The storm came from the south, but the seismic force in commercial real estate came from the west. On Feb. 18, the morning after a blizzard dumped two feet of snow on New York City, Los Angeles-based CB Richard Ellis announced ato buy Gotham's top brokerage, Insignia Financial Group, for $415 million.
The deal, which will produce the biggest commercialin the world, is also a huge wager on the eventual recovery of the New York market. And, industry insiders say, it will lead to repercussions throughout the city's cutthroat commercial brokerage community for months, and perhaps years, to come.
Amid a national slump, New York City remains the second strongest commercial real estate market, after Washington, D.C. But it is reeling from a leasing slowdown, with vacancy in many submarkets (including the Wall Street area) hovering in the mid-teens.
The leasing slump has produced a spate of high-level broker defections as firms seek a bigger portion of a shrinking pie. The most stunning coup was CB's hiring last summer of Mary Ann Tighe, Insignia's top broker.
The New York economy shows little sign of near-term improvement, with unemployment at more than 8%. And, after losing 176,000 jobs last year, the city is in for another year of economic decline, according to a recent report by the comptroller's office.
|No. of Employees||10,000||6,000||16,000|
|2002 Revenues||$1.17 B||$730 M||$1.8 B|
|Prop. Under Mgmt. (in millions of sq. ft.)||605||245||850|
|Market Strengths||Top national brokerage; market research; strong subsidiaries||Top New York City brokerage||Largest global service provider|
|Weaknesses||Lack of New York City market penetration||Weaker outside New York City & United States||Integration risks, and nearly $1B worth of debt|
|Top Executives||Ray Wirta, CEO |
Brett White, President
|Andrew Farkas, CEO of Insignia Financial Group |
Stephen Siegel, CEO of Insignia/ESG
|Ray Wirta will lead new entity|
|Source: CBRE, Insignia|
Even when the economy recovers, New York is a hard place for brokerage firms, if not brokers, to make money in. “New York City has historically been a very rich market,” says Peter Pattison, a Manhattan-based real estate consultant. “But most of the money goes to the brokers and rarely makes it down to the bottom line.”
Still, for CB Richard Ellis, the deal brings a long-sought presence in the top CBD in the country. Despite its strength across the U.S. and overseas, the firm had been frustrated in its efforts to make it big in New York.
“Insignia is the perfect hand-in-glove complement for our global platform,” says CB Richard Ellis CEO Ray Wirta, who will remain CEO of the combined company. Insignia Financial Group CEO Andrew Farkas will leave the company once the merger is finalized in June. As for Insignia's top broker Stephen Siegel, he is now head of global brokerage for the combined firm.
The challenge will be to integrate Insignia without losing the brokers that made it such a plumb acquisition target. “The brokers at Insignia will have to put their egos in their pockets on this one, and that won't be easy,” says one Manhattan leasing broker.
Some observers think the deal will result in high-level defections to rival firms. “They run the risk of the top 10 Insignia brokers just leaving,” says Will Marks, a real estate analyst with San Francisco-based JMP Securities. “You put Insignia brokers in CB Richard Ellis' office and they will step on each other's toes.”
Who stands to gain? Who stands to lose? Cushman & Wakefield, Insignia's arch-rival, would be a logical destination for defectors, but the firm also faces a renewed challenge from the new CB Richard Ellis. Cushman's president of U.S. operations, Bruce Mosler, says his firm is “well-positioned” to fend off any challenge from the new company after the deal closes in June. And, he says: “It will be very challenging to integrate those two cultures.”
Does Mosler expect to snag some star brokers? “We are positioned to offer people an alternative, and we will continue to attract talent,” he says.
In addition to the risk of losing talent post-merger, CB Richard Ellis also is left with a sizeable debt. Blum Capital Partners will contribute up to $145 million in cash while CB Richard Ellis has secured a commitment from Credit Suisse First Boston for necessary debt financing to complete the Insignia deal. Blum Capital headed the $800 million management-led buyout that took CB Richard Ellis private back in July 2001.
Altogether, the company, which will have combined revenues of about $1.8 billion, will have $1 billion in debt.