Why CoStar, Berkshire Hathaway are betting big on homebuilding

The past week saw two companies traditionally associated with the real estate industry make a splash in the homebuilding space. 

Things kicked off on Friday with CoStar Group’s $800 million all-cash acquisition of Zonda, a data company that tracks land development, construction activity, home sales and builder operations in North America. The action continued over the weekend, with Berkshire Hathaway, the parent company of HomeServices of America, announcing an $8.5 billion all-cash deal to buy homebuilder Taylor Morrison. 

While some may have been surprised by these deals, analysts that cover the housing space, agree that these two deals make a lot of sense. 

Zonda fills “key gap” for CoStar

“We are familiar with Zonda’s business and have long thought that an acquisition could make strategic sense to fill out CoStar’s data and analytics capabilities in the $1 trillion new home construction market,” Ryan Tomasello and Jade Rahmani, two analysts at Keefe, Bruyette and Woods, wrote in a note published on Friday.

“Over the last 18-24 months, CoStar has been building out its own data and analytics solutions to serve the new home construction market, which management has characterized as an attractive source of future growth. So, this deal should accelerate those initiatives by consolidating the leading incumbent in the category while also providing an opportunity for meaningful cross-sell synergies.” 

According to Tomasello and Rahmani, Zonda will fill a “key gap” in CoStar’s existing data set “by adding forward-looking, supply-side housing insights across land development and construction activity.”

“The deal also strengthens CoStar’s marketplace strategy by adding builder-direct new construction inventory, complementing its existing resale-focused platforms,” Tomasello and Rahmani added. 

Russ Cofano, a co-founder of Alloy Advisors, agrees that this transaction makes sense as it extends CoStar’s core identity of data and analytics into the new construction space where it has yet to establish “deep roots.”

“CoStar has already demonstrated that it views real estate through various segments including information, traffic, workflow and monetizable marketplace activity,” Cofano said in an interview with HousingWire. “Zonda gives it a stronger position in a segment of residential real estate that has historically operated somewhat separately from resale brokerage.”

For Amit Kulkarni, another co-founder of Alloy Advisors, CoStar’s acquisition of Zonda is just the latest example of the Andy Florance-helmed firm’s tried and true playbook: “buy the dominant data player in a category, then own it outright.”

“That [strategy] didn’t work in resale because the category was already mature and the big digital players were entrenched — Zillow owned the consumer. New construction is different. It’s earlier, more fragmented, and it looks a lot more like commercial [real estate] did when CoStar started,” Kulkarni said. “That’s a category they can actually take. And Zonda’s a subscription business with 104% net retention, which is exactly what those activists want to see instead of more portal losses.”

Berkshire Hathaway acquisition a sound bet

Like the CoStar-Zonda deal, Alloy Advisor co-founders also feel that Berkshire Hathaway’s acquisition of Taylor Morrison, is logical. 

In Kulkarni’s view, Berkshire is known for “making sound bets based on economics, human nature, and real market dynamics.” 

“I think they fully understand that brokerage is a low-margin, mostly unprofitable business that needs ancillary attach to be profitable at scale,” he said. “They also know homebuilding is incredibly profitable if done right — Taylor Morrison earned $783 million last year in a down market, a 13% return on equity. And whoever builds and controls the inventory has a leg up for decades, not just years, because we’ve got an enormous shortage of homes — somewhere around 3 to 5 million. If they can marry that with brokerage ops, that could be an interesting long term play, and that’s what Berkshire might be better at than anybody.”

Cofano agrees, adding that this acquisition strengthens Berkshire’s position in the new construction space as it already owns manufactured home builder Clayton Homes.

“Strategically, that fills a gap and gives Berkshire a broader position across manufactured housing, site-built housing and the broader housing value chain,” Cofano said. 

Additionally, Cofano believes this acquisition signals that Berkshire sees “long-term value in homebuilding despite the current affordability headwinds, elevated mortgage rates and soft buyer demand.”

Strong signals for housing

“CoStar’s move into Zonda points in a similar direction: the company is making a long-term bet that new construction data, builder workflows and new-home consumer marketplaces will become increasingly valuable,” Cofano added. “While neither transaction proves that the new-home market has bottomed, taken together, they are a strong signal that two sophisticated, long-horizon buyers believe we may be closer to the trough.  If they are right, that is not just bullish for homebuilders. It is constructive for the broader residential real estate ecosystem, including brokerages, portals, mortgage, title, data providers and the many businesses tied to housing transaction volume.”

Looking ahead, John Lovallo, a stock analyst at UBS, told HousingWire he believes these acquisitions are a harbinger of what is to come across two related industries that have seen quite a bit of consolidation in recent years. 

“The top-16 builders in the U.S. have gone from 25% market share in 2013 to 50% market share today, so this consolidation of the industry has been happening for years. I think where you are going to find that this is becoming more and more challenging is for smaller builders, whether public or private, because they just can’t access capital, land, labor or materials like the bigger builders,” Lovallo said. “So, I think the bigger builders are going to continue to get bigger and I think you are going to see some non-traditional companies coming into this space and helping this consolidation process. So I think you are going to see a much more consolidated industry as we look forward.” 

So this may just be the start of traditionally real estate-focused firms attempting to make a play in the homebuilding space.