad spend shown by Apartments.com.  Additionally, the financial results of ForRent and other industry players were being impacted.  Apartments.com was taking share (sales and consumer eyeballs) and more traffic had to be purchased at higher rates to maintain leads.
  • Spend – Brand/paid spend to a broader base of listings plus less of an opportunity for prospective renters to click on a non-CoStar site.  
  • SEO Shelf Space – Additional site on the first page of many search results.  More shelf space.
  • Data – Additional collection of consumer activity/searches in any given defined area (market, city, zip code, etc.).  

8. OffCampus Acquisition

• Key benefits
  • College Segments – If you are going to spend money on branding the space you need to have a product for the youngest demographic and build brand loyalty early.  This was the best available.  
  • Launching Pad for Other Universities – With CoStar’s resources behind this Site, adding more markets, increasing consumer traffic, and generating additional revenue should be easier.  It just depends on how much it is prioritized vs. other opportunities.

9. CitySnap Launch

• Key benefits
  • Significant NYC Presence – Partnered with the real estate board of NY to put together CitySnap.  Pitch is designed by New Yorkers, for New York City including distance to nearby subway stations and need-to-know details on the buildings in which each listing is located.  My estimate is roughly 7k listings.  As with LA and the acquisition of Westside Rentals, it was key to gain access to the approximately 5M+ renters in NYC.
  • Both Rentals and Resale Listings on one Site – Put residential rentals and properties for sale on one site.  With agents representing both rentals and properties for sale and with NYC consumers sometimes investigating both options simultaneously, it was important to have both listing types on one site.  CoStar may also develop some insight here on how both renters and buyers reach and actively consider both options on one site.  With big plays in both rentals and resale properties, understanding this in the most active and demanding market (NYC) could develop a playbook for the future.   
  • Head to Head with Zillow + Homes Marketplace Crossover – CoStar already owns Homes.com and Homesnap.com so it is clear they are focused on Resi (new TAM to support multiples) and going head to head with Zillow.  They were also in talks to buy Realtor, but backed out.  Launching CitySnap now puts them in direct competition with Zillow’s StreetEasy.  The “Your Listing, Your Lead” statement promising that all leads from listings in Citysnap will go directly to the listing broker or agent, differs from some of Zillow’s advertising products.  Zillow sells advertising to buyers’ agents that aren’t typically educated on the property.  They don’t know the property or represent it.  This is not an ideal consumer experience which CoStar wants to fix.  Again, the long-term view of the space by focusing on the consumer. It is more difficult to make this adjustment once your revenue model becomes meaningfully dependent on it. 

10. Listing of the Future Announcement

• Key benefits
  • There are many implications to unit-level listings that the Rental Industry should be thinking about…
    • Renting out units Airbnb style – The more unit content created the easier it is to rent out your unit to someone else.
    • Paid spend – Advertising/buying keywords for both entire properties and now apartment units. Spend can get more tactical.
    • Search engine optimization – Both organic unit results and property results.  
    • Industry pricing and changes to rental marketplace business models – There are significant implications based on unit-level listings. 
  • Other questions/opportunities
    • This is great news for consumers of digital marketplaces, but for owners and managers of properties, these changes will likely impact the unit of value (leads vs. leases) and their advertising costs.
    • For more see the article posted on January 23, 2023 (Rental Industry – Impact of Per Unit Listings)

If you would like to learn more, please contact me at rsternot@steadvisors.com.

About STE Advisors

STE Advisors helps companies prioritize organic and inorganic value creation opportunities and then executes against these activities. Frequently, organizations are too busy managing the day to day to take a step back, put together/confirm the big picture, and have the bandwidth to execute against the initiatives that could drive the most value. STE Advisors partners with companies to:

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