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Investors have recently questioned CoStar’s investments in residential real estate. Industry experts told Inman the company would be wise to pay attention to the criticism.

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Since launching a campaign to make Homes.com the most-visited home search portal, CoStar Group CEO Andy Florance has talked a big game about the portal’s potential. But how much longer can he keep it up?

That’s the question that emerged recently after a disgruntled CoStar investor challenged the value of the company’s investment in the residential real estate space. That investor, Third Point founder Daniel Loeb, published a public letter in which he called CoStar’s heavy investment in residential real estate a “fiasco” and called for a new slate of directors on the company’s board that would consider moving on from Homes.com.

CoStar said in a public response that abandoning Homes.com now would be premature ultimately harmful to stockholders.

“One thing we know for certain is that abandoning Homes.com now that the investment phase is tapering would be a certain way to destroy long-term value for stockholders,” the company said in a statement.

Then, a second CoStar investor — D. E. Shaw & Co. — followed up with another public letter lambasting the board’s “reckless” spending on Homes.com, while also calling into question CEO Andy Florance’s generous cash and equity incentive awards.

CoStar once again responded to the criticism, saying that abandoning the portal would cause “irreparable harm” to the company as well as “value destruction.” CoStar also said the investors’ attacks “[smack] of activism malpractice.” The company additionally noted that the investment phase of Homes.com has come to a close, which will result in $30 million in spending cuts on the portal this year, and over $100 million each year until 2030.

Still, it’s clear now that CoStar is feeling some heat. But how much heat exactly? How big a threat do CoStar face?

Bess Freedman | Brown Harris Stevens

When Inman checked in with real estate industry executives and experts, they said CoStar would be wise to pay attention to such strong concerns being voiced by investors — but noted that the jury was still out on Homes.com.

“I think they’re small potatoes compared to Zillow,” Bess Freedman, CEO of Brown Harris Stevens, told Inman. “If you just look at how much time people are spending on which websites and study that and the unique visitors, Zillow just has everybody beat.”

“If you were to ask nine out of 10 of your friends where they look to find a home or do a search, they will tell you they go to Zillow,” she added in a conversation on the eve of Inman Connect New York.

But Freedman also said that given the rate at which things change in the industry, Homes.com might still have time to make a bigger splash and become more competitive.

“But today, it’s just, Zillow is so far ahead of everybody else,” Freedman said. “It looks like a tough one.”

Ryan Serhant | SERHANT. Studios

Meanwhile Ryan Serhant, founder and CEO of SERHANT., suggested that any business hoping to find success in a sector where there is already a clear frontrunner needs to differentiate itself via some new type of value.

“You really need to have some other key value that you’re providing in that space in order to compete with them,” Serhant. said. “I think with any business, you have to ask the question of, what problem are we actually solving? How quickly are we solving it? And at a better quality than the competitors with the utmost incredible experience. If you can’t answer the problem-solving, speed, quality, experience questions, then you are going to burn cash because there’s no point in it.”

The luxury CEO added, however, that he wasn’t familiar with the details of the investor’s quarrel with CoStar, so he couldn’t speak specifically about the situation.

Michele Harrington | First Team

Meanwhile, FirstTeam Real Estate CEO Michele Harrington reminded Inman that, although Homes.com has been around in various iterations over the years, it was only acquired by CoStar in 2021. Zillow, meanwhile, was founded in 2005, and it took about seven years to become profitable.

“So, it’s definitely going to be hard to compete,” Harrington said. “I think it’s hard when you get away from your core business model, like CoStar being commercial real estate and trying to delve into something that’s kind of outside of your core.”

Russ Cofano of Alloy Advisors told Inman that although Homes.com has made progress in growing market share, “their overall revenue from their model pales in comparison to Zillow, especially when you consider the amount of spend they have made in that regard.”

And as far as Florance’s position at Homes.com goes, Freedman said he might want to think twice about what investors are saying, since it has the potential to become a threat to him down the line.

Russ Cofano

“I think it’s great to be persistent and try to create something,” Freedman said. “Whether that’s successful or not, obviously, [Homes.com is] still not there, but [Florance] still believes in it … I think he’s saying he can’t give up on it.”

“I think anyone who’s investing their money in something wants to know that the person [using that money] is being prudent, is making progress — even if there are setbacks or it’s idle, whatever it is. But, has there been progress, and what’s the way to progress? How are you getting there? I think that’s what the question is.”

Cofano noted that activist shareholders have increasingly become the impetus for public CEO departures in recent years. The resignation of former Opendoor CEO Carrie Wheeler last summer following investor criticism serves as one striking example.

But Florance’s deep ties to CoStar’s foundation would make such a move less likely in his case, Cofano added.

“The activist has no right to fire Florance, and the typical strategy is to take control of the Board and cause a departure through that means,” Cofano told Inman in an email. “That can be messy and disruptive. Also, founder CEOs like Florance are usually a more challenging target, especially when they have been successful in the past, growing the company like he has. It will be very interesting to watch this drama play out, the impact it might have on the overall portal wars and the potential for Homes.com to become an acquisition target.”

Email Lillian Dickerson

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