D.E. Shaw just joined fellow investor Third Point in a coordinated activist investor assault on CoStar over the company's expansion into residential real estate data. Both investors helped negotiate a settlement just last year that installed new directors and created a capital allocation committee specifically to address residential spending concerns. That those same investors are now publicly calling the board "incapable of providing effective oversight" suggests things have deteriorated beyond repair.

D.E. Shaw's involvement adds serious weight, given the firm's track record of successful activist campaigns at industrial giants. The $85 billion hedge fund has methodically built an activist operation since hiring former Elliott Management portfolio manager in 2017, with notable interventions at Lowe's, Emerson Electric, and most recently Air Products and Chemicals. The firm's approach combines detailed operational analysis with pressure for board changes—exactly what's happening at CoStar.

In its February 4th letter, D.E. Shaw estimated CoStar will have spent more than $3 billion on Homes.com by the end of 2026, generating roughly $80 million in annual revenue and more than $2 billion in cumulative losses. After all that spending CoStar has only been able to capture single-digit market share in a business dominated by Zillow.

The numbers from CoStar's recent earnings support the activists' case, though maybe not as dramatically as their rhetoric suggests. CoStar has delivered 58 consecutive quarters of double-digit revenue growth, hitting $834 million in Q3 2025, up 20 percent year-over-year. The core commercial businesses (CoStar Suite, LoopNet, Apartments.com) generated a 47 percent profit margin, but Homes.com continues to hemorrhage cash. CoStar reported a net loss of $31 million in Q3 2025, down from a $53 million gain a year earlier, driven almost entirely by residential investments. Every dollar of revenue growth is being consumed by Homes.com losses, leaving shareholders with expanding top-line numbers but shrinking profits. Turns out marketing campaigns with celebrity spokesmen and Super Bowl commercials make for expensive customer acquisition.

CoStar claims Homes.com has become the second-largest residential marketplace in the U.S. with 115 million average monthly unique visitors in Q3 2025, behind only Zillow. The company added 7,000 members in Q3 and touts a 337 percent increase in subscribers since Q1 2024. But those traffic and subscriber numbers obscure the revenue reality: approximately $80 million annually against billions in spending. Zillow generated $2.1 billion in revenue in 2024 from a similar model, meaning CoStar would need to increase Homes.com revenue by more than 25x just to reach competitive scale. CoStar's own guidance projects Homes.com won't achieve positive adjusted EBITDA until exiting 2029.

Executive compensation has become a particularly sore point. D.E. Shaw claims Florance received approximately $130 million over the last five years while the stock declined 32 percent, compared to a 101 percent gain for the S&P 500. Third Point noted that in 2024 alone, Florance received approximately $37 million in total compensation, placing him in the top 10 percent of S&P 500 CEO earners despite CoStar being in the bottom 10 percent of performers. The new board approved tying only 25 percent of his future long-term incentives to total shareholder return, further disconnecting pay from outcomes.

CoStar's response has been combative rather than conciliatory, which explains why both activists have abandoned private engagement for public campaigns. The company accused Third Point of acting "like a child" and claimed D.E. Shaw has "chosen to latch on to Third Point's dangerously misguided effort" to abandon Homes.com. A spokesperson emphasized that management has met with more than 300 shareholders who "expressed enthusiasm" for the strategy and that the board unanimously supports continuing the investment.

The company announced a $1.5 billion share repurchase program and plans to cut Homes.com investment by more than $300 million in 2026, targeting breakeven by 2029—but both activists argue this timeline remains unacceptable. With two prominent activists now publicly aligned, CoStar's stock trading near 52-week lows, down more than 23 percent year-to-date. If performance doesn't turn around, pressure on the board will only intensify ahead of the 2026 annual meeting. Both firms have signaled a need for change and D.E. Shaw's track record suggests they're serious about forcing change.

The Hamilton Project gave us the first rigorous framework for answering whether office-to-residential conversions can actually pencil out. Their finding, that most don't work without subsidies, was valuable, but the tool was built for economists, not the developers, city officials, and housing advocates now grappling with these decisions daily.

The calculator inside the Propmodo Office-to-Residential Conversion Playbook preserves that core DCF framework while fixing four key methodology issues: dynamic cap rates that respond to growth assumptions, terminal values that reflect actual accumulated vacancy, optional two-phase discount rates separating construction risk from operating risk, and IRR calculations based on staged equity draws rather than a single lump sum.

Running New York defaults still confirms the original finding: a typical conversion shows negative $50 million NPV. But now you can test what changes the math. A 36% acquisition discount, a 25-year tax abatement, Historic Tax Credits layered in. That's the analysis cities actually need when structuring incentive packages.

Artificial intelligence is reshaping commercial real estate at breakneck speed, with data centers becoming one of the hottest property types as tech giants scramble to build the infrastructure powering the AI revolution. Last year alone, AI-related companies and projects borrowed at least $200 billion to fund construction, and that figure is likely understated given all the private lending involved. Projections for total AI infrastructure spending over the next few years range from $3 trillion to $5 trillion, with hundreds of billions more in debt issuance expected this year. On the surface, it seems like a sure bet: buying land, building data centers, connecting them to power, and leasing to blue-chip tenants like Amazon, Microsoft, and Meta.

But lenders are discovering that tracking their risk exposure to AI has become nearly impossible. The financing structures are wildly complex, mixing private credit loans, special purpose vehicles, corporate bonds, junk debt, and asset-backed securities in ways that make it difficult to know exactly how much any given institution has riding on AI's success. Some deals are structured like traditional real estate loans, while others resemble construction project finance that requires refinancing when the debt comes due. Banks are already planning for eventual refinancing by designing loans that can carve up massive $10 billion campuses into smaller $1 billion pieces, but this only works if demand stays strong and borrowers can actually refinance or repay their debts.

The fundamental worry echoes every tech boom in history: massive overinvestment followed by a painful correction. The Bank for International Settlements is warning that AI companies now carry much higher debt levels than they traditionally did, which could amplify shocks throughout the financial system if things go wrong. Some sophisticated investors are already avoiding direct data center investments, choosing instead to back power grid upgrades and other infrastructure that will be needed regardless of whether specific AI projects succeed or fail. The risk isn't just theoretical, if AI doesn't generate profits as quickly as expected, or if overbuilding creates a glut of data centers, lenders and investors could suffer huge losses. The AI boom could either drive unprecedented growth or create the next wave of distressed assets, and right now it's genuinely difficult to predict which outcome is more likely.

Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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