How Andy Florance Turned a Simple Concept Into a $350-Million Tech Company
Commercial real estate is big business—and Florance has figured out how to capitalize on it.
Andy Florance stands in front of a floor-to-ceiling video screen that shows a satellite map of the Washington area. Every few seconds, blue, green, and red arrows pop up and then disappear, creating a ripple effect of colors all over the region.
“Each arrow means that one of our clients is looking at a building right now in that spot,” Florance says. “It’s constant. They look up 3 billion buildings a year.”
Florance is founder and CEO of CoStar Group, one of the world’s largest providers of commercial-real-estate data. The screen takes over the back wall of the two-story lobby in the company’s “green” building in downtown DC, which is filled with state-of-the-art computers and contemporary furniture.
The story behind how Florance bought the office has become real-estate legend. In February 2010, when the office market in Washington was scraping bottom, CoStar purchased the 168,000-square-foot building from the Mortgage Bankers Association for $41.3 million—less than half what the MBA had paid for it in 2008. A year later, Florance sold and leased back the building to a German real-estate holding company for $101 million, turning a $60-million profit.
As any real-estate investor knows, nailing the bottom of a bubble is very hard to do. But if anyone in Washington has the knowledge and wherewithal to pull off a flip like that, it’s Florance. The 50-year-old executive came up with the idea for CoStar as a college student, and over the last 25 years he has developed it into a company with $350 million in revenue and 2,000 employees in North America and Europe.
At a time when the District is pushing to become an incubator for tech firms and entrepreneurship, CoStar is an example of both. But unlike companies such as LivingSocial and AOL, you’ve probably never heard of CoStar—unless you work in commercial real estate, where its research has changed the way brokers do business.
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Florance got the idea for CoStar when he was at Princeton in the 1980s. The son of Coke Florance, one of Washington’s best-known architects (his projects include DC’s Verizon Center and the Torpedo Factory in Alexandria), Andy Florance loved real estate and architecture. He loved numbers and was fascinated by computers: “I was on the student computing committee, and I think I bought the first four PCs for Princeton.”
An economics major, Florance was studying financial markets and getting a feel for how companies used data to analyze their assets. He was shocked by how primitive and opaque the numbers were for commercial real estate. “I could see what Treasury was doing this morning versus this afternoon, I could see what a stock index was doing right now versus six seconds ago,” he says, “but there was just nothing for real estate. You’ve got $30 trillion of commercial real estate in the world—it’s four or five times larger than the value of all the securities on Nasdaq—and it was all manual.”
Florance’s idea? Make the commercial real-estate market more transparent. Find out the vacancy rates and rents for specific buildings and give that information to developers so they can more accurately estimate what their buildings are worth.
While in college, Florance started writing software for developers. In 1986, he launched Infonet, his first com-pany, and ran it from his parents’ basement in DC’s Cleveland Park. There was no centralized data on commercial buildings then—real-estate brokers compiled their own information, an expensive and time-consuming process, and many employed research staff. With Infonet, Florance set out to create a database brok-ers could subscribe to—it would allow them to pare down their researchers and get more up-to-date, comprehensive data for less money.
His first step was to get all the tax records for commercial buildings from the District government, which he then had to feed into a computer program he designed. “I worked like a freak to get this massive amount of data down to a PC,” he says.
When he finally got the data into a program that brokers could use, he started making sales calls. But few brokerages had computers, so in addition to subscribing to his service, they’d have to buy a computer, which was still very expensive. They all said no. So Florance began publishing Cornerstone, a phone-book-size monthly leasing guide filled with the data he’d unearthed.
Although Cornerstone was successful, Florance never intended to be in the publishing business, and he wasn’t for long. After three years, he sold Cornerstone and used the proceeds to expand his newest venture, Realty Information Group, which became CoStar.
Florance’s earliest investor was local attorney Michael Klein. As a lawyer at WilmerHale, Klein specialized in public securities during the savings-and-loan crisis. Like Florance, he was shocked to see how little data there was on commercial real estate, a situation that led banks to make very risky commercial loans. “I came away from that experience with the conviction that if there was more information available on commercial real estate, the problem could be resolved,” Klein says.
So when he saw the software Florance was peddling, Klein grasped the potential. Even though Florance was only 23, the lawyer was impressed by his talent and creativity. And for Florance, having an established backer like Klein gave him the stamp of credibility he needed to be taken seriously. The two forged a partnership that continues today—Klein is chairman of CoStar’s board.
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Pia Mianulli pulls out of the parking garage under CoStar’s office building and onto L Street, Northwest. As she drives down the street, the laptop above her center console shows the footprint of every building she passes. One click and she can see who owns it, what its vacancy rate is, who the tenants are, how expensive and long their leases are, photos of the building from several angles, even the landscaping.
