While the housing market contracts, the office-space market is poised to grow. One of the biggest beneficiaries of that growth may be a tech company: LoopNet ( LOOP). LoopNet appears to be growing the way eBay ( EBAY) grew: Sellers list their properties on the online marketplace to lure buyers, who attract more sellers, who bring in more buyers, and so on. This upward spiral of growth is called "network effects," and it happens when one company, such as eBay in auctions or Monster.com ( MNST) in job listings, wins a reputation as the go-to marketplace for transactions. LoopNet is gunning to be the go-to marketplace for commercial real estate -- and it just may get there. It's succeeding despite competition from the larger CoStar ( CSGP), which also offers research and information on the industry, and smaller sites such as Cityfeet and Xceligent. Just as eBay emerged triumphant over other auction-driven sites, LoopNet wants to lure in buyers and sellers to trigger network effects. So far, it seems to be working. According to Alexa.com, it has several times as many page views as either CoStar or Cityfeet. It's still early days for LoopNet's core market. Although the U.S. commercial real estate industry generates $23 billion a year in service revenue and addresses $5 trillion in assets, it has yet to be transformed by the Internet the way stocks and retailing have. It's one of the last holdouts.
But, listing by listing, LoopNet has been changing that. At the end of the third quarter, the company had 475,000 active listings in 27 states and 1.6 million registered members. LoopNet estimates that there are 20 million potential members -- agents, brokers, investors and business owners -- leaving plenty of room for growth. But 76,000 of those registered members were paying $49.95 a month for a premium account. Anyone can list a property for free, but only those with premium accounts can see all the listings. Buyers with basic accounts can see only listings made by sellers with premium accounts. Premium memberships make up 80% of LoopNet's revenue, and the company is using marketing to lure more members to paid accounts. And so far, LoopNet has managed its growth admirably. The company has beaten the Street's estimates for both of its quarters as a public company. Its sales grew 58% in the first nine months of 2006 to $34.6 million and its gross profit margin rose a percentage point to 88.4%, while operating profit rose to 43.8% from 36.4% without a decline in marketing spending as a percent of sales. Much of LoopNet's lead has to do with the openness of residential real estate information vs. the closed, opaque market for commercial buildings. Information about home sales -- prices, square footage -- are public knowledge. Residential agents have for years shared sales data over the Multiple Listings Service, a privately run database on which member agents post listings of homes for sale.
"The Multiple Listing Services in the residential world does a very effective job of creating an electronic database of single-family homes that are available for sale, and a very effective job of creating a searchable database of the available property," said LoopNet CEO Richard Boyle at a recent investment conference. "There is no Multiple Listing Service in the commercial real estate space. So the practices of marketing and searching for deals are still happening primarily in
the offline world," Boyle said. "And what we are trying to do is analogous to what that does in the residential real estate space." Whichever company is the first to develop the commercial equivalent of the MLS will likely win the network effects prize. But doing so requires a critical mass of active real estate players. CoStar has the advantage of offering a broader array of research and information, but LoopNet may benefit from its purer marketplace focus. That concentration is certainly helping it on the income statement. CoStar's gross margin in the third quarter was only 66%, compared with LoopNet's 89%. Similarly, CoStar's operating margin was 14%, below LoopNet's margin of 41%. LoopNet also is working to put more distance between it and its rivals. In 2004, it bought BizBuySell, which runs a related marketplace for small businesses for sale.
And last year, LoopNet unveiled a database on historical commercial real state sales. When properties are sold through LoopNet, the company follows up with the agent for pricing details and gets feeds from the tax assessor's office. That, combined with the original listing information, makes for a valuable resource in pricing properties. LoopNet charges $30 a month for access to the database. LoopNet is slowly building a service for commercial real estate that is similar to what Reuters did for equity prices and Bloomberg did for bond prices in the past: creating transparency in pricing and, subsequently, a more liquid and active market and lower commissions. That may well cement its role as the go-to place for buying office and retail space and would make the stock -- at $16.02, it trades at about 32 times its recent earnings -- a promising long-term holding.