The hot investment sales market for commercial real estate has proven to be a windfall for sellers and brokers alike. More than $170 billion in U.S. commercial properties changed hands in 2004, up from $120 billion in 2003, according to Manhattan-based Cushman & Wakefield. That whopping 41% increase in sales volume, in turn, has generated healthy broker commissions.

But unlike a few years ago — when vacancies were still climbing and absorption was negative in many markets — investment sales aren't the only revenue driver these days. Leasing activity, historically the lifeblood of brokerages, is clearly on the rise.

Data research firm Reis Inc. reports six straight quarters of positive absorption in the national office market through March 31. The increase in leasing activity has led to a decline in the overall vacancy rate, from 16.8% to 16% over the past year.

“Leasing fundamentals are clearly strengthening, and we expect them to improve over the balance of the year,” says Will Marks, a real estate analyst at San Francisco-based JMP Securities.

Charting a bellwether company

Los Angeles-based brokerage CB Richard Ellis, the publicly traded giant ranked No. 1 in NREI's annual survey of brokerages, posted a 22% jump in revenue in the first quarter compared with the same period a year earlier. Leasing activity accounted for 38% of the company's $205 million in revenue during the first quarter, while investment sales represented 34% of total revenue. The balance of revenue stemmed from other business lines, including mortgage brokerage, valuation and property management.

“We have seen appreciable gains in leasing activity on a year-over-year basis. It may be relatively slow and steady, but it's definitely progress over last year,” says Christopher Ludeman, president of U.S. brokerage at CB Richard Ellis.

Steady, if not spectacular job growth, in major markets has led many corporations to lease additional space, according to Ludeman. Another encouraging sign is the reduction in shadow space, a term that refers to space that is leased but empty.

“We have definitely seen this shadow space get absorbed over the past nine months. Not only that, but concessions are starting to diminish as well,” says Ludeman, who is optimistic that the balance of the year will continue this way.

Bright future?

Analysts are equally as bullish on the near-term prospects for CB Richard Ellis, whose stock was trading at $41.16 per share in late June, a tad below its 52-week high of $42.23. On June 13, Merrill Lynch analyst Jennifer Pinnick identified 2005 as a transitional year for the company. “After three strong years of a sales cycle, we expect 2005 to be a transition year from investment sales to leasing as the primary revenue-growth driver of the company,” wrote Pinnick in a research note.

The company's Americas region posted exceptionally strong results. The adjusted operating income of $38 million during the first quarter was 105% higher than a year ago. The Americas accounted for 91% of the real estate service provider's first-quarter operating profits.

The demand for U.S. real estate remains hot, reports Real Capital Analytics, with new capital sources popping up every month. Foreign buyers plowed $13 billion into U.S. real estate in 2004, an increase of more than 60% over 2003, according to sales transaction data. Through May of 2005, the sales volume generated by foreign buyers is up 50% over last year.

“Investment is up substantially across all groups of buyers, and new sources keep emerging,” says Bob White, president of Real Capital Analytics. “And this capital is far larger in magnitude and less cyclical in nature.”