Plastered with CoStar’s yellow-and-black logo, this Toyota Prius is Mianulli’s office, where she spends eight hours a day canvassing DC and Northern Virginia. She’s not the only one—there are two cars in Philadelphia, three in New York City, two in Dallas, four in Los Angeles. All told, CoStar employs 148 field researchers who track buildings all over the US, Canada, France, and the UK.
CoStar has a fleet of 137 cars that canvass streets all over the US, Canada, France, and the UK.
If Mianulli sees a “for lease” sign, she double-checks to see if that information is in the system. If it’s not, she collects the data and logs it in for the portfolio researcher covering that part of the country.
Mianulli’s research might land on the seventh floor of CoStar’s Washington headquarters, a sea of cubicles filled with young researchers. In addition to following up on leads gleaned from the CoStar fleet of cars, they hear from brokers wanting to market their listings, dig through public records, and make numerous cold calls a day to get information from building owners. Customized web robots—software programs that run automated tasks over the internet—also help keep track of changes in their territory. For example, a web robot may go to the 7-Eleven website and plug in each Zip code in the country every two weeks—if a new store has opened in a researcher’s assigned area, he’ll get an e-mail letting him know.
CoStar’s subscribers—there are more than 100,000—pay for access to this cache of data. “This one floor of researchers is bigger than the largest internal research program in any commercial real-estate firm in the world,” Florance says. “And we have 50 of these floors.”
Is he covering the whole country or just cities? “Every square inch,” he says. “Anything that moves.”
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Despite the gray hair sprouting around his temples, Florance exudes youthful energy. “Do you mind if we take the stairs?” he asks during a tour of CoStar’s headquarters, his foot already halfway through the door to the stairwell.
He talks fast and peppers the conversation with jokes and anecdotes. Mike Glosserman, managing partner of the JBG Companies and a member of CoStar’s board, says of Florance: “He is whip-smart. He is extremely personable and has a wonderful manner. He has a terrific sense of humor, is extraordinarily competitive, and very, very focused.”
Over the years, the company has faced pushback from the industry, which has fought to keep its leasing data private. “If everyone makes shoes by hand and one day you make a machine that sews the soles on, you end up with people with stones and torches at the front door,” Florance says.
If you search for articles about the company, you can see a tenacious businessman. In a 1993 Washington Post article about a lawsuit with another real-estate firm, Stout and Teague, Florance said, “We sued the pants off them and we won. A visible brokerage firm was caught with its drawers down.”
“I’ve got two floors of people in Washington working on stuff that won’t see the light of day for two or three years.”
In addition to spending money on fighting competitors, CoStar has invest-ed considerably in new markets, technology, and innovation. The company has about 250 software developers, many with PhDs in finance or math. “I’ve got two floors of people in Washington who are working on stuff that won’t see the light of day for two or three years,” Florance says.
Right now, CoStar field researchers are canvassing the streets of Toronto. They’ll spend several years there building up the database before CoStar makes a dime on the effort. When a city already has a real-estate research company doing something similar to CoStar, Florance sets out to acquire it—in the past 25 years, CoStar has bought 20 companies. In April 2012, it finalized its biggest acquisition, San Francisco’s LoopNet, a leader in marketing commercial real estate on the internet, which it bought for $860 million.
“CoStar is now more than a $3-billion corporation in terms of market capitalization,” says John Hill, former head of DC’s Federal City Council and a recent addition to Florance’s board, “but he’s never comfortable.”
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As CoStar has expanded into new markets, its CEO has been forced onto the road—last year Florance spent just 20 business days in Washington.
“I love the people I meet,” he says. “But I hate the travel with a passion.”
That problem isn’t going away soon—Florance describes CoStar as a naturally global business and expects to have 5,000 to 10,000 employees in the next ten years.
“The problems China has with understanding commercial real estate are the same as the ones we have in Washing-ton,” he says. “China has all these vacant buildings being built in the wrong place—that’s a lack of information and transparency.”
The more exciting frontier for Florance, however, is new technology. He says the next step is not only to provide data but to use it to predict how much a building will sell for at any given time. Because appraising commercial real estate is complicated—you have to take into account such factors as your income stream from the building, when your leases roll, whether they’ll roll into a good or bad market—human appraisals are often off by as much as 25 percent.
Says Florance: “If you can actually take a portfolio of a hundred buildings and understand, plus or minus 5 percent, what they’re worth today versus yesterday, that allows you to make decisions people couldn’t have dreamed of before.”
He also plans to replace the company’s fleet of hybrid cars with all-electric Teslas—he drives one himself and has been letting his software developers experiment with it. He hopes to build a version of CoStar’s iPad application that brokers can use directly on a Tesla computer screen.
“The whole time, we’ve been waiting for the technology to catch up to what we want to do,” Florance says. “We’ve been creating technology now for 25 years. We’ve innovated all these different areas, but there’s still so much more ahead.”
This article appears in the October 2013 issue of The Washingtonian.